UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Registrant, State of
Incorporation, Address
Commission of Principal Executive I.R.S. Employer
File Number Offices and Telephone Number Identification No.
1-11327 ILLINOVA CORPORATION 37-1319890
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
1-3004 ILLINOIS POWER COMPANY 37-0344645
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
<PAGE>
Securities registered pursuant to Section 12(b) of the Act:
Each of the following securities registered pursuant to Section 12(b) of the Act
are listed on the New York Stock Exchange.
Title of each class Registrant
- ------------------- ----------
Common Stock (a) Illinova Corporation
Preferred stock, cumulative, Illinois Power Company
$50 par value
4.08% Series 4.26% Series 4.70% Series
4.20% Series 4.42% Series
Mandatorily redeemable preferred securities of subsidiary
(Illinois Power Capital, L.P.)
9.45% Series
Trust originated preferred securities of subsidiary
(Illinois Power Financing 1)
8.00% Series
First mortgage bonds
6 1/2% Series due 1999 8 3/4% Series due 2021
7.95% Series due 2004
New mortgage bonds
6 1/8% Series due 2000 6 3/4% Series due 2005
5.625% Series due 2000 8% Series due 2023
6 1/2% Series due 2003 7 1/2% Series due 2025
(a) Illinova Common Stock is also listed on the Chicago Stock Exchange.
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Illinova Corporation Yes [X] No
Illinois Power Company Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Illinova Corporation [X]
Illinois Power Company [X]
<PAGE>
The aggregate market value of the voting common stock held by
non-affiliates of Illinova Corporation at February 28, 1998, was approximately
$2.0 billion. Illinova Corporation is the sole holder of the common stock of
Illinois Power Company. The aggregate market value of the voting preferred stock
held by non-affiliates of Illinois Power Company at February 28, 1998, was
approximately $46 million. The determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this requirement
and the registrants are not bound by this determination for any other purpose.
The number of shares of Illinova Corporation Common Stock, without par
value, outstanding on February 28, 1998, was 71,701,937.
The number of shares of Illinois Power Company Common Stock, without par
value, outstanding on February 28, 1998, was 66,215,292, all of which is owned
by Illinova Corporation.
Documents Incorporated by Reference
1. Portions of the 1997 Annual Report to Shareholders of Illinova Corporation
in the appendix to the Illinova Corporation Proxy Statement.
(Parts I, II, III and IV of Form 10-K)
2. Portions of the 1997 Annual Report to Shareholders of Illinois Power
Company in the appendix to the Illinois Power Company Information
Statement.
(Parts I, II, III and IV of Form 10-K)
3. Portions of the Illinova 1997 Proxy Statement.
(Part III of Form 10-K)
4. Portions of the Illinois Power 1997 Information Statement.
(Part III of Form 10-K)
<PAGE>
ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
FORM 10-K
For the Fiscal Year Ended December 31, 1997
This combined Form 10-K is separately filed by Illinova Corporation and
Illinois Power Company. Information contained herein relating to Illinois Power
Company is filed by Illinova Corporation and separately by Illinois Power
Company on its own behalf. Illinois Power Company makes no representation as to
information relating to Illinova Corporation or its subsidiaries, except as it
may relate to Illinois Power Company.
TABLE OF CONTENTS
Part I Page
Item 1. Business 6
General 6
Open Access and Competition 7
Customer and Revenue Data 8
Accounting Matters 9
Dividends 9
IP Electric Business 9
Overview 9
Soyland Power Cooperative, Inc. 10
Fuel Supply 11
Construction Program 13
Clinton Power Station 14
General 14
Decommissioning Costs 15
Accounting Matters 15
IP Gas Business 16
Gas Supply 16
Diversified Business Activities 16
Environmental Matters 17
Air Quality 17
Clean Air Act 18
Global Warming 18
Manufactured-Gas Plant Sites 18
Water Quality 18
Other Issues 19
Electric and Magnetic Fields 19
Environmental Expenditures 19
Year 2000 Data Processing 19
Research and Development 20
Regulation 20
Executive Officers of Illinova Corporation 21
Executive Officers of Illinois Power Company 21
Operating Statistics 22
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of
Security Holders 23
Part II
Item 5. Market for Registrants' Common Equity
and Related Stockholder Matters 24
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 24
Item 8. Financial Statements and Supplementary
Data 25
<PAGE>
TABLE OF CONTENTS (Continued)
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 25
Part III
Item 10. Directors and Executive Officers of
the Registrants 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain
Beneficial Owners and Management 26
Item 13. Certain Relationships and Related
Transactions 26
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 27
Signatures 29
Exhibit Index 31
<PAGE>
PART I
ITEM 1. Business
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General
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This report contains estimates, projections and other forward-looking
statements that involve risks and uncertainties. Actual results or outcomes
could differ materially as a result of such important factors as: the outcome of
state and federal regulatory proceedings affecting the restructuring of the
electric and gas utility industries; the impacts new laws and regulations
relating to restructuring, environmental, and other matters, have on Illinova
and its subsidiaries; the effects of increased competition on the utility
businesses; risks of owning and operating a nuclear facility; changes in prices
and cost of fuel; factors affecting non-utility investments, such as the risk of
doing business in foreign countries; construction and operation risks; and
increases in financing costs.
Illinois Power Company (IP) was incorporated under the laws of the
State of Illinois on May 25, 1923.
Illinova Corporation (Illinova) was incorporated under the laws of the
State of Illinois on May 27, 1994 and serves as the parent holding company of
four principal operating subsidiaries: IP, Illinova Generating Company (IGC),
Illinova Energy Partners, Inc. (IEP), and Illinova Insurance Company (IIC). In
May 1996, another Illinova subsidiary, Illinova Power Marketing, (IPMI),
consolidated its business activities with those of Illinova Energy Services and
with the non-regulated marketing activities of Illinova, in a new company named
IEP. On April 1, 1997, IEP and IPMI merged. In the merger, IPMI was the
surviving corporation and subsequently changed its name to IEP.
IP 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. IP is affected by changes in the electric utility
industry driven by regulatory and legislative initiatives to introduce
competition and end monopoly franchises in at least the generation side of the
business. One aspect of this change is "direct access," meaning giving customers
the freedom to purchase electricity from suppliers they choose. In December
1997, electric regulatory restructuring legislation was enacted by the Illinois
General Assembly and was signed by the Governor. For a more detailed discussion
of these developments, refer to the "Open Access and Competition" section of
this item.
IP provides funds to Illinova for operations and investments. Illinova
accrues interest due to IP on any borrowed funds at a rate equal to the higher
of the rate that Illinova would have to pay if it used a currently outstanding
line of credit, or IP's actual cost of the funds provided. At the end of each
quarter, if needed, IP effects a common stock repurchase from Illinova by
accepting shares having a market value equivalent to the amount of funds
provided to Illinova during the quarter plus the accrued interest for the
quarter. During 1997, IP provided approximately $122 million in funds to
Illinova through this stock repurchase feature. IP also provides funds to
Illinova in the form of cash dividends payable on the common stock of IP. In
1997, approximately $92 million in such dividends was declared and paid. For
further information on IP common stock repurchases, see Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operation" of this
report.
IGC is Illinova's wholly-owned independent power subsidiary. IGC
invests in energy-related projects throughout the world. For further discussion
of IGC, see the "Diversified Business Activities" section later in this item.
IEP is Illinova's wholly-owned subsidiary that engages in the brokering
and marketing of electric power and gas and the development and sale of
<PAGE>
energy-related services. For further discussion of IEP, see the "Diversified
Business Activities" section later in this item.
IIC was licensed in August 1996 by the State of Vermont as a captive
insurance company. The primary business of IIC is to insure the risks of the
subsidiaries of Illinova and risks related to or associated with their business
enterprises.
Open Access and Competition
Competition has become a dominant issue for the electric utility
industry. It has been promoted by federal legislation, starting with the Public
Utility Regulatory Policies Act of 1978, which facilitated the development of
co-generators and independent power producers. Federal promotion of competition
continued with enactment of the Energy Policy Act of 1992, which authorized the
Federal Energy Regulatory Commission (FERC) to mandate wholesale wheeling of
electricity by utilities at the request of certain authorized generating
entities and electric service providers. Wheeling is the transport of
electricity generated by one entity over transmission and distribution lines
belonging to another entity.
Competition arises not only from co-generation or independent power
production, but also from municipalities seeking to extend their service
boundaries to include customers being served by utilities. The right of
municipalities to have power wheeled to them by utilities was established in
1973. IP has been obligated to wheel power for municipalities and cooperatives
in its territory since 1976.
Further competition may be introduced by state action, as has occurred
in Illinois, or by federal regulatory action, although the Energy Policy Act
currently precludes the FERC from mandating retail wheeling. Retail wheeling
involves the transport of electricity to end-use customers. It is a significant
departure from traditional regulation in which public utilities have a universal
obligation to serve the public in return for protected service territories and
regulated pricing designed to allow a reasonable return on prudent investment
and recovery of operating costs.
On December 16, 1997, Illinois Governor Edgar signed electric
deregulation legislation, An Act in Relation to the Competitive Provision of
Utility Services (House Bill 362). House Bill 362 guarantees IP's residential
customers a 15 percent decrease in base electric rates beginning August 1, 1998,
and an additional 5 percent decrease effective on May 1, 2002. The rate
decreases are expected to result in revenue reductions of approximately $40
million in 1998, approximately $80 million in each of the years 1999 through
2001 and approximately $100 million in 2002, based on current consumption.
Customers with demand greater than 4 MW at a single site will be free to choose
their electric generation suppliers ("direct access") starting October 1999.
Customers with at least 10 sites which aggregate at least 9.5 MW in total demand
also will have direct access starting October 1999. Direct access for the
remaining non-residential customers will occur in two phases: customers
representing one-third of the remaining load in the non-residential class in
October 1999 and customers representing the entire remaining non-residential
load on December 31, 2000. Direct access will be available to all residential
customers in May 2002. IP remains obligated to serve all customers who continue
to take service from IP at tariff rates, and remains obligated to provide
delivery service to all at regulated rates. In 1999, rates for unbundled
delivery services will be established in proceedings mandated by the
legislation.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, House Bill 362
is designed to protect the financial integrity of electric utilities in
three principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer, adjusted to deduct: a) delivery
charges the utility will continue to receive from the customer, and b) the
market value of the freed-up energy net of a mitigation factor, which is a
<PAGE>
percentage reduction of the transition charge amount. The mitigation factor
is designed to provide incentive for management to continue cost reduction
efforts and generate new sources of revenue;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) Utilities are permitted to seek rate relief in the event that the change in
law leads to their return on equity falling below a specified minimum based
on a prescribed test. Utilities are also subject to an "over-earnings" test
which requires them, in effect, to share with customers earnings in excess
of specified levels.
The extent to which revenues are lowered will depend on a number of
factors including future market prices for wholesale and retail energy, and load
growth and demand levels in the current IP service territory. The impact on net
income will depend on, among other things, the amount of revenues earned and the
ongoing costs of doing business.
Within the next several months, IP intends to seek Illinois Commerce
Commission (ICC) approval for securitization financings up to $1.728 billion. It
plans to issue the transitional funding instruments in two steps: 1) up to $864
million on or after August 1, 1998, and 2) the remainder on or after August 1,
1999. The transitional funding mechanism using securitized bonds as authorized
in House Bill 362 is designed to provide these bondholders a prior claim on
future IP revenue. This feature is intended to facilitate a favorable credit
rating which should allow debt to be issued at an interest rate favorable to
that currently available to IP. Proceeds would be used to refinance higher cost
debt and reduce the capital structure through the purchase of outstanding
equity.
For related discussion of accounting implications of
deregulation, see the "Accounting Matters" section under "IP Electric Business"
in this item.
In 1996, IP received approval from both the ICC and FERC 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. Currently, 17 customers are participating
in the experiment. Since its inception, the experiment has cost IP approximately
$11.2 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 $2.7 million in transmission service charges.
Competition creates both risks and opportunities. At this time, the
ultimate effect of competition on Illinova's consolidated financial position and
results of operations is uncertain.
Customer and Revenue Data
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In 1997, approximately 57 percent and 14 percent of Illinova's
operating revenues were derived from IP's sale of electricity and IP's sale and
transportation of natural gas, respectively. Approximately 29 percent of
Illinova's operating revenues came from its diversified enterprises in 1997. The
territory served by IP comprises substantial areas in northern, central and
southern Illinois, including ten cities with populations greater than 30,000
(1990 Federal Census data). IP supplies electric service at retail to an
estimated aggregate population of 1,265,000 in 310 incorporated municipalities,
adjacent suburban and rural areas, and numerous unincorporated communities and
retail natural gas service to an estimated population of 920,000 in 257
incorporated municipalities and adjacent areas. IP holds franchises in all of
the 310 incorporated municipalities in which it furnishes retail electric
service and in all of the 257 incorporated municipalities in which it furnishes
retail gas service. At February 10, 1998, IP served 577,322 active electric
customers (billable meters) and 408,269 active gas customers (billable meters).
These numbers do not include non-metered customers such as street lights. Sales
of electricity and gas sales and transportation are affected by seasonal weather
<PAGE>
patterns, and, therefore, operating revenues and associated operating expenses
are not distributed evenly during the year.
For more information, see "Note 13 - Segments of Business" on page a-30
and "Note 2 - Illinova Subsidiaries" on pages a-16 and a-17 of the 1997 Annual
Report to Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference.
To the extent that information incorporated by reference herein appears
identically in both the 1997 Annual Report to Shareholders of Illinova
Corporation and the 1997 Annual Report to Shareholders of Illinois Power
Company, reference will be made herein only to the 1997 Annual Report to
Shareholders of Illinova Corporation, and such reference will be deemed to
include a reference to the 1997 Annual Report of Illinois Power Company.
Accounting Matters
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The Illinova consolidated financial statements include the accounts of
Illinova Corporation, a holding company; IP, a combination electric and gas
utility; IGC, a wholly-owned subsidiary that invests in energy-related projects
and competes in the independent power market; IEP, a wholly-owned subsidiary
that develops and markets energy-related services to the unregulated energy
market; and IIC, a wholly-owned subsidiary whose primary business is to insure
certain risks of Illinova and its subsidiaries.
All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements. All non-utility operating
transactions are included in the sections titled "Diversified Enterprises",
"Interest Expense", "Income Taxes", and "Other Income and Deductions", in
Illinova's Consolidated Statements of Income.
The IP consolidated financial statements include the accounts of
Illinois Power Capital, L.P., a limited partnership in which IP serves as the
general partner and Illinois Power Financing I, a statutory business trust in
which IP serves as sponsor.
Dividends
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On December 10, 1997, Illinova declared a quarterly common stock
dividend at $.31 per share payable February 1, 1998. On February 11, 1998,
Illinova declared a quarterly common stock dividend at $.31 per share payable
May 1, 1998.
IP Electric Business
--------------------
Overview
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IP supplies electric service at retail to residential, commercial and
industrial consumers in substantial portions of northern, central and southern
Illinois. Electric service at wholesale is supplied to numerous utilities and
power marketing entities, as well as to the Illinois Municipal Electric Agency
(IMEA) as agent for 11 municipalities and to Soyland Power Cooperative, Inc.
(Soyland) for resale to its member cooperatives. For additional information
related to Soyland, see "Note 6 - Facilities Agreement" on page a-23 of the 1997
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference. In 1997, IP provided interchange
power to 61 entities, including 37 power marketers.
IP's highest system peak hourly demand (native load) in 1997 was
3,532,000 kilowatts on July 26, 1997. IP's record for peak load is 3,667,000
kilowatts, set on July 13, 1995.
<PAGE>
IP owns and operates generating facilities with a total net summer
capability of 4,571,250 kilowatts. The generating capability comes from six
major steam generating plants and three peaking service combustion turbine
plants. See Item 2 "Properties" for further information.
IP is a participant, together with Ameren - Union Electric Company
(AmerenUE) and Ameren - Central Illinois Public Service Company (AmerenCIPS), in
the Illinois-Missouri Power Pool which was formed in 1952. The Pool operates
under an interconnection agreement which provides for the interconnection of
transmission lines. This agreement has no expiration date, but any party may
withdraw from the agreement by giving 36 months' notice to the other parties.
IP, AmerenCIPS and AmerenUE have a contract with the Tennessee Valley
Authority (TVA) providing for the interconnection of the TVA system with those
of the three companies to exchange economy and emergency power and for other
working arrangements. This contract has no expiration date, but any party may
withdraw from the agreement by giving five years' written notice to the other
parties.
IP also has interconnections with Indiana-Michigan Power Company,
Commonwealth Edison Company, Central Illinois Light Company, Mid-American Energy
Corporation, Kentucky Utilities Company, Southern Illinois Power Cooperative,
Electric Energy Inc. (EEI), Soyland, the City of Springfield, Illinois and the
TVA.
IP is a member of the Mid-America Interconnected Network, one of ten
regional reliability councils established to coordinate plans and operations of
member companies regionally and nationally.
In January 1998, IP, in conjunction with eight other
transmission-owning entities, filed with the FERC for all approvals necessary to
create and implement the Midwest Independent Transmission System Operator, Inc.
The goals of this joint undertaking are to: 1) put in place a tariff allowing
easy and nondiscriminatory access to transmission facilities in a multi-state
region, 2) enhance regional reliability and 3) establish an entity that operates
independently of any transmission owner(s) or other market participants thus
furthering competition in the wholesale generation market, consistent with the
objectives of the FERC's Transmission Open Access Notice of Proposed Rulemaking,
Order No. 888. The parties have requested that the FERC rule on the joint filing
by no later than September 1, 1998, in order to allow the participants to create
the infrastructure needed to allow the independent system operator to become
operational.
In 1996, IP transferred through a dividend its 20% ownership of the
capital stock of EEI to Illinova. Illinova's interest was transferred to IGC in
1996. EEI was organized to own and operate a steam electric generating station
and related transmission facilities near Joppa, Illinois to supply electric
energy to the U.S.
Department of Energy (DOE) for its project near Paducah, Kentucky.
Soyland Power Cooperative, Inc.
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For discussion of the transfer to IP of Soyland's share of Clinton
Power Station (Clinton) and the amended Power Coordination Agreement between
Soyland and IP, see "Note 6 - Facilities Agreement" on page a-23 of the 1997
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
<PAGE>
Fuel Supply
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Coal was used to generate approximately 97% of the electricity produced
by IP during 1997 with other fuels accounting for 3%. Based on current forecasts
through 2002, after Clinton returns to service the percentages of generation
attributable to nuclear fuel is projected to increase to as much as 31% while
projected generation from coal will decline to about 69% during those years in
which there is not a scheduled refueling outage for Clinton.
IP's rate schedules contain provisions for passing through to its
electric customers increases or decreases in the cost of energy provided to its
native load customers under the Uniform Fuel Adjustment Clause (UFAC). Such
costs include fuel and fuel transportation costs, emission allowance costs, DOE
spent fuel disposal fees and costs of power purchased to serve native load.
However, on March 6, 1998, IP made the ICC filing required for elimination of
the UFAC. This will establish a new base fuel cost recoverable in IP's electric
tariffs effective on the date of the filing. As provided in House Bill 362, the
new base fuel cost is 1.287 cents per kwh, which is equal to 91 percent of IP's
average prudent and allowable fuel and purchased power supply costs in the two
most recent years for which the ICC has approved the level of recovery. Every
year UFAC cost recoveries are audited by the ICC in a reconciliation proceeding
in which they may be adjusted upward for actual costs not recovered, or downward
through a disallowance of costs incurred. By opting out of the UFAC, IP
eliminates exposure for potential disallowed replacement power costs for periods
after December 31, 1996, as those years will no longer be subject to the ICC's
annual reconciliation proceeding. This change will prevent IP from automatically
passing through increases in cost and will expose IP to the risks and
opportunities of price volatility in these areas. Prior to the elimination of
the UFAC, under an IP petition approved by the ICC on September 29, 1997, fuel
costs charged to customers were set at a maximum level of 1.291 cents per kwh
until Clinton is back in service operating at least at a 65% capacity factor for
two consecutive months. Whether electric energy costs will continue to be
recovered in revenues from customers will depend on a number of factors,
including the number of customers served, demand for electric service, and
changes in fuel cost components. These variables may be influenced, in turn, by
market conditions, availability of generating capacity, future regulatory
proceedings, and environmental protection costs, among other things. For
additional information see the information under the sub-captions "Revenue and
Energy Cost" of "Note 1 - Summary of Significant Accounting Policies" on page
a-15 and "Fuel Cost Recovery" of "Note 4 - Commitments and Contingencies" on
page a-19 of the 1997 Annual Report to Shareholders in the appendix to the
Illinova Proxy Statement which is incorporated herein by reference.
COAL - Coal is expected to be a major source of fuel for future generation.
Through both long-term and short-term contracts, IP has obtained commitments for
the major portion of future coal requirements. IP has new short-term contracts
with two suppliers which last through 2000 and a third new contract which lasts
through 2002. Contracts renegotiated in 1993 and 1994, which last through 1999
and 2010, are providing for the continued economic use of high sulfur Illinois
coal while IP complies with Phase I of the Clean Air Act Amendments that became
effective January 1, 1995. IP is currently evaluating its fuel options for
compliance with Phase II of the Clean Air Act Amendments that becomes effective
January 1, 2000.
Spot purchases of coal in 1997 represented 9.0% of IP's total coal
purchases. IP believes that it will be able to obtain sufficient coal to meet
its future generating requirements. However, IP is unable to predict the extent
to which coal availability and price may fluctuate in the future. Coal
inventories on hand at December 31, 1997, represented a 20-day supply based on
IP's average daily burn projections for 1998.
IP continues to evaluate fuel options and alternate fuel delivery and
unloading facilities for greater flexibility of fuel supplies. New rail
unloading facilities at the Havana Station became operational in the spring of
1996. In addition, increased availability of nearby coal allowed for the return
of year-round coal generation at the Vermilion Station in June 1997.
<PAGE>
NUCLEAR - IP leases nuclear fuel from Illinois Power Fuel Company (Fuel
Company). The 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). As of December 31, 1997, the Fuel Company had an
investment in nuclear fuel of approximately $127 million. IP is obligated to
make subordinated loans to the Fuel Company at any time the obligations of the
Fuel Company which are due and payable exceed the funds available to the Fuel
Company. At December 31, 1997, IP had no outstanding loans to the Fuel Company.
For additional information relating to the nuclear fuel lease, see "Note 8 -
Capital Leases" on page a-25 of the 1997 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement which is incorporated herein by
reference.
At December 31, 1997, IP's net investment in nuclear fuel consisted of
$65 million of Uranium 308. This inventory represents fuel used in connection
with the sixth and seventh reloads of Clinton. At December 31, 1997, the
unamortized investment of the nuclear fuel assemblies in the reactor was $62
million.
IP has one long-term contract for the supply of uranium concentrates
with Cameco, a Canadian corporation. The Cameco contract was renegotiated in
1994 to lower the price and provide 55% to 65% of Clinton's estimated fuel
requirements through 2000. The decision to utilize Cameco for the additional 10%
of Clinton's fuel requirements is made the year before each delivery and depends
on the estimated price and availability from the spot market versus the
estimated contract price. The contract with Cameco is stated in terms of U.S.
dollars.
Conversion services for the period 1991-2001 are contracted with
Sequoyah Fuels. Sequoyah Fuels closed its Oklahoma conversion plant in 1992 and
joined with Allied Chemical Company to form a marketing company named CoverDyn.
All conversion services will be performed at Allied's Metropolis, Illinois
facility, but Sequoyah Fuels retains the contract with IP.
IP has a utility services contract for uranium enrichment requirements
with the DOE which provides 70% of the enrichment requirements of Clinton
through September 1999. The remaining 30% has been contracted with the DOE
through an amendment to its incentive pricing plan through 1999. This amendment
allows IP to either purchase the enrichment services at the DOE's incentive
price or provide electricity at DOE's Paducah, Kentucky enrichment plant at an
agreed exchange rate.
A contract with General Electric Company provides fuel fabrication
requirements for the initial core and approximately 19 reloads, or through 2019.
Beyond the stated commitments, IP may enter into additional contracts
for uranium concentrates, conversion to uranium hexafluoride, enrichment and
fabrication.
Currently, commercial reprocessing of spent nuclear fuel is not allowed
in the U.S. The Nuclear Waste Policy Act of 1982 (NWPA) was enacted to establish
a government policy with respect to disposal of spent nuclear fuel and
high-level radioactive waste. On July 6, 1984, as required by NWPA, IP signed a
contract with the DOE for disposal of spent nuclear fuel and/or high-level
radioactive waste. Under the contract, IP is required to pay the DOE one mill
(one-tenth of a cent) per net kilowatt-hour (one dollar per megawatt-hour) of
electricity generated and sold. IP had been recovering this amount through its
UFAC subject to UFAC limitations discussed under the heading "Fuel Supply"
previously in this item. With the elimination of UFAC, IP may continue to
recover some portion of these costs through the new base fuel cost included in
electric tariffs.
On June 20, 1994, IP, along with other utilities and state utility
commissions, filed an action in the D.C. Circuit Court of Appeals asking the
Court to rule that the DOE is obligated to take responsibility for spent nuclear
<PAGE>
fuel by January 31, 1998 under the NWPA. The utilities asked the Court to
confirm the DOE's commitment and to order the DOE to develop a compliance
program with appropriate deadlines. The utilities also asked for relief from the
ongoing funding requirements or to have an escrow account established for future
funds paid to DOE. Subsequently, the petition was amended to seek, in addition,
relief in the form of specific performance.
A three-judge panel ruled in July 1996 that the DOE's obligation to
take spent fuel, by the January 1998 date specified in the NWPA, is binding and
unconditional. The DOE notified utilities in December 1996 that it may not be
able to meet the 1998 deadline, and solicited utility suggestions on how to
accommodate the potential delay. In January 1997, petitions were filed in the
D.C. Circuit Court of Appeals by IP and other utilities and state utility
commissions, seeking further enforcement of DOE's obligation. In response, the
Court has reaffirmed its ruling that the DOE obligation is unconditional, but
has not granted injunctive relief. This means that the Court has found the DOE
in breach of DOE's obligation but has not literally ordered the DOE to perform.
The litigation is continuing.
IP has on-site storage capacity that will accommodate its spent fuel
storage needs until the year 2007, based on current operating levels. If by that
date the DOE has not complied with its statutory obligation to dispose of spent
fuel, and IP has continued to operate the plant, IP will have to use alternative
means of disposal, such as dry storage in casks on site or transportation of the
fuel rods to private or collectively-owned utility repositories. IP is currently
an equity partner with seven other utilities in an effort to develop a private
temporary repository. Attempts to reach agreement with the Mescalaro Apache
Tribe of New Mexico ended in early 1996; however, the group signed a lease in
December 1996 with the Goshute Tribe to use land on its Utah reservation. A
spent fuel storage license was filed with the Nuclear Regulatory Commission
(NRC) in 1997, initiating a process which will take the NRC up to three years to
complete. Continued participation in the partnership will depend on the
technological and economic viability of the project. Safe, dry, on-site storage
is technologically feasible, but is subject to licensing and local permitting
requirements, for which there may be effective opposition.
Under the Energy Policy Act of 1992, IP is responsible for a portion of
the cost to decontaminate and decommission the DOE's uranium enrichment
facilities. Each utility is assessed an annual fee for a period of fifteen years
based on quantities purchased from the DOE facilities prior to passage of the
Act. At December 31, 1997, IP has a remaining liability of $4.3 million
representing future assessments. IP had been recovering these costs, as
amortized, through its UFAC subject to UFAC limitations discussed under the
heading "Fuel Supply" previously in this item. With the elimination of UFAC, IP
may continue to recover some portion of these costs through the new base fuel
cost included in electric tariffs.
OIL and GAS - IP used natural gas and oil to generate 1.0% of the electricity
produced in 1997. IP has not experienced difficulty in obtaining adequate
supplies of these resources. However, IP is unable to predict the extent to
which oil and gas availability and price may fluctuate in the future.
Reference is made to the section "Environmental Matters" hereunder for
information regarding pollution control matters relating to IP's fuel supply.
Construction Program
- --------------------
To meet anticipated needs, Illinova and IP have used internally
generated funds and external financings. The timing and amount of external
financings depend primarily on economic and financial market conditions, cash
needs and capitalization ratio objectives.
For more information on Illinova's construction program and liquidity,
see "Note 4 - Commitments and Contingencies" on page a-19 of the 1997 Annual
Report to Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference; "Note 5 - Lines of Credit and Short-Term
<PAGE>
Loans" on page a-23 of the 1997 Annual Report to Shareholders in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference; and
"Capital Resources and Requirements" in "Management's Discussion and Analysis"
on pages a-8 and a-9 of the 1997 Annual Report to Shareholders in the appendix
to the Illinova Proxy Statement which is incorporated herein by reference.
For more information on IP's construction program and liquidity, see
"Note 3 - Commitments and Contingencies" on pages a-18 and a-19 of the 1997
Annual Report to Shareholders in the appendix to the Illinois Power Information
Statement which is incorporated herein by reference; "Note 4 - Lines of Credit
and Short-Term Loans" on page a-23 of the 1997 Annual Report to Shareholders in
the appendix to the Illinois Power Information Statement which is incorporated
herein by reference; and "Capital Resources and Requirements" in "Management's
Discussion and Analysis" on pages a-7 through a-9 of the 1997 Annual Report to
Shareholders in the appendix to the Illinois Power Information Statement which
is incorporated herein by reference.
Clinton Power Station
- ---------------------
General
-------
In March 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership in connection
with the transfer from Soyland to IP of all of Soyland's interest in Clinton.
Soyland's title to the plant and directly related assets such as nuclear fuel
was transferred to IP in May 1997. Soyland's nuclear decommissioning trust
assets were transferred to IP in May 1997, consistent with IP's assumption of
all of Soyland's ownership obligations including those related to
decommissioning.
Clinton was placed in service in 1987 and represents approximately 20%
of IP's installed generation capacity. For more information on the Clinton Power
Station, see "Note 3 - Clinton Power Station" on pages a-17 and a-18 of the 1997
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
In September 1996, a leak in a recirculation pump seal caused IP
operations personnel to shut down Clinton. As of the date of this report,
Clinton has not resumed operation.
In January 1997 and again in June 1997, the NRC named Clinton among
plants having a trend of declining performance. In June 1997, IP committed to
conduct an Integrated Safety Assessment (ISA) to thoroughly assess Clinton's
performance. The ISA was conducted by a team of 30 individuals with extensive
nuclear experience and no substantial previous involvement at Clinton. Their
report concluded that the underlying reasons for the performance problems at
Clinton were ineffective leadership throughout the organization in providing
standards of excellence, complacency throughout the organization, barrier
weaknesses and weaknesses in teamwork. In late October, a team commissioned by
the NRC performed an evaluation to validate the ISA results. In December, this
team concluded that the findings of the ISA accurately characterized Clinton's
performance deficiencies and their causes.
On January 5, 1998, IP and PECO Energy Company (PECO) announced an
agreement under which PECO will provide management services for Clinton.
Although a PECO team will help manage the plant, IP will continue to maintain
the operating license for Clinton and retain ultimate oversight of the plant.
PECO employees will assume senior positions at Clinton, but the plant will
remain primarily staffed by IP employees. IP made this decision based on a
belief that bringing in PECO's experienced management team would be the most
efficient way to get Clinton back on line and operating at a superior level as
quickly as possible.
On January 21, 1998, the NRC placed Clinton on its Watch List of
nuclear plants that require additional regulatory oversight because of declining
performance. Twice a year the NRC evaluates the performance of nuclear power
<PAGE>
plants in the United States and identifies those which require additional
regulatory oversight. Once placed on the Watch List a plant must demonstrate
consistent improved performance before it is removed from the list. The NRC will
monitor Clinton more closely than plants not on the Watch List. This may include
increased inspections, additional required documentation, NRC-required approval
of processes and procedures, and higher-level NRC oversight.
The NRC has advised IP that it must submit a written report to the NRC
at least two weeks prior to restarting Clinton, giving the agency reasonable
assurance that IP's actions to correct recurring weaknesses in the corrective
action program have been effective. After the report is submitted, the NRC staff
plans to meet with IP's management to discuss the plant's readiness for restart.
The prolonged outage at Clinton is having an adverse effect on Illinova's and
IP's financial condition, through higher operating and maintenance and capital
costs, lost opportunities to sell energy, and replacement power costs. The
magnitude of these costs and lost opportunities is unknown because of
uncertainty regarding the timing of Clinton's return to service and uncertain
future market conditions.
Decommissioning Costs
---------------------
IP is responsible for 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 and through
its Power Coordination Agreement with Soyland. Illinois deregulation legislation
provides for the continued recovery of decommissioning costs from IP's delivery
customers. For more information on the decommissioning costs related to Clinton,
see "Decommissioning and Nuclear Fuel Disposal" in "Note 4 - Commitments and
Contingencies" on page a-20 of the 1997 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement which is incorporated herein by
reference.
Accounting Matters
- ------------------
Prior to the passage of House Bill 362, IP prepared its consolidated
financial statements in accordance with Statement of Financial Accounting
Standards (FAS) 71, "Accounting for the Effects of Certain Types of Regulation."
Reporting under FAS 71 allows companies whose service obligations and prices are
regulated to maintain assets on their balance sheets representing costs they
expect to recover from customers, through inclusion of such costs in their
future rates. In July 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board (EITF) concluded that application of FAS 71
accounting should be discontinued at the date of enactment of deregulation
legislation for business segments for which a plan of deregulation has been
established. The EITF further concluded that regulatory assets and liabilities
that originated in the portion of the business being deregulated should be
written off unless their recovery is specifically provided for through future
cash flows from the regulated portion of the business.
Because House Bill 362 provides for market-based pricing of electric
generation services, IP discontinued application of FAS 71 for its generating
segment as of December 1997. IP evaluated its regulatory assets and liabilities
associated with its generation segment and determined that recovery of these
costs was not probable through rates charged to transmission and distribution
customers, the regulated portion of the business.
IP wrote off generation-related regulatory assets and liabilities of
approximately $195 million (net of income taxes) in December 1997. These net
assets related to previously incurred costs that had been expected to be
collected through future revenues, including deferred Clinton costs, unamortized
gains and losses on reacquired debt, recoverable income taxes and other
generation-related regulatory assets. At December 31, 1997, IP's net investment
in generation facilities was $3.5 billion and was reflected in "Utility Plant,
at Original Cost" on IP's balance sheet.
<PAGE>
In addition, IP evaluated its generation segment plant investments to
determine if they had been impaired as defined in FAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This
evaluation determined that future revenues were expected to be sufficient to
recover the costs of its generation segment plant investments and as a result,
no plant write-downs were necessary. However, ultimate recovery depends on a
number of factors and variables including market conditions and IP's ability to
operate its generation assets efficiently.
The provisions of House Bill 362 allow for an acceleration in the rate
at which any utility-owned assets are expensed without regulatory approval
provided such charges are consistent with generally accepted accounting
principles. Under this legislation, up to an aggregate of $1.5 billion in
additional expense for generation-related assets could be accelerated through
the year 2008. This reduction in the net book value of IP's generation-related
assets should help position IP to operate competitively and profitably in the
changing business environment. This accelerated charge would have a direct
impact on earnings but not on cash flows.
IP Gas Business
---------------
IP supplies retail natural gas service to an estimated aggregate
population of 920,000 in 257 incorporated municipalities, adjacent suburban
areas and numerous unincorporated communities. IP does not sell gas for resale.
IP's rate schedules contain provisions for passing through to its gas
customers increases or decreases in the cost of purchased gas. For information
on revenue and energy costs, see the sub-caption "Revenue and Energy Cost" of
"Note 1 - Summary of Significant Accounting Policies" on page a-15 of the 1997
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
that is incorporated herein by reference.
IP has eight underground gas storage fields having a total capacity of
approximately 15.2 million MMBtu and a total deliverability on a peak day of
about 347,000 MMBtu. In addition to the capacity of the eight underground
storage fields, IP has contracts with various natural gas suppliers and
producers for 9.9 million MMBtu of underground storage capacity and a total
deliverability on a peak day of 160,000 MMBtu. Operation of underground storage
permits IP to increase deliverability to its customers during peak load periods
by taking gas into storage during the off-peak months.
IP owns one active liquefied petroleum gas plant having an aggregate
peak-day deliverability of about 20,000 MMBtu for peak-shaving purposes. Gas
properties include approximately 8,000 miles of mains.
IP experienced its 1997 peak-day send out of 705,725 MMBtu of natural
gas on January 10, 1997. This compares with IP's record peak-day send out of
857,324 MMBtu of natural gas on January 10, 1982.
Gas Supply
- ----------
IP has contracts with six interstate pipeline companies for firm
transportation and storage services. These contracts have varying expiration
dates ranging from 1998 to 2002. IP also enters into contracts for the
acquisition of natural gas supply. Those contracts range in duration from one
month to five months.
Diversified Business Activities
-------------------------------
IGC, a wholly-owned subsidiary of Illinova, invests in energy-related
projects throughout the world. IGC is an equity partner with Tenaska, Inc. in
<PAGE>
four natural gas-fired generation plants, of which three plants totaling
approximately 700 megawatts (MW) are in operation and one 240 MW plant has had
construction suspended. Tenaska, Inc. is an Omaha, Nebraska-based developer of
independent power projects throughout the United States. IGC also owns 50
percent of the North American Energy Services Company (NAES). NAES supplies a
broad range of operations, maintenance and support services to the world-wide
independent power generation industry and operates the Tenaska generation plants
in which IGC has an equity interest. IGC is an equity partner in the Indeck
North American Power Fund (Fund). The Fund has generation projects in Long
Beach, California, and Pepperell, Massachusetts. In addition to these ventures,
IGC is involved in generation projects in Teesside, England; Puerto Cortez,
Honduras; Zhejiang Province and Hunan Province, People's Republic of China;
Aguaytia, Peru; Old Harbour, Jamaica; Barranquilla, Columbia; and Balochistan,
Pakistan. In August 1996, Illinova's interest in the 1000 MW coal-fired plant in
Joppa, Illinois was transferred to IGC.
IEP is Illinova's wholly-owned subsidiary that engages in the brokering
and marketing of electric power and gas, respectively; and the development and
sale of energy-related products and services. In May 1995, IEP obtained approval
from the FERC to conduct business as a marketer of electric power and gas to
various customers outside of IP's present service territory. In September 1995,
IEP began buying and selling wholesale electricity in the Western United States.
IEP owns 50 percent of Tenaska Marketing Ventures (TMV). TMV focuses on natural
gas marketing in the Midwestern United States. IEP and TMV have formed Tenaska
Marketing Canada to market natural gas in Canada. In July 1996, IP received FERC
approval to sell electricity to IEP without prior transaction approval from
FERC.
For more information on the activities of the Illinova's diversified
enterprises, see "Note 2 - Illinova Subsidiaries" on pages a-16 and a-17 of the
1997 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement which is incorporated herein by reference.
Environmental Matters
---------------------
IP is subject to regulation by certain federal and Illinois authorities
with respect to environmental matters and may in the future become subject to
additional regulation by such authorities or by other federal, state and local
governmental bodies. Existing regulations affecting IP are principally related
to air and water quality, hazardous wastes and toxic substances.
Air Quality
- -----------
Pursuant to the Federal Clean Air Act (Act), the United States
Environmental Protection Agency (USEPA) has established ambient air quality
standards for air pollutants which, in its judgment, have an adverse effect on
public health or welfare. The Act requires each state to adopt laws and
regulations, subject to USEPA approval, designed to achieve such standards.
Pursuant to the Illinois Environmental Protection Act, the Illinois Pollution
Control Board (Board) adopted and, along with the Illinois Environmental
Protection Agency (IEPA), is enforcing a comprehensive set of air pollution
control regulations which include emission limitations, permit issuances,
monitoring and reporting requirements.
The air pollution regulations of the Board impose limitations on
emissions of particulate, sulfur dioxide, carbon monoxide, nitrogen oxides and
various other pollutants. Enforcement of emission limitations is accomplished in
part through the regulatory permitting process. IP's practice is to obtain an
operating permit for each source of regulated emissions. Presently, it has a
total of approximately 100 permits for emission sources at its power stations
and other facilities, expiring at various times. In addition to having the
requisite operating permits, each source of regulated emissions must be operated
within the regulatory limitations on emissions. Verification of such compliance
is usually accomplished by reports to regulatory authorities and inspections by
such authorities.
<PAGE>
In accordance with the requirements of the Illinois Clean Air Act
Permit Program (CAAPP), IP submitted new air permit applications for each of its
generating facilities in 1995. The IEPA will review these applications and is
expected to issue CAAPP permits in 1998.
In addition to the sulfur dioxide emission limitations for existing
facilities, both the USEPA and the State of Illinois adopted New Source
Performance Standards (NSPS) applicable to coal-fired generating units limiting
emissions to 1.2 pounds of sulfur dioxide per million Btu of heat input. This
standard is applicable to IP's Unit 6 at the Havana Power Station. The federal
NSPS also limit nitrogen oxides, opacity and particulate emissions and imposes
certain monitoring requirements. In 1977 and 1990 the Act was amended and, as a
result, USEPA has adopted more stringent emission standards for new sources.
These standards would apply to any new plant constructed by IP.
Clean Air Act
- -------------
For information on the impacts of the Clean Air Act Amendments of 1990,
see "Environmental Matters" in "Note 4 - Commitments and Contingencies" on page
a-21 of the 1997 Annual Report to Shareholders in the appendix to the Illinova
Proxy Statement which is incorporated herein by reference.
Global Warming
- --------------
For information on the impacts of the international negotiations to
reduce greenhouse gas emissions and the Kyoto Protocol, see "Environmental
Matters" in "Note 4 - Commitments and Contingencies" on page a-21 of the 1997
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
Manufactured-Gas Plant Sites
- ----------------------------
IP's estimated liability for MGP site remediation is $65 million. This
amount represents IP's current best estimate of the cost 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 costs through tariff
riders approved by the ICC. Accordingly, IP has recorded a regulatory asset on
its balance sheet totaling $65 million as of December 31, 1997. Management
expects that cleanup costs will be fully recovered from IP's customers.
In October 1995, to offset the burden imposed on its customers, IP
initiated litigation against a number of insurance carriers. As of February
1998, settlements or settlements in principle have been reached with all of the
carriers. Dismissal of the litigation is proceeding pending the necessary
documentation with the court. The settlement proceeds recovered from the
carriers will offset a significant portion of the remediation costs and will be
credited to customers through the tariff rider mechanism which the ICC
previously approved.
Water Quality
- -------------
The Federal Water Pollution Control Act Amendments of 1972 require that
National Pollutant Discharge Elimination System (NPDES) permits be obtained from
USEPA (or, when delegated, from individual state pollution control agencies) for
any discharge into navigable waters. Such discharges are required to conform
with the standards, including thermal, established by USEPA and also with
applicable state standards.
Enforcement of discharge limitations is accomplished in part through
the regulatory permitting process similar to that described previously under
<PAGE>
"Air Quality". Presently, IP has approximately two dozen permits for discharges
at its power stations and other facilities, which must be periodically renewed.
In addition to obtaining such permits, each source of regulated
discharges must be operated within the limitations prescribed by applicable
regulations. Verification of such compliance is usually accomplished by
monitoring results reported to regulatory authorities and inspections by such
authorities.
The Clinton permit was reissued in the third quarter of 1995. The
Havana Power Station permit was reissued in the first quarter of 1996. The
Hennepin Power Station permit application for reissuance was submitted in the
fourth quarter of 1996 and is not expected until 1998. The Vermilion Power
Station permit was reissued in the fourth quarter of 1996. The Wood River Power
Station permit was reissued in the first quarter of 1996. The Baldwin Power
Station permit was reissued in the first quarter of 1998.
Other Issues
- ------------
Hazardous and non-hazardous wastes generated by IP must be managed in
accordance with federal regulations under the Toxic Substances Control Act
(TSCA), the Comprehensive Environmental Response, Compensation and Liability Act
and the Resource Conservation and Recovery Act (RCRA) and additional state
regulations promulgated under both RCRA and state law. Regulations promulgated
in 1988 under RCRA govern IP's use of underground storage tanks. The use,
storage, and disposal of certain toxic substances, such as polychlorinated
biphenyls (PCBs) in electrical equipment, are regulated under the TSCA.
Hazardous substances used by IP are subject to reporting requirements under the
Emergency Planning and Community-Right-To-Know Act. The State of Illinois has
been delegated authority for enforcement of these regulations under the Illinois
Environmental Protection Act and state statutes. These requirements impose
certain monitoring, recordkeeping, reporting and operational requirements which
IP has implemented or is implementing to assure compliance. IP does not
anticipate that compliance will have a material adverse effect on its financial
position or results of operations.
Electric and Magnetic Fields
- ----------------------------
For information on Electric and Magnetic Fields, see "Electric and
Magnetic Fields" in "Note 4 Commitments and Contingencies" on page a-22 of the
1997 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement which is incorporated herein by reference.
Environmental Expenditures
- --------------------------
Operating expenses for environmentally-related activities were $49
million in 1997 (including the incremental costs of alternative fuels to meet
environmental requirements). IP's net capital expenditures (including AFUDC) for
environmental protection programs were approximately $7 million in 1997.
Accumulated net capital expenditures since 1969 have reached approximately $800
million.
Year 2000 Data Processing
-------------------------
In November 1996, Illinova deployed a project team to coordinate the
identification, evaluation, and implementation of changes to computer systems
and applications necessary to achieve a year 2000 date conversion with no effect
on customers or disruption to business operations.
These actions are necessary to ensure that systems and applications
will recognize and process coding for the year 2000 and beyond. Major areas of
potential business impact have been identified and initial conversion efforts
are underway. Illinova also is communicating with third parties with whom it
<PAGE>
does business to ensure continued business operations. The cost of achieving
year 2000 compliance is estimated to be at least $14 million through 1999.
Contingency plans for operating without year 2000 compliance have not
been developed. Such activity will depend on assessment of progress. Project
completion is planned for the fourth quarter of 1999.
Research and Development
------------------------
Illinova's research and development expenditures for 1997 included
approximately $5.4 million for IP and $2.0 million for Illinova. In 1996 and
1995, Illinova's research and development expenditures consisting entirely of IP
expenditures, were $5.4 million and $5.5 million, respectively.
Regulation
----------
The Illinois Public Utilities Act was significantly modified in 1997 by
House Bill 362, but the ICC continues to have broad powers of supervision and
regulation with respect to the rates and charges of IP, its services and
facilities, extensions or abandonment of service, classification of accounts,
valuation and depreciation of property, issuance of securities and various other
matters. Before a significant plant addition may be included in IP's rate base,
the ICC must determine that the addition is reasonable in cost, prudent and used
and useful in providing utility service to customers. IP must continue to
provide bundled retail electric service to all who choose to continue to take
service at tariff rates, and IP must provide unbundled electric distribution
services to all customers at rates to be determined in a future ICC proceeding.
Illinova and IP are exempt from all the provisions of the Public
Utility Holding Company Act of 1935 except Section 9(a)(2) thereof. That section
requires approval of the Securities and Exchange Commission prior to certain
acquisitions of any securities of other public utility companies or public
utility holding companies.
IP is subject to regulation under the Federal Power Act by the FERC as
to rates and charges in connection with the transmission of electric energy in
interstate commerce and the sale of such energy at wholesale in interstate
commerce, the issuance of debt securities maturing in not more than 12 months,
accounting and depreciation policies, interaction with affiliates, and certain
other matters. The FERC has declared IP exempt from the Natural Gas Act and
related FERC orders, rules and regulations.
IP is subject to the jurisdiction of the NRC with respect to Clinton.
NRC regulations control the granting of permits and licenses for the
construction and operation of nuclear power stations and subject such stations
to continuing review and regulation. Additionally, the NRC review and regulatory
process covers decommissioning, radioactive waste, environmental and
radiological aspects of such stations.
IP is subject to the jurisdiction of the Illinois Department of Nuclear
Safety (IDNS) with respect to Clinton. IDNS and the NRC entered a memorandum of
understanding which allows IDNS to review and regulate nuclear safety matters at
state nuclear facilities. The IDNS review and regulatory process covers
radiation safety, environmental safety, non-nuclear pressure vessels, emergency
preparedness and emergency response.
<PAGE>
Executive Officers of Illinova Corporation
------------------------------------------
Name of Officer Age Position
- --------------- --- --------
Larry D. Haab 60 Chairman, President and Chief
Executive Officer
Larry F. Altenbaumer 49 Chief Financial Officer, Treasurer
and Controller
Leah Manning Stetzner 49 General Counsel and Corporate
Secretary
Mr. Haab was elected Chairman, President and Chief Executive Officer in
December 1993.
Mr. Altenbaumer was elected Chief Financial Officer, Treasurer and
Controller in June 1994.
Ms. Stetzner was elected General Counsel and Corporate Secretary in June
1994.
The executive officers are elected annually by the Board of Directors at
the first meeting of the Board held after the annual meeting of shareholders,
and hold office until their successors are duly elected or until their death,
resignation or removal by the Board.
Executive Officers of Illinois Power Company
--------------------------------------------
Name of Officer Age Position
- --------------- --- --------
Larry D. Haab 60 Chairman, President and Chief
Executive Officer
Larry F. Altenbaumer 49 Senior Vice President and Chief
Financial Officer
Paul L. Lang 57 Senior Vice President
Walter G. MacFarland, IV 48 Senior Vice President and Chief
Nuclear Officer
John G. Cook 50 Senior Vice President
Richard W. Eimer, Jr. 49 Vice President
Kim B. Leftwich 50 Vice President
Robert D. Reynolds 41 Vice President
Robert A. Schultz 57 Vice President
Leah Manning Stetzner 49 Vice President, General Counsel
and Corporate Secretary
Cynthia G. Steward 40 Controller
Eric B. Weekes 46 Treasurer
Each of the IP executive officers, except for Mr. Weekes and Mr.
MacFarland, has been employed by IP or another subsidiary of Illinova for more
than five years in executive or management positions. Prior to election to the
positions shown above, the following executive officers held the following
positions since January 1, 1993.
Mr. Altenbaumer was elected Senior Vice President, Chief Financial Officer
and Treasurer in September 1995. Prior to being elected Senior Vice President
and Chief Financial Officer in June 1992, Mr. Altenbaumer was Vice President,
Chief Financial Officer and Controller.
Mr. Lang was elected Senior Vice President in June 1992. He joined IP as
Vice President in July 1986.
Mr. MacFarland was contracted from PECO Energy Company in Philadelphia
in January 1998. He was elected Senior Vice President in February 1998 after
<PAGE>
being named Chief Nuclear Officer in January 1998. Prior to joining IP as a
contractor from PECO, Mr. MacFarland held the positions of Vice President and
Director of Outage Management, both at PECO's Limerick Generating Station.
Mr. Cook was elected Senior Vice President in December 1995. Prior to being
elected Vice President in 1992, Mr. Cook was Manager of Clinton Power Station.
Mr. Eimer was elected Vice President in December 1995. He previously held
the positions of Assistant to the Vice President and Manager of Marketing.
Mr. Leftwich was elected Vice President in February 1998. He previously
held the positions of Managing Director - Customer Management Processes and
Manager of Marketing.
Mr. Reynolds was elected Vice President in May 1996. Prior to his election
to Vice President, Mr. Reynolds served as Director of Pricing and Manager of
Electric Supply.
Mr. Schultz was elected Vice President in February 1998. He previously held
the positions of President of Illinova Energy Partners, President of Illinova
Power Marketing and Treasurer of IP.
Ms. Stetzner was elected Vice President, General Counsel and Corporate
Secretary in February 1993. She joined IP as General Counsel and Corporate
Secretary in October 1989.
Ms. Steward was elected Controller in September 1995. She previously held
the positions of Manager of Employee Services and Director of Accounting.
Mr. Weekes joined IP as Treasurer in January 1997. He previously served as
Director of Financial Analysis, Budgets and Controls with a unit of Kraft Foods.
The present term of office of each of the above executive officers
extends to the first meeting of Illinova's and IP's Board of Directors after the
Annual Election of Directors. There are no family relationships among any of the
executive officers and directors of Illinova and IP.
Operating Statistics
---------------------
For Illinova the information under the caption "Selected Illinois Power
Company Statistics" on page a-33 of the 1997 Annual Report to Shareholders in
the appendix to the Illinova Proxy Statement is incorporated herein by
reference.
For IP the information under the caption "Selected Statistics" on page
a-33 of the 1997 Annual Report to Shareholders in the appendix to the IP
Information Statement is incorporated herein by reference.
Item 2. Properties
- -------
IP owns and operates six steam generating stations with composite net
summer capacity of 4,419,000 kilowatts. In addition, IP owns nine quick start
combustion turbine peaking units at three locations with a combined net summer
capacity of 147,000 kilowatts. All of IP's generating stations are in the State
of Illinois, including IP's only nuclear generating station, Clinton. IP owns
50% of three combustion turbine units, located in Bloomington, Illinois, with
combined net capacity of 5,250 kilowatts. State Farm Insurance Company owns the
other 50% of these units. The total IP available net summer capability is
4,571,250 kilowatts.
The major coal-fired units at Baldwin, Havana, Hennepin, Vermilion and
Wood River make up 3,112,000 kilowatts of summer capacity. Three natural
gas-fired units at Wood River were reactivated in 1997. These units have a
<PAGE>
combined net summer capacity of 139,000 kilowatts. Five oil-fired units at
Havana remain in cold standby status, not currently staffed for operation.
In December 1996, the control and computer rooms for Wood River Units 4 and
5 were damaged by an in-plant fire. Unit 4 was returned to service in June 1997
and Unit 5 was returned to service in October 1997.
During 1995, natural gas firing capability was added to the Vermilion
station. Vermilion now has the capability for either coal or natural gas firing
to achieve its summer capacity of 176,000 kilowatts. In June 1997, the Vermilion
units returned to coal as its primary fuel.
IP owns an interconnected electric transmission system of approximately
2,800 circuit miles, operating from 69,000 to 345,000 volts and a distribution
system which includes about 35,800 circuit miles of overhead and underground
lines.
All outstanding first mortgage bonds issued under the Mortgage and Deed
of Trust dated November 1, 1943 are secured by a first mortgage lien on
substantially all of the fixed property, franchises and rights of IP with
certain exceptions expressly provided in the mortgage securing the bonds. All
outstanding New Mortgage Bonds issued under the General Mortgage and Deed of
Trust dated November 1, 1992, are secured by a lien on IP's properties used in
the generation, purchase, transmission, distribution and sale of electricity and
gas. On October 24, 1997, a special meeting of First Mortgage Bondholders was
held. At this meeting the Trustee, holding more that the required two-thirds of
First Mortgage Bonds outstanding, voted in favor of a resolution amending the
Mortgage and Deed of Trust dated November 1, 1943, to conform in certain
respects to the General Mortgage and Deed of Trust dated November 1, 1992. On
December 10, 1997, the IP Board of Directors approved the resolution adopted by
the Bondholders and forwarded a certified resolution approving the Bondholders'
resolution of amendment to the Mortgage Trustee. This resolution was received by
the Mortgage Trustee on December 11, 1997, at which time the amendment became
effective.
Item 3. Legal Proceedings
- -------
See discussion of legal proceedings in "Manufactured-Gas Plant" in
"Note 4 - Commitments and Contingencies" on pages a-21 and a-22 of the 1997
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
See "Environmental Matters" reported under Item 1 of this report for
information regarding legal proceedings concerning environmental matters.
See "Fuel Supply" reported under Item 1 of this report for information
regarding legal proceedings concerning nuclear fuel disposal.
Item 4. Submission of Matters to a Vote of Security Holders
- -------
On October 24, 1997, a special meeting of First Mortgage Bondholders was
held. At this meeting the Trustee, holding more that the required two-thirds of
First Mortgage Bonds outstanding, voted in favor of a resolution amending the
Mortgage and Deed of Trust dated November 1, 1943, to conform in certain
respects to the General Mortgage and Deed of Trust dated November 1, 1992.
<PAGE>
PART II
- -------------------------------------------------------------------------------
Item 5. Market for Registrants' Common Equity and Related
- ------- Stockholder Matters
For Illinova the information under the caption "Quarterly Consolidated
Financial Information and Common Stock Data (Unaudited)" on page a-31 of the
1997 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement is incorporated herein by reference.
For IP the information under the caption "Quarterly Consolidated
Financial Information and Common Stock Data (Unaudited)" on page a-31 of the
1997 Annual Report to Shareholders in the appendix to the IP Information
Statement is incorporated herein by reference.
Item 6. Selected Financial Data
- -------
For Illinova the information under the caption "Selected Consolidated
Financial Data" on page a-32 of the 1997 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement is incorporated herein by reference.
For IP the information under the caption "Selected Consolidated
Financial Data" on page a-32 of the 1997 Annual Report to Shareholders in the
appendix to the IP Information Statement is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations
For Illinova the information under the caption "Management's Discussion
and Analysis" on pages a-2 through a-9 of the 1997 Annual Report to Shareholders
in the appendix to the Illinova Proxy Statement is incorporated herein by
reference.
For IP the information under the caption "Management's Discussion and
Analysis" on pages a-2 through a-9 of the 1997 Annual Report to Shareholders in
the appendix to the IP Information Statement is incorporated herein by
reference.
In March 1995, the ICC approved a program whereby IP will reacquire
shares of its common stock from Illinova, from time to time, at prices
determined to be equivalent to current market value. The reacquired stock will
be retained as treasury stock or canceled. The ICC did not set a limit on the
number of shares of common stock that can be repurchased, subject to meeting
certain financial tests. Authorization for this program expires October 3, 1998.
The repurchase program may be extended subject to ICC approval. During 1997, IP
repurchased 6,017,748 shares for a total of $121.5 million, averaging about $20
per share.
For information regarding the redemption of IP preferred stock, see
"Note 10 - Preferred Stock of Subsidiary" in the "Notes to Consolidated
Financial Statements" on page a-27 in the 1997 Annual Report to Shareholders in
the appendix to the Illinova Proxy Statement or "Note 9 - Preferred Stock" in
the "Notes to Consolidated Financial Statements" on page a-27 in the 1997 Annual
Report to Shareholders in the appendix to the IP Information Statement.
On February 26, 1998, IP issued a redemption notice for all outstanding
bonds of its 6.00% Pollution Control First Mortgage Bonds due 2007 ($18.7
million) and its 8.30% Pollution Control First Mortgage Bonds due 2017 ($33.8
million). The effective call date for both series is April 1, 1998. On March 6,
1998, IP issued $18.7 million of 5.40% Pollution Control First Mortgage Bonds
due 2028 and $33.8 million of 5.40% Pollution Control First Mortgage Bonds due
2028.
<PAGE>
Item 8. Financial Statements and Supplementary Data
- -------
For Illinova the consolidated financial statements and related notes on
pages a-11 through a-31 and Report of Independent Accountants on page a-10 of
the 1997 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement are incorporated herein by reference. With the exception of the
aforementioned information and the information incorporated in Items 1, 3, 5, 6
and 7, the 1997 Annual Report to Shareholders in the appendix to the Illinova
Proxy Statement is not to be deemed filed as part of this Form 10-K Annual
Report.
For IP the consolidated financial statements and related notes on pages
a-11 through a-31 and Report of Independent Accountants on page a-10 of the 1997
Annual Report to Shareholders in the appendix to the IP Information Statement
are incorporated herein by reference. With the exception of the aforementioned
information and the information incorporated in Items 1, 3, 5, 6 and 7, the 1997
Annual Report to Shareholders in the appendix to the IP Information Statement is
not to be deemed filed as part of this form 10-K Annual Report.
Item 9. Changes in and Disagreements With Accountants on
- ------- Accounting and Financial Disclosure
None.
<PAGE>
PART III
- -------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrants
- --------
For Illinova the information under the caption "Board of Directors" on
pages 3 through 7 of Illinova's Proxy Statement for its 1998 Annual Meeting of
Stockholders is incorporated herein by reference. The information relating to
Illinova's executive officers is set forth in Part I of this Annual Report on
Form 10-K.
For IP the information under the caption "Board of Directors" on pages 4
through 7 of IP's Information Statement for its 1998 Annual Meeting of
Stockholders is incorporated herein by reference. The information relating to
Illinois Power Company's executive officers is set forth in Part I of this
Annual Report on Form 10-K.
Item 11. Executive Compensation
- --------
For Illinova the information under the caption "Executive Compensation"
on pages 8 through 12 of Illinova's Proxy Statement for its 1998 Annual Meeting
of Stockholders is incorporated herein by reference.
For IP the information under the caption "Executive Compensation" on
pages 8 through 13 of IP's Information Statement for its 1998 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------
For Illinova the information under the caption "Security Ownership of
Management and Certain Beneficial Owners" on page 7 and the information
regarding securities owned by certain officers and directors under the caption
"Board of Directors" on pages 3 through 7 of Illinova's Proxy Statement for its
1998 Annual Meeting of Stockholders is incorporated herein by reference.
For IP the information under the caption "Security Ownership of
Management and Certain Beneficial Owners" on page 7 and the information
regarding securities owned by certain officers and directors under the caption
"Board of Directors" on pages 4 through 7 of IP's Information Statement for its
1998 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------
None.
<PAGE>
PART IV
- ------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- -------- Form 8-K
(a) Documents filed as part of this report.
(1a) Financial Statements:
Page in 1997
Annual Report
to Shareholders
in the appendix
to the Illinova
Proxy Statement*
----------------
Report of Independent Accountants a-10
Consolidated Statements of Income for the
three years ended December 31, 1997 a-11
Consolidated Balance Sheets at
December 31, 1997 and 1996 a-12
Consolidated Statements of Cash Flows for
the three years ended December 31, 1997 a-13
Consolidated Statements of Retained
Earnings for the three years
ended December 31, 1997 a-13
Notes to Consolidated Financial Statements a-14 - a-31
* Incorporated by reference from the indicated pages of the 1997 Annual
Report to Shareholders in the appendix to the Illinova Proxy
Statement.
(1b) Financial Statements:
Page in 1997
Annual Report
to Shareholders
in the appendix
to the IP
Information
Statement**
---------------
Report of Independent Accountants a-10
Consolidated Statements of Income for the
three years ended December 31, 1997 a-11
Consolidated Balance Sheets at
December 31, 1997 and 1996 a-12
Consolidated Statements of Cash Flows for
the three years ended December 31, 1997 a-13
Consolidated Statements of Retained
Earnings for the three years
ended December 31, 1997 a-13
Notes to Consolidated Financial Statements a-14 - a-31
** Incorporated by reference from the indicated pages of the 1997 Annual
Report to Shareholders in the appendix to the IP Information Statement
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- -------- Form 8-K (Continued)
(2) Financial Statement Schedules:
All Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
(3) Exhibits
The exhibits filed with this Form 10-K are listed in the Exhibit
Index located elsewhere herein. All management contracts and
compensatory plans or arrangements set forth in such list are
marked with a ~.
(b) Reports on Form 8-K since September 30, 1997:
Report filed on Form 8-K on November 21, 1997
Other Events: IP releases results of independent
assessment of the Clinton Power Station.
Report filed on Form 8-K on January 8, 1998
Other Events: IP selects PECO Nuclear to manage
Clinton Power Station. Impacts
of Illinois House Bill 362 and
returning Clinton to operation
will result in a fourth quarter
1997 charge of $260 million
(net of income taxes).
Report filed on Form 8-K on January 21, 1998
Other Events: The Nuclear Regulatory Commission
places IP's Clinton Power Station on
its Watch List.
Report filed on Form 8-K on January 21, 1998
Other Events: Illinova offers Medium-Term Notes under
its shelf Registration Statement on
Form S-3.
Financial
Statements,
Pro Forma
Financial
Information
and
Exhibits: Exhibits
Report filed on Form 8-K on February 13, 1998
Other Events: Illinova releases 1997 earnings and
discloses that it will not take a
previously announced $40 million charge
(net of income taxes) in 1997 for
returning Clinton Power Station to
operation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ILLINOIS POWER COMPANY
(REGISTRANT)
By Larry D. Haab
Larry D. Haab, Chairman, President
and Chief Executive Officer
Date: March 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
Larry D. Haab Chairman, President, Chief
Larry D. Haab Executive Officer and Director
(Principal Executive Officer)
Larry F. Altenbaumer Senior Vice President and
Larry F. Altenbaumer Chief Financial Officer
(Principal Financial Officer)
Cynthia G. Steward Controller
Cynthia G. Steward
(Principal Accounting Officer)
J. Joe Adorjan
J. Joe Adorjan
C. Steven McMillan
C. Steven McMillan
Robert M. Powers
Robert M. Powers
Sheli Z. Rosenberg
Sheli Z. Rosenberg Director March 11, 1998
Walter D. Scott
Walter D. Scott
Ronald L. Thompson
Ronald L. Thompson
Walter M. Vannoy
Walter M. Vannoy
Marilou von Ferstel
Marilou von Ferstel
John D. Zeglis
John D. Zeglis
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ILLINOVA CORPORATION
(REGISTRANT)
By Larry D. Haab
Larry D. Haab, Chairman, President
and Chief Executive Officer
Date: March 11, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
Larry D. Haab Chairman, President, Chief
Larry D. Haab Executive Officer and Director
(Principal Executive Officer)
Larry F. Altenbaumer Chief Financial Officer,
Larry F. Altenbaumer Treasurer and Controller
(Principal Financial
and Accounting Officer)
J. Joe Adorjan
J. Joe Adorjan
C. Steven McMillan
C. Steven McMillan
Robert M. Powers
Robert M. Powers
Sheli Z. Rosenberg
Sheli Z. Rosenberg
Walter D. Scott
Walter D. Scott Director March 11, 1998
Joe J. Stewart
Joe J. Stewart
Ronald L. Thompson
Ronald L. Thompson
Walter M. Vannoy
Walter M. Vannoy
Marilou von Ferstel
Marilou von Ferstel
John D. Zeglis
John D. Zeglis
Exhibit Index
Exhibit Description
(3)(i) Articles of Incorporation
Illinova Corporation
(a)(1) Articles of Amendment to the Articles of Incorporation of Illinova
Corporation, filed as of October 31, 1994. Filed as Exhibit 3(a) to
the Quarterly Report on Form 10-Q under the Securities Exchange Act of
1934 for the quarter ended September 30, 1994 (File No. 1-11327). *
(a)(2) Statement of Correction to the Articles of Incorporation of Illinova
Corporation, filed as of October 31, 1994. Filed as Exhibit 3(b) to
the Quarterly Report on Form 10-Q under the Securities Exchange Act of
1934 for the quarter ended September 30, 1994 (File No. 1-11327). *
Illinois Power Company
(b)(1) Amended and Restated Articles of Incorporation of Illinois Power
Company, dated September 7, 1994. Filed as Exhibit 3(a) to the Current
Report on Form 8-K dated September 7, 1994 (File No. 1-3004). *
(3)(ii) By-Laws
(a) By-laws of Illinova Corporation, as amended December 14, 1994. Filed
as Exhibit 3(b)(2) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1994
(File No. 1-11327). *
(b) By-laws of Illinois Power Company, as amended December 14, 1994. Filed
as Exhibit 3(b)(1) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1994
(File No. 1-3004). *
(4) Instruments Defining Rights of Security Holders,
Including Indentures
Illinova Corporation
(a)(1) See (4)(b) below for instruments defining the rights of holders of
long-term debt of Illinois Power Company.
(a)(2) Indenture dated February 1, 1997, between Illinova Corporation and
The First National Bank of Chicago, as trustee. Filed as Exhibit
(4)(a)(2) to the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31, 1996. (File No.
1-11327) *
<PAGE>
(a)(3) Distribution Agreement dated January 16, 1998, and Officers'
Certificate and Issuer Order of Illinova Corporation, dated January
16, 1998 (with forms of Fixed Rate Note and Floating Rate Note
attached), delivered pursuant to the terms of the Indenture dated as
of February 1, 1997, between Illinova Corporation and The First
National Bank of Chicago. Filed as Exhibit (1) and (4) of Form 8-K
under the Securities Exchange Act of 1934 dated January 21, 1998.
(File No. 1-11327) *
Illinois Power Company
(b)(1) Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit
2(b) Registration No. 2-14066. *
(b)(2) Supplemental Indenture dated May 1, 1974. Filed as Exhibit 2(v)
Registration No. 2-51674. *
(b)(3) Supplemental Indenture dated May 1, 1977. Filed as Exhibit 2(w)
Registration No. 2-59465. *
(b)(4) Supplemental Indenture dated July 1, 1979. Filed as Exhibit 2 to the
Quarterly Report on Form 10-Q under the Securities Exchange Act of
1934 for the quarter ended June 30, 1979. *
(b)(5) Supplemental Indenture dated March 1, 1985. Filed as exhibit 4(a) to
the Quarterly Report on Form 10-Q under the Securities Exchange Act of
1934 for the quarter ended March 31, 1985 (File No. 1-3004). *
(b)(6) Supplemental Indenture dated July 1, 1987, providing for $33,755,000
principal amount of 8.30% First Mortgage Bonds, Pollution Control
Series I, due April 1, 2017. Filed as Exhibit 4(ll) to the Annual
Report on Form 10-K under the Securities Exchange Act of 1934 for the
year ended December 31, 1987 (File No. 1-3004). *
(b)(7) Supplemental Indenture dated December 13, 1989, providing for
$300,000,000 principal amount of Medium-Term Notes, Series A. Filed as
Exhibit 4(nn) to the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31, 1989 (File No.
1-3004). *
(b)(8) Supplemental Indenture dated July 1, 1991, providing for $84,710,000
principal amount of 7 3/8% First Mortgage Bonds due July 1, 2021.
Filed as Exhibit 4(mm) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1991
(File No. 1-3004). *
(b)(9) Supplemental Indenture No. 1 dated June 1, 1992. Filed as Exhibit
4(nn) to the Quarterly Report on Form 10-Q for the quarter ended June
30, 1992 (File No. 1-3004). *
<PAGE>
(b)(10) Supplemental Indenture No. 2 dated June 1, 1992. Filed as Exhibit
4(oo) to the Quarterly Report on Form 10-Q for the quarter ended June
30, 1992 (File No. 1-3004). *
(b)(11) Supplemental Indenture No. 1 dated July 1, 1992. Filed as Exhibit
4(pp) to the Quarterly Report on Form 10-Q for the quarter ended June
30, 1992 (File No. 1-3004). *
(b)(12) Supplemental Indenture No. 2 dated July 1, 1992. Filed as Exhibit
4(qq) to the Quarterly Report on Form 10-Q for the quarter ended June
30, 1992 (File No. 1-3004). *
(b)(13) Supplemental Indenture dated September 1, 1992, providing for
$72,000,000 principal amount of 6 1/2% First Mortgage Bonds due
September 1, 1999. Filed as Exhibit 4(rr) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992 (File No. 1-3004).
*
(b)(14) General Mortgage Indenture and Deed of Trust dated as of November
1, 1992. Filed as Exhibit 4(cc) to the Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year ended December
31, 1992 (File No. 1-3004). *
(b)(15) Supplemental Indenture dated February 15, 1993, to Mortgage and
Deed of Trust dated November 1, 1943. Filed as Exhibit 4(dd) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1992 (File No. 1-3004). *
(b)(16) Supplemental Indenture dated February 15, 1993, to General Mortgage
Indenture and Deed of Trust dated as of November 1, 1992. Filed as
Exhibit 4(ee) to the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31, 1992 (File No.
1-3004). *
(b)(17) Supplemental Indenture No. 1 dated March 15, 1993, to Mortgage and
Deed of Trust dated November 1, 1943. Filed as Exhibit 4(ff) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1992 (File No. 1-3004). *
(b)(18) Supplemental Indenture No. 1 dated March 15, 1993, to General
Mortgage Indenture and Deed of Trust dated as of November 1, 1992.
Filed as Exhibit 4(gg) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1992
(File No. 1-3004). *
(b)(19) Supplemental Indenture No. 2 dated March 15, 1993, to Mortgage and
Deed of Trust dated November 1, 1943. Filed as Exhibit 4(hh) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1992 (File No. 1-3004). *
(b)(20) Supplemental Indenture No. 2 dated March 15, 1993, to General
Mortgage Indenture and Deed of Trust dated as of November 1, 1992.
Filed as Exhibit 4(ii) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1992
(File No. 1-3004). *
(b)(21) Supplemental Indenture dated July 15, 1993, to Mortgage and Deed of
Trust dated November 1, 1943. Filed as Exhibit 4(jj) to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993 (File No.
1-3004). *
(b)(22) Supplemental Indenture dated July 15, 1993, to General Mortgage
Indenture and Deed of Trust dated as of November 1, 1992. Filed as
Exhibit 4(kk)to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 (File No. 1-3004). *
(b)(23) Supplemental Indenture dated August 1, 1993, to Mortgage and Deed
of Trust dated November 1, 1943. Filed as Exhibit 4(ll) to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993
(File No. 1-3004). *
(b)(24) Supplemental Indenture dated August 1, 1993, to General Mortgage
Indenture and Deed of Trust dated as of November 1, 1992. Filed as
Exhibit 4(mm) to the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 (File No. 1-3004). *
(b)(25) Supplemental Indenture dated October 15, 1993, to Mortgage and Deed
of Trust dated November 1, 1943. Filed as Exhibit 4(nn) to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
(File No. 1-3004). *
(b)(26) Supplemental Indenture dated October 15, 1993, to General Mortgage
Indenture and Deed of Trust dated as of November 1, 1992. Filed as
Exhibit 4(oo) to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (File No. 1-3004). *
(b)(27) Supplemental Indenture dated November 1, 1993, to Mortgage and Deed
of Trust dated November 1, 1943. Filed as Exhibit 4(pp) to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
(File No. 1-3004). *
(b)(28) Supplemental Indenture dated November 1, 1993, to General Mortgage
Indenture and Deed of Trust dated as of November 1, 1992. Filed as
Exhibit 4(qq) to the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (File No. 1-3004). *
(b)(29) Supplemental Indenture dated February 1, 1994, to Mortgage and Deed
of Trust dated November 1, 1943. Filed as Exhibit 4(hh) to the Annual
Report on Form 10-K under the Securities Exchange Act of 1934 for the
year ended December 31, 1993 (File No. 1-3004). *
<PAGE>
(b)(30) Indenture dated October 1, 1994 between Illinois Power Company and
the First National Bank of Chicago. Filed as Exhibit 4(a) to the
Quarterly Report on Form 10-Q for the quarter ended September 30, 1994
(File No. 1-3004). *
(b)(31)Supplemental Indenture dated October 1, 1994, to Indenture dated as
of October 1, 1994. Filed as Exhibit 4(b) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1994 (File No.1-3004). *
(b)(32) Indenture dated January 1, 1996 between Illinois Power Company and
Wilmington Trust Company. Filed as Exhibit 4(b)(36) to the Annual
Report on Form 10-K under the Securities Exchange Act of 1934 for the
year ended December 31, 1995 (File No. 1-3004). *
(b)(33) First Supplemental Indenture dated January 1, 1996, between
Illinois Power Company and Wilmington Trust Company. Filed as Exhibit
4(b)(37) to the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31, 1995 (File No.
1-3004). *
(b) (34) Supplemental Indenture dated April 1, 1997, to Mortgage and Deed
of Trust dated November 1, 1943 Filed as Exhibit 4(a) to the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997. (File No.
1-3004) *
(b) (35) Supplemental Indenture dated April 1, 1997 to General Mortgage
Indenture and Deed of Trust dated November 1, 1992. Filed as Exhibit
4(b) to the Quarterly Report on Form 10-Q for the quarter ended March
31, 1997. (File No. 1-3004) *
(b) (36) Supplemental Indenture dated December 1, 1997 to Mortgage and
Deed of Trust dated November 1, 1943.
(10) Material Contracts
Illinova Corporation
(a)(1) Illinova Corporation Deferred Compensation Plan for Certain
Directors, as amended April 10, 1991. Filed as Exhibit 10(b) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1991 (File No. 1-3004).~ *
(a)(2) Illinova Corporation Director Emeritus Plan for Outside Directors.
Filed as Exhibit 10(e) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1989
(File No. 1-3004).~ *
<PAGE>
(a)(3) Illinova Corporation Stock Plan for Outside Directors as amended and
restated by the Board of Directors on April 9, 1992 and as further
amended April 14, 1993. Filed as Exhibit 10(h) to the Annual Report on
Form 10-K under the Securities Exchange Act of 1934 for the year ended
December 31, 1993 (File No. 1-3004).~ *
(a)(4) Illinova Corporation Retirement Plan for Outside Directors, as
amended through December 11, 1991. Filed as Exhibit 10(j) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1991 (File No. 1-3004).~ *
(a)(5) Illinova Corporation 1992 Long-Term Incentive Compensation Plan.
Filed as Exhibit 10(k) to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 (File No. 1-3004).~ *
(a)(6) Illinova Corporation Comprehensive Deferred Stock Plan for Outside
Directors, as approved by the Board of Directors on February 7, 1996.
Filed as Exhibit 10 (a)(6) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1995
(File No. 1-11327).~ *
(a)(7) Form of Employee Retention Agreement in place between Illinova
Corporation and its elected officers, Illinois Power Company's elected
officers, and the Presidents of Illinova Corporation's subsidiaries.
Filed as Exhibit 10(g) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1989
(File no. 1-3004).~ *
(a)(8) Illinova Corporation Leadership Incentive Program, effective January
1, 1996.~
(a)(9) Illinova Corporation Retirement Plan for Outside Directors, as
amended by resolutions adopted by the Board of Directors on February
7, 1996.~
(a)(10) Illinova Corporation Employee Retention Agreement, as amended by
resolutions adopted by the Board of Directors on February 7, 1996.~
(a)(11) Illinova Corporation Deferred Compensation Plan for Certain
Directors as amended October 9, 1996, effective January 1, 1997.~
(a)(12) Illinova Corporation Employee Retention Agreement, as amended by
resolutions adopted by the Board of Directors on June 10-11, 1997.~
(a)(13) Illinova Corporation Deferred Compensation Plan for Certain
Directors, as amended by resolutions adopted by the Board of Directors
on June 10-11, 1997.~
<PAGE>
Illinois Power Company
(b)(1) Group Insurance Benefits for Managerial Employees of Illinois Power
Company as amended January 1, 1983. Filed as Exhibit 10(a) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1983 (File No. 1-3004).~ *
(b)(2) Illinois Power Company Incentive Savings Trust and Illinois Power
Company Incentive Savings Plan and Amendment I thereto. Filed as
Exhibit 10(d) to the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31, 1984 (File No.
1-3004).~ *
(b)(3) Illinois Power Company's Executive Incentive Compensation Plan.
Filed as Exhibit 10(f) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1989
(File No. 1-3004).~ *
(b)(4) Illinois Power Company Incentive Savings Plan, as amended and
restated effective January 1, 1991. Filed as Exhibit 10(h) to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1990 (File No. 1-3004).~ *
(b)(5) Illinois Power Company Executive Deferred Compensation Plan. Filed
as Exhibit 10(l) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended December 31, 1993.
(File No. 1-3004)~ *
(b)(6) Illinois Power Company Retirement Income Plan for salaried employees
as amended and restated effective January 1, 1989, as further amended
through January 1, 1994. Filed as Exhibit 10(m) to the Annual Report
on Form 10-K under the Securities Exchange Act of 1934 for the year
ended December 31, 1994 (File No. 1-3004).~ *
(b)(7) Illinois Power Company Retirement Income Plan for employees covered
under a collective bargaining agreement as amended and restated
effective as of January 1, 1994. Filed as Exhibit 10(n)to the Annual
Report on Form 10-K under the Securities Exchange Act of 1934 for the
year ended December 31, 1994 (File No. 1-3004).~ *
(b)(8) Illinois Power Company Incentive Savings Plan as amended and
restated effective January 1, 1991 and as further amended through
amendments adopted December 28, 1994. Filed as Exhibit 10(o)to the
Annual Report on Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1994 (File No. 1-3004).~ *
<PAGE>
(b)(10) Illinois Power Company Incentive Savings Plan for employees covered
under a collective bargaining agreement as amended and restated
effective January 1, 1991 and as further amended through amendments
adopted December 28, 1994. Filed as Exhibit 10(p) to the Annual Report
on Form 10-K under the Securities Exchange Act of 1934 for the year
ended December 31, 1994 (File No. 1-3004).~ *
(b)(11) Illinois Power Company Executive Incentive Compensation Plan, as
amended, effective January 1, 1997. ~
(b)(12) Illinois Power Company Executive Deferred Compensation Plan as
amended by resolutions adopted by the Board of Directors on June
10-11, 1997.~
(b)(13) Illinois Power Company Supplemental Retirement Income Plan for
Salaried Employees of Illinois Power Company as amended by resolutions
adopted by the Board of Directors on June 10-11, 1997.~
(b)(14) Retirement and Consulting Agreement entered into as of June 30,
1997 between Illinois Power Company and Wilfred Connell.~
(12) Statement Re Computation of Ratios
(a) Computation of ratio of earnings to fixed charges for Illinova
Corporation.
(b) Computation of ratio of earnings to fixed charges for Illinois Power
Company.
(13) Annual Reports to Shareholders
(a) Illinova Corporation Proxy Statement and 1997 Annual Report to
Shareholders.
(b) Illinois Power Company Information Statement and 1997 Annual Report to
Shareholders.
(21) Subsidiaries of Registrants
(a) Subsidiaries of Illinova Corporation and Illinois Power Company.
(23) Consents of Experts
Consent of Independent Accountants for Illinova Corporation.
(27) Financial Data Schedules
(a) Illinova Corporation
(b) Illinois Power Company
* Incorporated herein by reference.
~ Management contract and compensatory plans or arrangements.
Exhibit (b)(36)
[Conformed Copy]
ILLINOIS POWER COMPANY
TO
HARRIS TRUST AND SAVINGS BANK,
as Trustee
Supplemental Indenture
DATED AS OF DECEMBER 1, 1997
TO
Mortgage and Deed of Trust
DATED NOVEMBER 1, 1943
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of the first day of December, Nineteen hundred
and ninety-seven (1997) (the "Supplemental Indenture"), made by and between
ILLINOIS POWER COMPANY, a corporation organized and existing under the laws of
the State of Illinois (the "Company"), and HARRIS TRUST AND SAVINGS BANK, a
corporation organized and existing under the laws of the State of Illinois (the
"Trustee"), as Trustee under the Mortgage and Deed of Trust dated November 1,
1943.
WHEREAS, the Company has heretofore executed and delivered its Mortgage and
Deed of Trust dated November 1, 1943 (the "Original Indenture"), to the Trustee,
for the security of the First Mortgage Bonds of the Company issued and to be
issued thereunder (the "Bonds"); and
WHEREAS, the Company desires to amend the Original Indenture in certain
respects, and in connection therewith has complied with the applicable
provisions of Articles XIV and XV of the Original Indenture; and
WHEREAS, the Company, in the exercise of the powers and authority conferred
upon and reserved to it under the provisions of the Original Indenture, and
pursuant to appropriate resolutions of the Board of Directors, has duly resolved
and determined to make, execute and deliver to the Trustee a Supplemental
Indenture in the form hereof for the purposes herein provided; and
WHEREAS, all the conditions and requirements necessary to make this
Supplemental Indenture a valid, binding and legal instrument have been done,
performed and fulfilled and the execution and delivery hereof have been in all
respects duly authorized:
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
THAT Illinois Power Company, in consideration of the purchase and ownership
from time to time of the Bonds and the service by the Trustee, and its
successors, under the Original Indenture and of One Dollar to it duly paid by
the Trustee at or before the ensealing and delivery of these presents, the
receipt whereof is hereby acknowledged, hereby covenants and agrees to and with
the Trustee and its successors in the trust under the Original Indenture, for
the benefit of those who shall hold the Bonds and coupons, if any, appertaining
thereto, as follows:
<PAGE>
ARTICLE I
AMENDMENT OF ORIGINAL INDENTURE
Section 1. The Original Indenture is hereby amended to delete the terms "St.
Clair bonds" and "St. Clair mortgage" and all references thereto.
Section 2. Article I of the Original Indenture, "Definitions," is hereby amended
in the following respects:
(a) The definition of "Net bondable value of property additions not
subject to an unfunded prior lien" is hereby amended by changing the
fractions set forth in each of Subdivisions (e)(1) and (f) thereof
from "ten-sixths (10/6ths)" to "133 1/3%."
(b) The definition of "Net bondable value of property additions subject to
an unfunded prior lien" is hereby amended by changing the fractions
set forth in each of Subdivisions (c) and (d) thereof from "ten-sixths
(10/6ths)" to "133 1/3%."
(c) The definition of "Net earnings of the Company available for interest
and property retirement appropriations" is hereby amended and restated
in its entirety as follows:
"The term net earnings of the Company available for interest and
property retirement appropriations shall mean the net earnings of the
Company ascertained as follows, specifying:
(a) its operating revenues (which may include revenues of the
Company subject when collected or accrued to possible refund at a
future date) with the principal divisions thereof.
(b) its operating expenses, with the principal divisions thereof,
excluding (A) expenses for income, profits and other taxes measured
by, or dependent on, net income, (B) provisions for reserves for
renewals, replacements, depreciation, depletion or retirement of
property (or any expenditures therefor), or provisions for
amortization of property, (C) expenses or provisions for interest on
any indebtedness of the Company, for the amortization of debt
discount, premium, expense or loss on reacquired debt, for any
maintenance and replacement, improvement or sinking fund or other
device for the retirement of any indebtedness, or for other
amortization, (D) expenses or provisions for any non-recurring charge
to income or to retained earnings of whatever kind or nature
(including without limitation the recognition of expense due to the
non-recoverability of assets or expense), whether or not recorded as a
non-recurring charge in the Company's books of account, and (E)
provisions for any refund of revenues previously collected or accrued
by the Company subject to possible refund;
<PAGE>
(c) the amount remaining after deducting the amount in clause (b)
above from the amount in clause (a) above;
(d) its rental revenues (net of rental expenses not included in
clause (b) above);
(e) the sum of the amounts in clauses (c) and (d);
(f) its other income, which amount may include any portion of the
allowance for funds used during construction and other income related
to deferred costs (or any analogous amounts) which is not included in
"other income" (or any analogous item) in the Company's books of
account;
(g) Net earnings of the Company available for interest and
property retirement appropriations (being the sum of clauses (e) and
(f) above).
Notwithstanding anything herein to the contrary, neither profits
nor loss from the sale or other disposition of property, nor
non-recurring charges of any kind or nature, whether items of revenue
or expense, shall be included in calculating net earnings of the
Company available for interest and property retirement appropriations.
If any of the property of the Company owned by it at the time of
calculating net earnings of the Company available for interest and
property retirement appropriations (a) shall have been acquired during
or after any period for which net earnings of the Company available
for interest and property retirement appropriations are to be
computed, (b) shall not have been acquired in exchange or substitution
for property the net earnings of which have been included in the net
earnings of the Company available for interest and property retirement
appropriations, and (c) had been operated as a separate unit and items
of revenue and expense attributable thereto are readily ascertainable,
then the net earnings of such property (computed in the manner in this
Section provided for the computation of the net earnings of the
Company available for interest and property retirement appropriations)
during such period or such part of such period as shall have preceded
the acquisition thereof, to the extent that the same have not
otherwise been included in the net earnings of the Company available
for interest and property retirement appropriations, shall be so
included."
(d) The definition of "Net earnings of the Company available for interest
after property retirement appropriations" and all references thereto
are hereby deleted in their entirety.
<PAGE>
Section 3. Article III of the Original Indenture, "Authentication and Delivery
of Bonds," is hereby amended in the following respects:
(a) Section 3, Subdivision (b)(1) is hereby amended by (i) changing the
period "fifteen calendar months" to "eighteen calendar months," (ii)
deleting the phrase "the greater of" and changing the figure "two and
one-half" to "two," and (iii) deleting the phrase "or ten percent
(10%) of the principal amount of".
(b) Section 3, Subdivision (b)(2) and all references thereto are hereby
deleted in their entirety.
(c) The first paragraph of Section 4 is hereby amended by changing the
percentage set forth in the first sentence thereof from 60% to 75%.
(d) Section 4, Subdivisions (a)(7)(i) and (a)(8) are hereby amended by
changing the fraction set forth in each such Subdivision thereof from
"ten-sixths (10/6ths)" to "133 1/3%."
Section 4. Article IV of the Original Indenture, "Particular Covenants of the
Company," is hereby amended in the following respects:
(a) Section 6, Subdivision (a) is hereby amended by (i) deleting the
phrase "such hazards and risks as are usually insured by companies
similarly situated and operating like properties" and replacing in
lieu thereof the word "fire," (ii) deleting the phrase "Fifty thousand
dollars" and replacing in lieu thereof "the greater of Five Million
Dollars ($5,000,000) or three per cent (3%) of the aggregate principal
amount of the Bonds then outstanding under this Indenture, and (iii)
deleting the phrase "hazards and risks covered thereby" in Subdivision
(a)(1) and replacing in lieu thereof the word "fire."
(b) Section 6, Subdivision (b) is hereby amended by deleting the phrase
"Twenty five thousand dollars" and replacing in lieu thereof "the
greater of Five Million Dollars or three per cent (3%) of the
aggregate principal amount of Bonds then outstanding under this
Indenture."
(c) Section 6, Subdivision (c) is hereby amended by deleting the phrase
"any insurance" and replacing in lieu thereof "any fire insurance
required to be maintained by it pursuant to Subdivision (a) of this
Section."
(d) Section 14, Subdivision (a) is hereby amended by changing the
percentage set forth therein from "50%" to "75%."
<PAGE>
(e) Section 14, Subdivision (b)(1) is hereby amended by (i) changing the
period "fifteen calendar months" to "eighteen calendar months," (ii)
deleting the phrase "the greater of" and changing the figure "two and
one-half" to "two," and (iii) deleting the phrase "or ten percent
(10%) of the principal amount of."
(f) Section 14, Subdivision (b)(2) and all references thereto are hereby
deleted in their entirety.
(g) Section 16, Subdivisions (a)(1) and (a)(2) are hereby amended by
changing the percentages set forth in each such Subdivision from "60%"
to "75%."
(h) Section 16, Subdivision (b)(1) is hereby amended by (a) changing the
period "fifteen calendar months" to "eighteen calendar months," (b)
deleting the phrase "the greater of" and changing the figure "two and
one-half" to "two," and (c) deleting the phrase "or ten percent (10%)
of the principal amount of, and."
(i) Section 16, Subdivision (b)(2) and all references thereto are hereby
deleted in their entirety.
(j) Sections 24, 25 and 26 and all references thereto are hereby deleted
in their entirety.
Section 5. Article VI of the Original Indenture, "Concerning Securities Held by
the Trustee," is hereby amended to delete Sections 6, 7, 8, 9, 10, 11 and 12 and
all references thereto in their entirety.
Section 6. Article VII of the Original Indenture, "Possession, Use and Release
of Property," is hereby amended in the following respects:
(a) Section 3 is amended by adding the following paragraph at the end of
Section 3:\
"Notwithstanding any of the foregoing, if the property constituting
part of the trust estate to be released is (i) capital stock of any
Subsidiary owned by the Company, or (ii) secured funded indebtedness
of any Subsidiary owned by the Company, the Company shall not be
required to comply with any of the provisions of this Section 3."
(b) Article VII is hereby amended by adding the following new Section 9:
"SECTION 9. Notwithstanding the other provisions of this Article VII,
unless an Event of Default shall have occurred and be continuing, the
Company may obtain the release from the lien of this Indenture, any
part of the property constituting part of the trust estate, or any
part thereof, and the Trustee shall whenever from time to time
requested by the Company, and without requiring compliance with any of
the other provisions of this Article VII, release the same from the
lien hereof all the right, title and interest of the Trustee in and to
the same, provided either that:
<PAGE>
(a) the aggregate fair value of the property to be so released on
any date in a given calendar year, together with all other property
released pursuant to this Subdivision (a) in such calendar year, shall
not exceed the greater of Five Million Dollars ($5,000,000) or one
percent (1%) of the aggregate principal amount of the Bonds at the
time outstanding, provided that there shall be delivered to the
Trustee an engineer's certificate stating the fair value, in the
judgment of the signers, of the property to be released, the aggregate
fair value of all other property theretofore released pursuant to this
Subdivision (a) in such calendar year and that, in the judgment of the
signers, the release thereof will not impair the security under this
Indenture in contravention of the provisions hereof; or
(b) the aggregate fair value of the property to be so released on
any date in a given calendar year, together with all other property
released pursuant to Subdivision (a) of this Section 9 or this
Subdivision (b) in such calendar year, shall exceed the greater of
Five Million Dollars ($5,000,000) or one percent (1%) of the aggregate
principal amount of the Bonds at the time outstanding, but shall not
exceed three percent (3%) of the aggregate principal amount of the
Bonds at the time outstanding, provided that there shall be delivered
to the Trustee an engineer's certificate stating the fair value, in
the judgment of the signers, of the property to be released, the
aggregate fair value of all other property theretofore released
pursuant to Subdivision (a) of this Section 9 and this Subdivision (b)
in such calendar year and, as to property additions, the cost thereof
(or, if the fair value to the Company of such property at the time the
same became property additions was less than the cost thereof, then
such fair value, in the judgment of the signers, in lieu of cost), and
that, in the judgment of the signers, the release thereof will not
impair the security under this Indenture in contravention of the
provisions hereof. On or before December 1st of each year, the Company
shall deposit with the Trustee an amount in cash equal to the
aggregate cost of the properties constituting property additions so
released pursuant to this Subdivision (b) during the previous calendar
year (or, if the fair value to the Company of any particular property
at the time the same became property additions was less than the cost
thereof, then such fair value in lieu of cost); provided, however,
that no such deposit shall be required to be made hereunder to the
extent that cash or other consideration shall, as indicated in an
Officer's certificate delivered to the Trustee, have been deposited
with the trustee or other holder of a funded prior lien, a unfunded
prior lien or other lien prior to the lien of this Indenture in
accordance with the provision thereof. Any cash deposited with the
Trustee under this Subdivision (b) may thereafter be withdrawn, used
or applied in the manner, to the extent and for the purposes, and
subject to the conditions, provided in this Article VII."
<PAGE>
Section 7. Article VIII of the Original Indenture, "Application of Moneys
Received by the Trustee," is hereby amended in the following respects:
(a) The first paragraph of Section 1 is hereby amended and restated in its
entirety as follows:
"Section 1. Any moneys held by the Trustee as part of the trust estate
(other than moneys received by the Trustee pursuant to Section 5(a) of
Article III or on account of judgment liens or in order to make a
prior lien a funded prior lien) shall be paid over from time to time
by the Trustee to or upon the order of the Treasurer or an Assistant
Treasurer of the Company, in amount equal to the cost, or the fair
value to the Company if the fair value is less than the cost, of all
property additions purchased, constructed or otherwise acquired by the
Company not previously included within the definition of "net bondable
value of property additions not subject to an unfunded prior lien" for
purposes of issuing Bonds or withdrawing cash, but only upon the
receipt by the Trustee of :"
(b) Section 1, Subdivision (b)(1) is hereby amended by deleting the
following in its entirety:
"during the period specified in such certificate, commencing,
(i) in the case of withdrawal of moneys received by the Trustee
pursuant to Sections 3, 4 or 5 of Article VII upon the release of any
property (other than obligations deposited pursuant to Section 3(d) of
Article VII) from the lien of this Indenture, on a date not earlier
than the date of the application for such release,
(ii) in the case of withdrawal of moneys received by the Trustee
upon the payment of principal of obligations deposited pursuant to
Section 3(d) of Article VII, or upon the release of such obligations
from the lien of this Indenture, on a date not earlier than the date
of the application for the release of the property with respect to
which such obligations were deposited,
(iii) in the case of withdrawal of moneys deposited with the
Trustee pursuant to Section 6 of Article IV, on the date of the loss
or destruction of the property with respect to which such moneys were
deposited, and
<PAGE>
(iv) in the case of withdrawal of any other moneys which may be
withdrawn pursuant to this Section 1, on a date not earlier than the
date of the receipt by the Trustee of such moneys."
(c) Section 3, Subdivision (a) is hereby amended by changing the
percentage set forth therein from "60%" to "75%."
(d) Section 8 and all references thereto are hereby deleted in their
entirety.
Section 8. Article IX of the Original Indenture, "Remedies Upon Default," is
hereby amended by deleting Section 1, Subdivisions (a) through (k) thereof and
substituting therefor the following:
"(a) failure to pay interest, if any, on any Bond within
forty-five (45) days after the same becomes due and payable; or
(b) failure to pay the principal of or premium, if any, on any
Bond within three (3) business days after its maturity; or
(c) failure to make any payment to any sinking, maintenance or
other analogous fund within sixty (60) days after the same becomes due
and payable;
(d) failure to perform or breach of any covenant or warranty of
the Company in this Indenture (other than a covenant or warranty a
default in the performance of which or breach of which is elsewhere in
this Section specifically dealt with) for a period of sixty (60) days
after there has been given, by registered or certified mail, to the
Company by the Trustee, or to the Company and the Trustee by the
Bondholders of at least twenty-five percent (25%) in principal amount
of the Bonds then outstanding under this Indenture, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "notice of default" hereunder, unless
the Trustee, or the Trustee and the Bondholders of a principal amount
of Bonds not less than the principal amount of Bonds the Bondholders
of which gave such notice, as the case may be, shall agree in writing
to an extension of such period prior to its expiration; provided,
however, that that Trustee, or the Trustee and the Bondholders of such
principal amount of Bonds, as the case may be, shall be deemed to have
agreed to an extension of such period if corrective action is
initiated by the Company within such period and is being diligently
pursued; or
(e) the entry by a court having jurisdiction in the premises of
(i) a decree or order for relief in respect of the Company in an
involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or (ii) a
decree or order adjudging the Company a bankrupt or insolvent, or
<PAGE>
approving as properly filed a petition by one or more Persons other
than the Company seeking reorganization, arrangement, adjustment or
composition of or in respect of the Company under any applicable
Federal or State law, or appointing a custodian, receiver, liquidator,
assignee, trustee, sequestrator or other similar official of the
Company or of any substantial part of for the Company or for any
substantial part of its property, or ordering the winding up or
liquidation of its affairs, and any such decree or order for relief or
any such other decree or order shall have remained unstayed and in
effect for a period of ninety (90) consecutive days; or
(f) the commencement by the Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or of any other case
or proceeding to be adjudicated a bankrupt or insolvent, or the
consent by it to the entry of a decree or order for relief in respect
of the Company in a case or proceeding under any applicable Federal or
State bankruptcy, insolvency, reorganization or other similar law or
to the commencement of any bankruptcy or insolvency case or proceeding
against it, or the filing by it of a petition or answer or consent
seeking reorganization or relief under any applicable Federal or State
law, or the consent by it to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company or of any substantial part of its property, or the making by
it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they
become due, or the authorization of such action by the Board of
Directors; or
(g) an "Event of Default" under the General Mortgage Indenture
and Deed of Trust, dated as of November 1, 1992 (the "1992 Mortgage"),
from the Company to Harris Trust and Savings Bank, trustee, or a
Matured Event of Default under any Prior Mortgage (as such terms are
defined in the 1992 Mortgage); provided, however, that, anything in
this Indenture to the contrary notwithstanding, the waiver of cure of
such "Event of Default" or event of default and the rescission and
annulment of the consequences thereof shall constitute a waiver of the
corresponding completed default under this Indenture and a rescission
and annulment of the consequences thereof;"
Section 9. Article XII of the Original Indenture, "Consolidation, Merger and
Sale," is hereby amended in the following respects:
(a) Section 1, Subdivision (b)(1) is hereby amended by changing the
percentage set forth therein from "50%" to "75%."
(b) Section 1, Subdivision (b)(2) is hereby amended by (a) changing the
period "fifteen calendar months" to "eighteen calendar months," (b)
deleting the phrase "the greater of" and changing the figure "two and
one-half" to "two," and (c) deleting the phrase "or ten percent (10%)
<PAGE>
of the principal amount of, and the net earnings of such other
corporation available for interest after property retirement
appropriations (determined in the manner provided in Article I) for
the same twelve month period shall have amounted in the aggregate to
at least two times the amount of the annual interest charges on".
ARTICLE II
THE TRUSTEE
The Trustee hereby accepts the trusts hereby declared and provided and
agrees to perform the same upon the terms and conditions in the Original
Indenture set forth and upon the following terms and conditions:
The Trustee shall not be responsible in any manner whatsoever for or
in respect of the validity or sufficiency of this Supplemental Indenture or
the due execution hereof by the Company or for or in respect of the
recitals contained herein, all of which recitals are made by the Company
solely. In general, each and every term and condition contained in Article
XIII of the Original Indenture shall apply to this Supplemental Indenture
with the same force and effect as if the same were herein set forth in
full, with such omissions, variations and modifications thereof as may be
appropriate to make the same conform to this Supplemental Indenture.
ARTICLE III
MISCELLANEOUS
This Supplemental Indenture may be simultaneously executed in any
number of counterparts, each of which when so executed shall be deemed to
be an original; but such counterparts shall together constitute but one and
the same instrument.
<PAGE>
IN WITNESS WHEREOF, said Illinois Power Company has caused this Indenture
to be executed on its behalf by its Chairman and President, one of its Executive
Vice Presidents, one of its Senior Vice Presidents or one of its Vice Presidents
and its corporate seal to be hereto affixed and said seal and this Indenture to
be attested by its Secretary or one of its Assistant Secretaries; and said
Harris Trust and Savings Bank, in evidence of its acceptance of the trust hereby
created, has caused this Indenture to be executed on its behalf by its President
or one of its Vice Presidents and its corporate seal to be hereto affixed and
said seal and this Indenture to be attested by its Secretary or one of its
Assistant Secretaries; all as of the first day of December, nineteen hundred and
ninety-seven.
ILLINOIS POWER COMPANY,
By /s/ Larry F. Altenbaumer
(CORPORATE SEAL) Senior Vice President and Chief Financial Officer
ATTEST:
/s/ Leah Manning Stetzner
Secretary
HARRIS TRUST AND SAVINGS BANK, Trustee,
By /s/ J. Bartolini
(CORPORATE SEAL) Vice President
/s/ C. Potter
Assistant Secretary
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF MACON )
BE IT REMEMBERED, that on this 19th day of December, 1997, before me, the
undersigned Teresa Stewart, a Notary Public within and for the County and State
aforesaid, personally came Larry F. Altenbaumer, Senior Vice President and Chief
Financial Officer, and Leah Manning Stetzner, Secretary, of Illinois Power
Company, a corporation duly organized, incorporated and existing under the laws
of the State of Illinois, who are personally known to me to be such officers,
and who are personally known to me to be the same persons who executed as such
officers the within instrument of writing, and such persons duly acknowledged
that they signed, sealed and delivered the said instrument as their free and
voluntary act as such Senior Vice President, Chief Financial Officer and
Secretary, respectively, and as free and voluntary act of said Illinois Power
Company for the uses and purposes therein set forth.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my
official seal on the day and year last above written.
/s/ Teresa Stewart
Notary Public, Macon County, Illinois
My Commission Expires September 17, 2001.
(NOTARIAL SEAL)
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
BE IT REMEMBERED, that on this 17th day of December, 1997, before me, the
undersigned Marianne Tinerella, a Notary Public within and for the County and
State aforesaid, personally came J. Bartolini, Vice President, and C. Potter,
Assistant Secretary, of Harris Trust and Savings Bank, a corporation duly
organized, incorporated and existing under the laws of the State of Illinois,
who are personally known to me to be such officers, and who are personally known
to me to be the same persons who executed as such officers the within instrument
of writing, and such persons duly acknowledged that they signed, sealed and
delivered the said instrument as their free and voluntary act as such Vice
President and Assistant Secretary, respectively, and as free and voluntary act
of said Harris Trust and Savings Bank for the uses and purposes therein set
forth.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my
official seal on the day and year last above written.
/s/ Marianne Tinerella
Notary Public, Cook County, Illinois
My Commission Expires May 21, 2001.
(NOTARIAL SEAL)
CHI2:149570.5 03.06.98 10.41
Exhibit (a)(8)
ILLINOVA CORPORATION
LEADERSHIP INCENTIVE PROGRAM
(Effective as of January 1, 1996)
Effective Date
The Illinova Corporation Leadership Incentive Program (the "Plan") was
established by Illinova Corporation (the "Company") effective as of January 1,
1996 (the "Effective Date").
Objectives
The objectives of the Plan are:
o To link incentives with performance in order to encourage improved
Company performance.
o To focus attention on value enhancement for shareholders.
o To foster and encourage teamwork at the Illinova Leadership Team
level.
o To motivate and reward performance above a planned or expected level.
o To attract and retain strong management personnel.
o To develop a more competitive compensation package relative to market.
Eligibility
The Chief Executive Officer of the Company (the "CEO"), in his discretion, shall
designate those management employees of the Company who will participate in the
Plan ("Participants") for each Plan Year, which is the calendar year. The
Participants for each Plan Year will normally be designated by the CEO prior to
the beginning of the year. If an individual is designated as a Participant in
the middle of a Plan Year, the Participant's award may be pro-rated based upon
the number of completed months of service between the date of eligibility and
the end of the Plan Year.
Awards
For each Plan Year, Participants will receive incentive payments for corporate,
business group and departmental performance that exceeds normal expectations.
Determination of whether performance exceeds normal expectations for a Plan Year
shall be made on the basis of measurement of internal achievement levels against
the goals established under the Plan for the year.
Participants will have the opportunity to earn up to 14% of salary in any Plan
Year for achievement of corporate goals established for that year. Two levels of
Company performance will be identified for each goal -- a threshold level and a
maximum level. Attainment of any goal at the threshold level for any Plan Year
will qualify for an award for that year with respect to that goal equal to a
percentage of the Participant's salary for the year times the weighting factor
(described below) for that goal. Attainment of any goal at or above the maximum
level qualifies for the maximum award of 14% of the Participant's salary for the
year times the weighting factor for that goal. Attainment at a level between
threshold and maximum will result in a pro-rated award.
In addition, Participants will have the opportunity to earn up to 6% of salary
in any Plan Year for achievement of business group and departmental goals for
that year ("variable goals"). A Participant's "Total Award" for any Plan Year
will equal the sum of the awards with respect to each corporate goal (including
the award with respect to the discretionary category, if any) for the year, plus
the sum of the awards with respect to the Participant's variable goals. A
Participant's Total Award for any Plan Year shall not exceed 20% of the
Participant's salary for the year.
Awards under the Plan shall not be considered part of a Participant's base
salary. It is intended that, in determining whether such base salaries for
Participants are at a competitive level relative to base salaries in the utility
industry, awards under the Plan shall be disregarded.
Goals
No later than the first meeting of the Company's Board of Directors in each Plan
Year, the Chief Executive Officer of the Company (the "CEO") shall establish
specific goals for corporate performance for that Plan Year. The corporate goals
(except for the discretionary performance goal, if any) shall be the same for
all Participants with respect to any Plan Year. Goals shall focus on major
challenges and issues facing the Company. The goals shall include specific
performance criteria that are determined to be vital to the achievement of the
Company's long term strategic objectives. A "weighting factor" will be assigned
to each of the goals that recognizes the relative importance and influence of
the goal to the overall success of the Company.
Except as otherwise provided in the Plan, the corporate goals for each Plan
Year, and the manner of measuring performance against those goals, will be
developed in conjunction with the annual planning and budgeting activities of
the Company for the year.
In addition to establishing specific performance categories and assigning
weighting factors to those categories, the [CEO] may establish a discretionary
performance category for any Plan Year and assign a weighting factor to it. The
performance factors with respect to any such discretionary category for any Plan
Year shall be established by the Participant's business group leader at any time
before, during or after the end of the year. The level of achievement with
respect to the discretionary category for any Plan Year, and the award payable
with respect to that category, shall be determined by comparing the Company's
performance for the year with factors that the Participant's business group
leader determines to be appropriate measures of such performance.
The total of the weighting factors with respect to the corporate performance
goals for each Plan Year will equal 100%. No awards will be earned under the
Plan with respect to the corporate performance goals for any Plan Year unless
the Company has declared a dividend for that Plan Year.
Variable goals with respect to any Plan Year will be established by the
Participant's business group leader prior to the beginning of the Plan Year.
Payment of Award
A Participant's Total Award for any Plan Year shall be made in two cash
payments, known as the Short-Term Payment and the Long-Term Payment.
Subject to the following provisions of the Plan, the Short-Term Payment earned
for any Plan Year shall be made to the Participant in the first quarter of the
following year. A Participant's Short-Term Payment shall equal one-half of the
Participant's Total Award for the year.
Subject to the following provisions of the Plan, the Long-Term Payment for any
Plan Year shall be made to the Participant in the first quarter of the fourth
year following the Plan Year for which the award is earned. The Long-Term
Payment earned for a Plan Year shall equal one-half of the Total Award for that
Plan Year, increased or decreased to the same extent that the value of a share
of Company common stock has increased or decreased for the Holding Period (based
on the closing prices of the stock on the first and last day of the Holding
Period, and adjusted by the CEO to reflect stock splits and other extraordinary
events) and further increased to reflect Dividend Equivalents for the Holding
Period. The "Holding Period" for a Long-Term Payment is the period beginning on
last trading day of the Plan Year for which the payment was earned, and ending
on the first trading day of the fourth year thereafter.
The "Dividend Equivalents" for a Long-Term Payment for the Holding Period are
the dividends that would be paid during the Holding Period on the number of
shares of common stock of the Company that could be purchased with 50% of the
Total Award, determined by dividing 50% of the Total Award by the closing price
of the stock on the first day of the Holding Period, and adjusted by the CEO to
reflect subsequent stock splits and other extraordinary events. For purposes of
determining the Dividend Equivalents, it is assumed that the dividends are
reinvested in a manner that is comparable to the manner of reinvesting dividends
set forth in Illinova Corporation Automatic Reinvestment and Stock Purchase
Plan; provided that dividends paid in the last six months of the Holding Period
shall not be deemed to be reinvested; and further provided that if a
Participant's employment with the Company and its affiliates terminates prior to
the end of the Holding Period, the amount payable to the Participant will be
adjusted so that dividends for the six-month period prior to the termination of
employment are not deemed to be reinvested.
If a Participant for any Plan Year ceases to be employed by the Company and its
affiliates during the year for reasons of retirement after attaining age 55,
disability (as determined by the CEO) or death, the Participant (or the
Participant's beneficiary) shall be entitled to the amount of the Total Award
for the year, pro-rated based on the number of months between the beginning of
the Plan Year and the date of retirement, disability or death. The payment of
such amount shall be made in the first quarter of the year following the year in
which occurs the termination of employment because of retirement, disability or
death.
If a Participant for any Plan Year ceases to be employed by the Company and its
affiliates during that year for reasons other than retirement after attaining
age 55, disability (as determined by the CEO) or death, the Participant shall
forfeit the Total Award for the year.
If a Participant for any Plan Year ceases to be employed by the Company and its
affiliates after the end of such Plan Year for any reason, the Participant's
Short-Term Payment shall be unaffected by the termination of employment.
If a Participant for any Plan Year ceases to be employed by the Company and its
affiliates after the end of that Plan Year, and prior to the end of the Holding
Period, for reasons of retirement after attaining age 55, disability (as
determined by the CEO) or death, the Participant (or the Participant's
beneficiary) shall be entitled to the Long-Term Payment, determined as though
the Holding Period ended on the last business day of the Participant's
employment. The payment of such amount shall be made as soon as practicable
after termination of employment.
If a Participant for any Plan Year ceases to be employed by the Company and its
affiliates after the end of such Plan Year, and prior to the end of the Holding
Period, for reasons other than retirement after attaining age 55, disability (as
determined by the CEO) or death, the Participant shall forfeit the Long-Term
Payment for the year.
Administration
The Plan shall be administered by the CEO; provided that, the Employee Services
department shall have responsibility for the day-to-day administration of the
Plan.
Amendment and Termination
The Plan may be amended or terminated by the Board of Directors of the Company
at any time, except that no such amendment or termination adopted in any Plan
Year shall adversely affect the awards of any Participant for that Plan Year or
any prior Plan Year.
Exhibit (a)(9)
ILLINOVA CORPORATION
BOARD OF DIRECTORS
RESOLUTIONS
WHEREAS, the continuation of the Retirement Plan for Outside Directors,
except for those beneficiaries for whom the rights have already vested through
retirement, is viewed as no longer desirable.
THEREFORE, BE IT RESOLVED, that the Plan be terminated as to those
directors not yet retired, and that benefits under the Plan continue to be paid
to those otherwise qualified directors who have retired on or before the date of
this resolution; and
RESOLVED, that the proper officers of the Company are authorized and
directed to adopt a new compensation plan for outside directors, in
substantially the form presented to the meeting, in which such directors receive
an annual award of stock units having a value of $6,000, to be paid to the
beneficiary in cash on retirement in a lump sum or in installments, as such
director may elect, together with dividend equivalents attributable to such
stock units; and
RESOLVED, that the proper officers of the Company are authorized and
directed to make a cash payment to each current outside director equal to the
present value of the payments such director would have received, had he or she
retired under the Plan, based on each such director's actual years of service
but not to exceed ten years of service; and
RESOLVED, that the proper officers of the Company are authorized to
take all such further action as may be necessary or desirable to effect the
purpose and intent of the foregoing resolutions.
Exhibit (a)(10)
ILLINOIS POWER COMPANY
BOARD OF DIRECTORS
RESOLUTIONS
WHEREAS, the Company and its Board of Directors believe it is in the best
interests of the Company to make certain modifications to the Illinois Power
Company Employee Retention Plan (the "Plan") and Agreements, to preserve the
original purpose of the Plan and the Agreements, which is to facilitate the
retention of the services of motivated officers and employees of the Company and
to clarify certain administrative issues;
RESOLVED, that pursuant to the amending authority reserved to the Board of
Directors of the Company, the Plan and the Employee Retention Agreements are
hereby amended, effective February 7, 1996, in the following respects:
1. Employees in Salary Band 4 who have not entered in separate Employee
Retention Agreements with the Company shall be eligible for
participation in the Plan.
2. The definition of "Good Reason" set forth in Section 3(a)(ii) of the
Plan is hereby expanded to include a reduction in any material element
of an eligible employee's compensation.
3. The definition of "Change in Control" set forth in Section 3(a)(iii)
of the Plan and as set forth in the Agreements is hereby modified to
clarify that the acquisition of stock by a trustee of any employee
benefit plan maintained by the Company will not be treated as a Change
in Control, and to clarify that in no event will a merger or other
transaction result in a Change in Control if the Company's
shareholders own at least 80 percent of the surviving entity.
4. Eligible employees who are terminated prior to a Change in Control at
the request of a potential acquiror will be eligible for Plan, or
Agreement, benefits.
5. The provision in Section 2 of the Plan and in the Agreements which
authorizes the Board to determine, after the fact, that a transaction
is not a Change in Control is hereby eliminated.
6. The Company, and its successors and assigns, waive any contract
formation or other defenses it may otherwise be entitled to assert
with respect to the Plan.
RESOLVED, that the proper officers of the Company are hereby authorized and
directed to do any and all acts and things and to execute and deliver any and
all documents or instruments, including but not limited to the preparation and
execution of an amended Plan document and of amended Agreements, as they shall
deem necessary or appropriate to carry of the intent and purposes of the
foregoing resolution.
Exhibit (a)(11)
AMENDMENT
OF
ILLINOVA CORPORATION
DEFERRED COMPENSATION PLAN FOR CERTAIN DIRECTORS
WHEREAS, Illinova Corporation (the "Company") maintains the Illinova
Corporation Deferred Compensation Plan for Certain Directors (the "Plan"); and
WHEREAS, the Company has determined that it would be beneficial to
contract with Fidelity Institutional Retirement Service Company for provision of
certain record keeping and administrative services in connection with the Plan,
beginning on or about January 1, 1997, and, because of Fidelity Institutional
Retirement Service Company's highly automated systems, Fidelity Institutional
Retirement Service Company can promptly convert deferred funds into common stock
(or equivalent stock units) so that Plan participants may be credited with
common stock ownership immediately rather than on a quarterly basis as is
currently provided in the Plan.
NOW, THEREFORE, BE IT RESOLVED that the Plan is hereby amended by
adding a new subsection (d) to Section 3, worded as follows:
"(d) Notwithstanding the foregoing, if administrators of this Plan have
the capability to convert funds in the Deferred Money Accounts sooner
or more frequently than on a quarterly basis, conversions will be made
as quickly as they may feasibly be accomplished."
Exhibit (a)(12)
AMENDMENT
TO
EMPLOYEE RETENTION AGREEMENT OF ILLINOVA CORPORATION
WHEREAS, Illinova Corporation (Corporation) has entered into Employee
Retention Agreements with certain of its employees (the "Agreements"); and
WHEREAS, amendment of the Agreements is now deemed desirable;
NOW, THEREFORE, BE IT RESOLVED that, pursuant to the amending authority
reserved to the Corporation in paragraph 8 of each of the Agreements, each
Agreement is hereby amended by adding the following sentence at the end of
paragraph 1 thereof:
"Notwithstanding any provision in this Agreement to the contrary, the benefits
under this paragraph 1 shall be in lieu of, and not in addition to, any benefits
to which the Eligible Employee might otherwise be entitled under any other
severance plan maintained by the Company."
Exhibit (a)(13)
AMENDMENT
OF
ILLINOVA CORPORATION
DEFERRED COMPENSATION PLAN FOR CERTAIN DIRECTORS
WHEREAS, Illinova Corporation (the "Company") maintains the Illinova
Corporation Company Deferred Compensation Plan for Certain Directors (the
"Plan"); and
WHEREAS, amendment of the Plan is now deemed desirable;
NOW, THEREFORE, BE IT RESOLVED that, pursuant to the amending authority
reserved to the Corporation in Section 6 of the Plan, the Plan is hereby amended
by substituting the following for Section 4 of the Plan:
"4. Distribution.
(a) As of a Participant's Date of Termination, the number of stock units in
his Stock Unit Account shall be converted to a dollar value, which shall be
determined by multiplying the number of stock units in such Account as of his
Date of Termination by the closing market composite price per share of the
Company's Common Stock as reported on the New York Stock Exchange Composite Tape
as of the last day of the month immediately preceding such Date of Termination
or, if such shares are not traded on that date, on the next preceding date on
which shares were traded. Such dollar value, in addition to the balance in the
Participant's Deferred Money Account, if any, is the Participant's "Account
Value". For purposes of this Section 4, a Participant's `Date of Termination'
means the last day on which the Participant ceases to serve as a member of the
Company's Board of Directors.
(b) Payment of a Participant's Account Value shall be made solely in cash
and shall be made, or commence to be made, as soon as practicable following the
Participant's Date of Termination, as follows:
(i) in a lump sum payment; or
(ii) in ten or fewer annual installments, as elected by the Participant;
provided, however, any such election that has not been on file with
the Committee at least 12 months prior to the Participant's Date of
Termination shall be disregarded and payments shall be made in
accordance with the Participant's most recent election form that has
been on file with the Committee at least 12 months, or if no such
election has been filed, in accordance with paragraph (i) next above.
(c) In the event of a Participant's death before he has received payment of
his full Account Value, the remaining unpaid Account Value shall be paid to his
designated beneficiary or beneficiaries as soon as practicable thereafter in a
lump sum. If no designated beneficiary has been named or survives the
Participant, the beneficiary will be the Participant's estate."
Exhibit (b)(11)
AMENDMENT OF
ILLINOIS POWER COMPANY
EXECUTIVE INCENTIVE COMPENSATION PLAN
(As Amended and Restated Effective as of January 1, 1992)
WHEREAS, Illinois Power Company (the "Company") maintains the Illinois
Power Company Executive Incentive
Compensation Plan (the "Plan"); and
WHEREAS, amendment of the Plan is now deemed desirable;
NOW, THEREFORE, IT IS RESOLVED that, by virtue and in exercise of the
amending authority reserved to the Company under the Plan, the Plan is hereby
amended, effective January 1, 1997, by substituting the following for the
"Eligibility" section of the Plan:
"Eligibility
The Board of Directors of the Company (the 'Board'), in its discretion,
shall designate those elected officers of the Company who will participate
in the Plan for each Plan Year, which is the calendar year. The Board of
Directors of each Subsidiary (as defined below), in its discretion, shall
designate those officers of such Subsidiary who will participate in the
Plan for each Plan Year. The Participants for each Plan Year normally will
be designated by the applicable Board of Directors prior to the beginning
of the year; provided, however, for the Plan Year beginning January 1,
1997, Participants who are employed by a Subsidiary may be designated by
the Board of Directors of such Subsidiary no later than [February 28,
1997]. If an individual is designated as a Participant in the middle of a
Plan Year, the Participant's award will be pro-rated based upon the number
of completed months of service between the date of eligibility and the end
of the Plan Year. For purposes of the Plan, 'Subsidiary' means any company
during any period in which it is a 'subsidiary corporation' as that term is
defined in section 424(f) of the Internal Revenue Code with respect to the
Company."
Exhibit (b)(12)
AMENDMENT
OF
ILLINOIS POWER COMPANY
EXECUTIVE DEFERRED COMPENSATION PLAN
WHEREAS, Illinois Power Company (the "Company") maintains the Illinois
Power Company Executive Deferred Compensation Plan (the "Plan"); and
WHEREAS, amendment of the Plan is now deemed desirable;
NOW, THEREFORE, BE IT RESOLVED that, pursuant to the amending authority
reserved to the Corporation in Section 8 of the Plan, the Plan is hereby amended
in the following particulars:
1. By substituting the following for subsection 3.5 of the Plan:
"3.5 Employee Selection of Investment Return Rate. Subject to the terms of
the Plan, a Participant may elect the Investment Return Rate(s) that will apply
to all of his Accounts from time to time by filing an election in accordance
with such rules as the Plan Administrator may establish regarding the form and
timing of such elections, including to the extent provided by the Plan
Administrator rules relating to daily Investment Return Rate changes and
telephonic filing of elections. To the extent permitted by the Committee, the
Participant may elect to have different Investment Return Rates apply to
different portions of his Account balances."
2. By substituting the phrase "Employee Services Department" for the phrase
"Employee Relations Department" where the latter phrase appears in paragraph
7.2(b) of the Plan.
Exhibit (b)(13)
AMENDMENT
OF
SUPPLEMENTAL RETIREMENT INCOME PLAN
FOR SALARIED EMPLOYEES OF ILLINOIS POWER COMPANY
WHEREAS, Illinois Power Company (the "Company") maintains the Supplemental
Retirement Income Plan for Salaried Employees of Illinois Power Company (the
"Plan"); and
WHEREAS, amendment of the Plan is now deemed desirable;
NOW, THEREFORE, BE IT RESOLVED that, pursuant to the amending authority
reserved to the Corporation in Section 6.1 of the Plan, the Plan is hereby
amended by substituting the following for Section 1.5 of the Plan:
"1.5 `Participant' means an elected officer of the Company and any officer
of a Subsidiary designated as a Participant by the Company's Chairman of the
Board of Directors who is a participant under the Qualified Plan and to whom or
with respect to whom a benefit is payable under the Plan. `Subsidiary' means (i)
any company during any period in which it is a member of a controlled group of
corporations (as defined in Section 414(b) of the Code) that includes the
Company; (ii) any trade or business (whether or not incorporated) that is under
common control (as defined in Section 414(c) of the Code) with the Company; and
(iii) any corporation or other entity that is a member of an affiliated service
group (as defined in Section 414(m) of the Code) that includes the Company."
Exhibit (b)(14)
June 30, 1997
Mr. Wilfred Connell
2899 Forrest Lane
Decatur, IL 62521
Dear Wilfred:
This letter represents the full and complete terms of the agreement between
Wilfred Connell and Illinois Power (Company) regarding your retirement from the
Company.
1. You will remain an active employee of the Company, at your present monthly
rate of $16,000, through July 31, 1997. During this period you will
continue to report to John Cook and will be assigned projects as
appropriate.
2. You agree to make yourself available to perform consulting services for the
Company during the period August 1, 1997 through December 31, 1997 as may
be requested by the Company from time to time. The Company will give you
advance notice when consulting services are required and agrees that such
consulting services will not require more than 60 hours of your time in any
month and will not exceed 300 hours in total. In consideration of the
consulting services to be provided under this paragraph 2 and the other
covenants contained in this Agreement, within 15 days after July 31, 1997,
the Company will pay you a lump sum payment of $80,000. This payment will
not be treated as compensation for purposes of any retirement or other
benefit plan maintained by the Company.
3. On August 1, 1997 your status will change from active to retired.
4. You and your spouse are entitled to active employee medical in retirement.
5. Based on your age at retirement, life insurance of $112,000 per year will
be provided.
6. Long Term Incentives are divided into two components: SVA Award and Stock
Options.
SVA Award: Performance permitting, you will receive your previously
earned SVA Award(s) on the regular payout cycle based on previously
established goals.
Stock Options: Unvested options will continue to vest in accordance
with our preestablished schedule. Vested options must be exercised
before your fifth anniversary after retirement.
7. Executive Incentive Compensation: Vested awards and deferred compensation
will be distributed according to your previous declarations.
8. Executive tax assistance and financial planning are available to you as a
retiring officer for the reminder of 1997 and calendar years 1998 and 1999,
not to exceed $2500 per year.
9. Outplacement assistance of up to $1000 will be reimbursed for expenses you
incur prior to August 1, 1998.
10. In the event the NRC determines individual enforcement is appropriate for
events that occurred on June 2, 1997, Illinois Power will provide
appropriate legal representation to aid you in defense of NRC enforcement
actions.
11. Your company vehicle must be returned to the Headquarter's parking garage
by August 1, 1997.
12. You must make the proper arrangements for out processing according to
Clinton Power Station Procedure.
13. The total monthly benefit you are entitled to with a August 1, 1997
retirement date is $3594.16 consisting of $2900.05 from the Qualified Plan
and $694.11 from the Supplemental Retirement Income Plan (Plan).
Additionally, by special Amendment to the Plan, an additional supplemental
monthly payment of $765.58 will be paid through the Plan. A contingent
annuity options available for your qualified benefit. The amount payable to
you through the Plan is only paid while you are living.
14. You understand and agree that the benefits provided under this Agreement
exceed those to which you would otherwise be entitled and Illinois Power
shall not be obligated to pay you any additional compensation or to provide
any additional benefits to you except as provided in this Agreement or as
required by law.
15. In consideration of the foregoing, you, on behalf of yourself, your
heirs, agents, successors, representatives and assigns, hereby release
Illinois Power, its past, present and future officers, directors,,
employees, agents and representatives and their successors and
assigns, from any and all claims of whatever sort which you had or now
have against each or any one of them relating in any way to or arising
out of your employment with Illinois Power or the severance thereof,
including, but not limited to, any claims of age discrimination under
the Age Discrimination in Employment Act or other statute,
constructive discharge, wrongful termination, or any other claims
under any federal, state or local statute, ordinance or common law.
Nothing in this paragraph shall be construed to release any claims or
waive any right to sue arising out of violations of this Agreement or
acts subsequent to the date of this Agreement. You are advised to
consult with your attorney prior to signing this Agreement.
Illinois Power, on behalf of itself and its past, present and future
officers, directors, employees, agents and representatives hereby
releases you from any and all claims of whatever sort which they had
or now have against you relating in any way to or arising out of your
employment with Illinois Power. Nothing in this paragraph shall be
construed to release any claims or waive any right to sue arising out
of violations of this Agreement or acts subsequent to the date of this
Agreement.
You agree that, except as required by law, you will not use or
disclose any non-public information about the company, and that you
will promptly return all materials containing confidential material
about the Company which still may be in your possession. You also
agree to cooperate with the company in any third party lawsuits or
other claims involving the Company, to the extent that the claims
relate to your work for the Company, and the Company will provide you
with reasonable compensation for the time you spend in connection with
such cooperation.
If you concur with the terms of this Agreement, please sign and date in the
appropriate place below.
Sincerely,
/s/Larry D. Haab
Larry D. Haab
Accepted and agreed to this
30 day of June, 1997
/s/Wilfred Connell
Wilfred Connell
<TABLE>
Exhibit (12)(a)
ILLINOVA CORPORATION
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Thousands of Dollars)
Year ended December 31, Supplemental** Supplemental***
-------------------------------------------------------------------------------------
1992 1993 1993 1994 1995 1996 1997 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
---- ---- ---- ---- ---- ---- ---- ----
Earnings Available for
Fixed Charges:
Net Income (Loss).................... $ 93,234 ($ 81,874) ($ 81,874) $ 151,786 $ 151,601 $ 191,021 ($ 90,553) ($ 90,553)
Add:
Income Taxes:
Current ..................... 22,930 25,260 25,260 58,354 98,578 163,873 70,975 70,975
Deferred - Net............... 63,739 82,057 82,057 71,177 34,137 (16,028) 36,963 36,963
Allocated income taxes ........ (6,632) (12,599) (12,599) (8,285) (11,851) (12,641) (20,345) (20,345)
Investment tax credit - deferred (519) (782) (782) (11,331) (6,894) (7,278) (7,278) (7,278)
Income tax effect of disallowed costs -- (70,638) (70,638) -- -- -- -- --
Income tax effect of FAS 71 write-off ... -- -- -- -- -- -- (117,998) (117,998)
Interest on long-term debt....... 160,795 154,110 154,110 135,115 125,581 118,438 116,137 116,137
Amortization of debt expense and
premium-net, and other interest charges 12,195 17,007 17,007 15,826 29,558 24,031 27,984 27,984
One-third of all rentals (Estimated to be
representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229
Interest on in-core fuel 8,278 6,174 6,174 7,185 6,716 4,757 3,842 3,842
Disallowed Clinton plant costs... -- -- 270,956 -- -- -- -- --
FAS 71 Regulatory Write-Offs..... -- -- -- -- -- -- -- 313,030
--------- --------- --------- --------- --------- -------- --------- --------
Earnings (loss) available for fixed $ 359,137 $ 124,707 $ 395,663 $ 425,674 $ 432,647 $ 470,519 $ 23,956 $ 336,986
charges
========= ========= ========= ======== ======== ========= ========= =========
Fixed charges:
Interest on long-term debt $ 160,795 $ 154,110 $ 154,110 $ 135,115 $ 125,581 $ 118,438 $ 116,137 $ 116,137
Amortization of debt expense and
premium-net, and other interest charges 25,785 27,619 27,619 25,381 38,147 30,663 32,928 32,928
One-third of all rentals (Estimated to be
representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229
--------- -------- -------- --------- --------- --------- --------- ---------
Total Fixed Charges........................ $ 191,697 $ 187,721 $ 187,721 $ 166,343 $ 168,949 $ 153,447 $ 153,294 $ 153,294
========= ========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 1.87 0.66* 2.11 2.56 2.56 3.07 0.16* 2.20
========= ========= ======== ========= ========= ========= ========= =========
* Earnings are inadequate to cover fixed charges. Additional earnings
(thousands) for 1993 and 1997 of $63,014 and $129,338, respectively,
are required to attain a one-to-one ratio of Earnings to Fixed
Charges.
** Supplemental ratio of earnings to fixed charges presented to exclude
nonrecurring item - Disallowed Clinton plant costs.
*** Supplemental ratio of earnings to fixed charges presented to exclude
write-off related to the discontinued application of SFAS 71,
"Accounting for the Effects of Certain Types of Regulation" for the
generation segment of the business.
</TABLE>
<TABLE>
Exhibit (12)(b)
ILLINOIS POWER COMPANY
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Thousands of Dollars)
Year Ended December 31, Supplemental** Supplemental***
-------------------------------------------------------------------------------------------------------
1992 1993 1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
Earnings Available for
Fixed Charges:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $ 122,088 ($ 56,038) ($ 56,038) $ 180,242 $ 182,713 $ 228,618 ($ 65,669)($ 65,669)
Add:
Income Taxes:
Current 22,930 25,260 25,260 58,354 98,578 163,873 72,680 72,680
Deferred - Net 63,739 82,057 82,057 71,177 34,137 (16,028) 36,963 36,963
Allocated income taxes (6,632) (12,599) (12,599) (8,285) (8,417) (2,642) (1,446) (1,446)
Investment tax credit - deferred (519) (782) (782) (11,331) (6,894) (7,278) (7,278) (7,278)
Income tax effect of disallowed costs -- (70,638) (70,638) -- -- -- -- --
Income tax effect of FAS 71 write-off -- -- -- -- -- -- (117,998) (117,998)
Interest on long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 109,595 109,595
Amortization of debt expense and
premium-net, and other interest charges 12,195 17,007 17,007 15,826 29,558 22,325 26,260 26,260
One-third of all rentals(Estimated to be
representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229
Interest on in-core fuel 8,278 6,174 6,174 7,185 6,716 4,757 3,842 3,842
Disallowed Clinton plant costs -- -- 270,956 -- -- -- -- --
FAS 71 Regulatory Write-Offs -- -- -- -- -- -- -- 313,030
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss) available for fixed charges $ 387,991 $ 150,543 $ 421,499 $ 454,130 $ 467,193 $ 516,409 $ 61,178 $ 374,208
========= ========= ========= ========= ========= ========= ========= =========
Fixed charges:
Interest on long-term debt $ 160,795 $ 154,110 $ 154,110 $ 135,115 $ 125,581 $ 118,438 $ 109,595 $ 109,595
Amortization of debt expense and
premium-net, and other interest charges 25,785 27,619 27,619 25,381 38,147 28,957 31,204 31,204
One-third of all rentals (Estimated to be
representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229
--------- --------- --------- --------- --------- --------- --------- ---------
Total Fixed Charges $ 191,697 $ 187,721 $ 187,721 $ 166,343 $ 168,949 $ 151,741 $ 145,028 $ 145,028
========= ========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges 2.02 0.80 * 2.25 2.73 2.77 3.40 0.42 * 2.58
========= ========= ========= ========= ========= ========= ========= =========
* Earnings are inadequate to cover fixed charges. Additional earnings
(thousands) for 1993 and 1997 of $63,014 and $83,850, respectively,
are required to attain a one-to-one ratio of Earnings to Fixed
Charges.
** Supplemental ratio of earnings to fixed charges presented to exclude
nonrecurring item - Disallowed Clinton plant costs.
*** Supplemental ratio of earnings to fixed charges presented to exclude
write-off related to the discontinued application of SFAS 71,
"Accounting for the Effects of Certain Types of Regulation" for the
generation segment of the business.
</TABLE>
1997 PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
UNLOCKING THE POWER 1997
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Proxy Statement
Table of Contents
Notice of Annual Meeting 2
Proxy Statement 3
Appendix: 1997 Annual Report to Shareholders a-1
To the Shareholders
of Illinova Corporation:
Notice is Hereby Given that the Annual Meeting of Shareholders of Illinova
Corporation ("Illinova") will be held at 10 a.m. Wednesday, April 8, 1998, 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 9, 1998, will be
entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
General Counsel and Corporate Secretary
Decatur, Illinois
March 10, 1998
IMPORTANT
Illinova invites each of its approximately 35,000 shareholders 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. If you are unable to be present at the meeting, it is important
that you sign and return the enclosed proxy, no matter how many shares you own.
An envelope on which postage will be paid by Illinova is enclosed for that
purpose.
Return of your executed proxy will ensure that you are represented at the
Annual Meeting. Your cooperation is appreciated.
<PAGE>
PROXY STATEMENT
Solicitation and Revocation of Proxies
This Proxy Statement is furnished in connection with a solicitation of proxies
by the Board of Directors of Illinova, for use at the Annual Meeting of
Shareholders to be held at Shilling Community Education Center, Richland
Community College, One College Park, Decatur, Illinois 62521, at 10 a.m.
Wednesday, April 8, 1998, and at any adjournment thereof (the "Annual Meeting").
Any shareholder giving a proxy may revoke it at any time by giving a later proxy
or by giving written notice of revocation to the Corporate Secretary of Illinova
prior to the Annual Meeting. All duly executed proxies received prior to the
Annual Meeting will be voted.
Shares credited to the accounts of participants in Illinova's Investment
Plus Plan and Illinois Power Company's Incentive Savings Plans will be voted in
accordance with the instructions of the participants or otherwise in accordance
with the terms of those plans.
Voting Rights
Shareholders of record at the close of business on Monday, February 9, 1998 (the
"Record Date"), will be entitled to receive notice of and to vote at the Annual
Meeting. As of that date, Illinova had outstanding 71,701,937 shares of Common
Stock. Shareholders who are present at the Annual Meeting in person or by proxy
will be entitled to one vote for each share of Illinova's Common 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 11 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 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
Common Stock held of record at the close of business on the Record Date. The
affirmative vote of the holders of a majority of the shares of Common Stock
present in person or represented by proxy and entitled to vote at the Annual
Meeting is required for the election of directors.
Annual Report, Proxy and Proxy Statement
Accompanying this Proxy Statement, which includes Consolidated Financial
Statements, is a Notice of Annual Meeting of Shareholders, a form of Proxy and
the Summary Annual Report to Shareholders covering operations of Illinova for
the year 1997. This Proxy Statement and accompanying documents are first being
mailed to shareholders on or about March 10, 1998.
Board of Directors
Information Regarding the Board of Directors
The Board of Directors held eight Board meetings during 1997. Other than Mr.
Adorjan, who joined the Board in August 1997, and Mr. Berry, who retired from
the Board December 1, 1997, all directors attended at least 75 percent of the
aggregate meetings of the Board and Committees of which they were members during
1997. The Board has three standing committees: the Audit Committee, the Finance
Committee, and the Compensation and Nominating 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 Illinova'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 Illinova'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 1997.
This Committee consists of the following non-employee directors ("Outside
Directors"): Robert M. Powers, Chairman, Richard R. Berry, C. Steven McMillan,
Sheli Z. Rosenberg, Walter M. Vannoy, and Marilou von Ferstel.
<PAGE>
Finance Committee
(1) Review management's cash flow forecasts, financial forecasts and financing
program, and make recommendations to the Board regarding the approval of such
plans; (2) review Illinova'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 Illinova'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 1997.
This Committee consists of the following members of the Board: Walter D.
Scott, Chairman, J. Joe Adorjan, Richard R. Berry, Larry D. Haab, C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel, and John D. Zeglis.
Compensation and
Nominating Committee
(1) Review performance and recommend salaries plus other forms of compensation
of elected Illinova officers and the Board of Directors; (2) review Illinova'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 on 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
Illinova. The recommendation should include 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
must be delivered to or mailed and received at the executive offices of Illinova
not less than 90 nor more than 120 days prior to the Annual Meeting.
The Compensation and Nominating Committee met seven times during 1997.
This Committee consists of the following Outside Directors: Ronald L.
Thompson, Chairman, J. Joe Adorjan, C. Steven McMillan, Robert M. Powers, Walter
D. Scott, Marilou von Ferstel, and John D. Zeglis.
<PAGE>
Board Compensation
The Outside Directors of Illinova receive a retainer fee of $18,000 per year.
Outside Directors who also chair Board Committees receive an additional $2,000,
increased in February 1998 to $2,500, per year retainer. Outside Directors
receive a grant of 650 shares of 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 terms 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,
the 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's 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 Common Stock which the
director would have received if the director had been the record owner of the
shares represented by stock units, and these amounts are converted into
additional stock units. On termination of the participating directors' services
as directors, payment of their deferred fees and stock grants was made in shares
of Common Stock in an amount equal to the aggregate number of stock units
credited to their accounts. The plan was amended in 1997 to provide for a payout
in cash instead of shares of Common Stock. Deferred amounts are still converted
into stock units representing shares of Common Stock with the value of each
stock unit based on the last reported sales price of such stock. Payment is made
in cash, in a lump sum or installments, as soon as practical following a
director's termination. The cash paid on termination equals the number of stock
units times the share price at the close of market on the last business day of
the month preceding termination. No other payments are made after service on the
Board ceases.
Election of Directors
Illinova'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 11 directors nominated
by Illinova's Board of Directors. The names and certain additional information
concerning each of the director nominees is set forth on the following pages.
The dates shown for service as a director include service as a director of
Illinois Power prior to the May 1994 restructuring in which Illinois Power
became a subsidiary of Illinova. If any nominee should become unable to serve as
a director, another nominee may be selected by the current Board of Directors.
Walter M. Vannoy would normally have not been eligible for election as a
director at the Annual Meeting of Shareholders pursuant to a Bylaw provision
which mandates retirement from Board service at age 70. Because there is a
current need for his nuclear expertise, the Board of Directors has elected to
waive this requirement in Mr. Vannoy's case, and he has agreed to serve if
elected.
<PAGE>
BOARD OF DIRECTORS
Name of Director Nominee, Age, Year in Which First
Business Experience and Elected a Director
Other Information of Illinova
J. Joe Adorjan, 59 1997
Chairman and Chief Executive Officer of Borg-Warner Security Corporation,
Chicago, Ill., a security systems services firm, since 1995. He was President of
Emerson Electric Company from 1993 to 1995. Prior to that, he was Chairman and
Chief Executive Officer of ESCO Electronics Corporation. He is a director of The
Earthgrains Company, ESCO Electronics Corporation and Goss Graphics Systems,
Inc.
Larry D. Haab, 60 1986
Chairman, President, and Chief Executive Officer of Illinova since December
1993, and of Illinois Power since June 1991, and an employee of Illinois Power
since 1965. He is a director of First Decatur Bancshares, Inc.; The First
National Bank of Decatur; and Firstech, Incorporated.
C. Steven McMillan, 52 1996
President, Chief Operating Officer, and Director of Sara Lee Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was Executive Vice President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy Development from 1986 to 1993. He is Chairman of the Board of
Electrolux Corporation.
Robert M. Powers, 66 1984
From 1980 until retirement in December 1988, Mr. Powers was President and Chief
Executive Officer of A. E. Staley Manufacturing Company, Decatur, Ill., a
processor of grain and oil seeds. He is a director of A. E. Staley Manufacturing
Company.
Sheli Z. Rosenberg, 56 1997
President and Chief Executive Officer since 1994 and General Counsel 1980 to
1994 of Equity Group Investments, Inc., Chicago, Ill., a privately held business
conglomerate holding controlling interests in nine publicly traded corporations
involved in basic manufacturing, radio stations, retail, insurance, and real
estate. She is a director of American Classic Voyages Company; Quality Food
Centers, Inc.; Jacor Communications, Inc.; Anixter International, Inc.; Equity
Office Properties Trust; Equity Residential Properties Trust; CVS Corporation;
and Manufactured Home Communities, Inc.
Walter D. Scott, 66 1990
Professor of Management and Senior Austin Fellow, J. L. Kellogg Graduate School
of Management, Northwestern University, 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, Neodesic Corporation,
Orval Kent Holding Company, Inc., and Intermatic Incorporated.
Joe J. Stewart, 59 1998
President of BWX Technologies, Inc., formerly The Babcock & Wilcox Government
Group, Lynchburg, Va., a diversified energy equipment and services company, and
Executive Vice President of McDermott International, Inc. (parent of BWX
Technologies, Inc. and The Babcock & Wilcox Company), since 1995. He was
President and Chief Operating Officer of The Babcock and Wilcox Company and
Executive Vice President of McDermott International, Inc., from 1993 to 1995 and
Executive Vice President of the Power Generation Group of The Babcock and Wilcox
Company from 1987 to 1993.
<PAGE>
Ronald L. Thompson, 48 1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing Co.,
Bowling Green, Ohio, a manufacturer of automotive parts, since 1993. He was
President and Chief Executive Officer and a director of The GR Group, Inc., St.
Louis, Mo., from 1980 to 1993. He is a director of Teachers Insurance and
Annuity Association, and Ryerson Tull.
Walter M. Vannoy, 70 1990
Chairman until retirement in May 1995 and Chief Executive Officer from May 1994
until January 1995 of Figgie 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.
Marilou von Ferstel, 60 1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. 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, 50 1993
President of AT&T, Basking Ridge, N.J., a diversified communications company,
since October 1997. He was Vice Chairman from June 1997 to October 1997, Senior
Executive Vice President and General Counsel, from 1995 to June 1997 and 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 table below shows shares of Illinova Common Stock beneficially owned as of
January 31, 1998, by each director nominee, executive officers named in the
Summary Compensation Table, and entities owning more than 5 percent.
Number Number of Stock
of Shares Units in Deferred
Name of Beneficially Compensation Percent
Beneficial Owner Owned (1)(2) Plans of Class
J. Joe Adorjan 0 0 (3)
Larry D. Haab 68,250 0 (3)
C. Steven McMillan 1,300 289 (3)
Robert M. Powers 8,550 289 (3)
Sheli Z. Rosenberg 0 1,539 (3)
Walter D. Scott 5,150 289 (3)
Joe J. Stewart 0 0 (3)
Ronald L. Thompson 3,677 3,275 (3)
Walter M. Vannoy 5,010 289 (3)
Marilou von Ferstel 4,420 1,603 (3)
John D. Zeglis 2,626 1,603 (3)
Paul L. Lang 21,216 0 (3)
Larry F. Altenbaumer 13,092 0 (3)
John G. Cook 11,894 0 (3)
Robert A. Schultz 8,551 0 (3)
Hotchkis & Wiley (4) 6,321,233 8.8%
Merrill Lynch Asset
Management, L.P.(5) 6,321,253 8.8%
State of Michigan
Retirement Systems(6) 3,714,300 5.18%
(1) With sole voting and/or investment power.
(2) Includes the following shares issuable pursuant to stock options exercisable
March 31, 1998: Mr. Haab, 56,900; Mr. Lang, 17,800; Mr. Altenbaumer, 17,800; Mr.
Cook, 9,900; and Mr. Schultz, 6,750.
(3) No director or executive officer owns any other equity securities of
Illinova or as much as 1% of the Common Stock. As a group, directors and
executive officers of Illinova and Illinois Power own 187,021 shares of Common
Stock (less than 1%).
(4) With sole voting and dispositive power, as of January 31, 1998, Hotchkis &
Wiley, 800 W. 6th Street, 5th Floor, Los Angeles, CA 90017.
(5) With shared voting and dispositive power, per February 2, 1998, Schedule
13G, Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road, Plainsboro,
NJ 08536.
(6) With sole voting and dispositive power, as of January 31, 1998, State of
Michigan Retirement Systems, 430 W. Allegan, Lansing, MI 48909.
<PAGE>
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 Illinova subsidiaries for the years indicated. The compensation shown
includes all compensation paid for service to Illinova and its subsidiaries,
including Illinois Power, Illinova Generating Company, and Illinova Energy
Partners.
<TABLE>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Larry D. Haab 1997 $514,952 $41,840 $ 16,557 $ 41,840 20,000 shs. $2,614
Chairman, President and 1996 493,709 69,267 15,973 69,267 22,000 shs. 2,615
Chief Executive Officer of 1995 472,250 91,144 19,088 91,144 20,000 shs. 2,550
Illinova and Illinois Power
Paul L. Lang 1997 $242,325 $ 10,602 $ 8,305 $ 10,601 6,500 shs. $2,615
Senior Vice President 1996 233,450 19,747 8,863 19,747 6,500 shs. 2,595
of Illinois Power 1995 222,812 23,841 8,265 23,841 6,500 shs. 2,510
Larry F. Altenbaumer 1997 $232,048 $ 8,992 $ 9,521 $ 8,992 6,500 shs. $1,985
Chief Financial Officer, 1996 222,374 19,832 8,459 19,832 7,500 shs. 1,976
Treasurer and Controller 1995 204,937 20,391 7,686 20,391 6,500 shs. 2,378
of Illinova, and Senior
Vice President and Chief
Financial Officer of
Illinois Power
John G. Cook 1997 $203,413 $ - $ 7,642 $ - 6,000 shs. $ 2,575
Senior Vice President 1996 196,474 16,293 7,409 16,293 6,500 shs. 2,575
and former chief nuclear 1995 179,069 16,620 6,930 16,620 4,500 shs. 2,530
officer of Illinois Power
Robert A. Schultz 1997 $185,560 $ - $ 8,480 $ - 6,000 shs. $ 2,214
Vice President of Illinois 1996 176,170 23,604 6,957 23,604 6,500 shs. 2,114
Power, formerly President 1995 150,000 20,539 7,316 20,639 4,000 shs. 2,584
of Illinova Energy Partners
</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 1997, 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 1997 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, 1997, 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 price of Common Stock on December 31, 1997: Mr. Haab, 7,619 units
valued at $205,241; Mr. Lang, 2,044 units valued at $55,071; Mr.
Altenbaumer, 1,862 units valued at $50,151; Mr. Cook, 1,250 units valued at
$33,685; Mr. Schultz, 1,509 units valued at $40,635. 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).
<PAGE>
The following tables summarize grants during 1997 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 1997
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Grant Date
Granted (1) in 1997 Price Per Share (1) Expiration Date Present Value (2)
<S> <C> <C> <C> <C> <C>
Larry D. Haab 20,000 24% $26.125 2/12/2007 $107,200
Paul L. Lang 6,500 8% 26.125 2/12/2007 34,840
Larry F. Altenbaumer 6,500 8% 26.125 2/12/2007 34,840
John G. Cook 6,000 7% 26.125 2/12/2007 32,160
Robert A. Schultz 6,000 7% 26.125 2/12/2007 32,160
</TABLE>
(1) Each option becomes exercisable on February 12, 2000. In addition to the
specified expiration date, the grant expires on the first anniversary of
the recipient's death and/or 5 years following date of 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 12, 2000, 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 1997 those percentages ranged between 20 and 45 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 2000, 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 .2248. After
discounting for risk of forfeiture at three percent per year over
Illinova's three-year vesting schedule, the ratio is reduced to .2052; (ii)
An annual dividend yield on Illinova Common Stock of 4.11%; (iii) A
risk-free interest rate of 6.57%, based on the yield of a zero-coupon
government bond maturing at the end of the option term; and (iv) Stock
volatility of 19.54%.
<TABLE>
Aggregated Option and Fiscal Year-End Option Value Table
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
<S> <C> <C>
Larry D. Haab 56,900 shs./62,000 shs. $237,414/$57,400
Paul L. Lang 17,800 shs./19,500 shs. $75,148/$18,655
Larry F. Altenbaumer 17,800 shs./20,500 shs. $75,148/$18,655
John G. Cook 9,900 shs./17,000 shs. $43,634/$14,130
Robert A. Schultz 6,750 shs./16,500 shs $29,165/$13,100
</TABLE>
<PAGE>
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 certain 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)
<S> <C> <C> <C> <C> <C>
Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Average Credited Credited Credited Credited Credited
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
700,000 210,000 280,000 350,000 420,000 490,000
</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, 1997, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Haab, Lang, Altenbaumer, Cook and Schultz had
completed 32, 16, 25, 23 and 16 years of credited service, respectively.
Employee Retention Agreements
Illinova has entered into Employee Retention Agreements with each of its
executive officers and with 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 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) or terminated prior to a change of control at the
request of a potential acquirer. 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.
<PAGE>
Compensation and Nominating Committee
Report on Officer Compensation
The seven-member Compensation and Nominating Committee of the Board of Directors
(the "Committee") is composed entirely of Outside Directors. The Committee's
role includes an assessment of Illinova's Compensation Strategy, 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 while rewarding executives for achieving
levels of operational and financial excellence consistent with continuous
improvement. Illinova's current compensation policy is to provide a total
compensation opportunity targeted to the median of all utilities in the Edison
Electric Institute (EEI) database. All but one of the electric power 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 industry broadly including electric and gas
utilities. After careful consideration, the Committee has decided to maintain a
separate compensation peer group limited to electric or combination electric and
gas companies for reference purposes. While the philosophy described above was
used by Illinova in 1997 as an indicator of future utility pay practices, as the
industry migrates toward deregulation and diversification, it is anticipated
that the company will broaden its competitive reference beyond the regulated
utility industry in order to compete sufficiently for talent in the deregulated
environment of the future.
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 similarly sized utilities. Officer salaries
correspond to approximately the median 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 participants 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. Maximum awards under the plan may be up to 150 percent of
target; threshold awards are 50 percent of target.
For Illinois Power officers, 1997 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 50 percent of the awarded amount is based on an assessment of
the individual officer's performance during the year.
<PAGE>
Awards shown under Bonus in the Summary Compensation Table for performance
during 1997 were based on achievement of officer's individual goals. There was
no payout for the identified performance areas.
For the unregulated subsidiaries, Illinova Generating and Illinova Energy
Partners, 1997 officer awards were based on achievement of specific marketing
objectives and earnings objectives of the units. Up to 50 percent of the awarded
amount is based on an assessment of the individual officer's performance during
the year.
Long-Term Incentive Compensation (LTIC) Plan
Awards under the LTIC plan are based on corporate performance as well as
individual officer's contributions to corporate performance subject to the
review of this Committee. In 1997, 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 1997 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 Shareholder Value-Added (SVA) performance relative
to a peer group of utility companies, as measured in overlapping three-year
periods. SVA measures Illinova's return on the Company's weighted average cost
of capital. SVA performance at the median of the peer group will result in
target award levels. Performance above the median will result in payouts greater
than target to a maximum of two times target; performance significantly below
the median results in no payouts. Since 1996 represented the first year of the
SVA plan's first three-year 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 1997
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 1997, the
Committee, with the participation of all Outside Directors determined that Mr.
Haab had provided very strong leadership in promoting electric deregulation in
the State of Illinois. The continuing outage at the Clinton Power Station was a
major setback. Significant progress was made in advancing other strategic
objectives of the Company.
The 1997 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 1,539 stock units which vest over a
three-year period as described above.
The 20,000 option shares granted to the CEO reflect the Committee's
recognition of this work in directing Illinova towards its long-term objectives.
Compensation and Nominating Committee
Ronald L. Thompson, Chairman
J. Joe Adorjan
C. Steven McMillan
Robert M. Powers
Walter D. Scott
Marilou von Ferstel
John D. Zeglis
<PAGE>
Stock Performance Graphs
The following performance graphs compare the cumulative total shareholder return
on Illinova's Common Stock to the cumulative total return on the S&P 500 Index,
S&P MidCap 400 Index and S&P Utilities Index from (i) December 31, 1992, through
December 31, 1997, and (ii) December 31, 1994, through December 31, 1997.
Comparison of Five-Year Cumulative Total Return
Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities
Assumes $100 invested on December 31, 1992, in Illinova Common Stock, S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.
Fiscal year ended December 31.
Comparison of Three-Year Cumulative Total Return
Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities
Assumes $100 invested on December 31, 1994, in Illinova Common Stock, S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.
Fiscal year ended December 31.
<PAGE>
Independent Auditors
The Board of Directors of Illinova has selected Price Waterhouse LLP as
independent auditors for Illinova for 1998. 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 1997 Summary Annual Report to Shareholders was mailed to shareholders
commencing on or about March 10, 1998. Copies of Illinova'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, 1998. Requests should
be addressed to Investor Relations, G-21, Illinova Corporation, 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 Illinova's executive offices not later than November 12,
1998.
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,
General Counsel and Corporate Secretary
Decatur, Illinois
March 10, 1998
<PAGE>
APPENDIX: 1997 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 Illinois Power Company Statistics a-33
Abbreviations Used Throughout this Report
AFUDC Allowance for Funds Used
During Construction
Baldwin Baldwin Power Station
Clinton Clinton Power Station
DOE Department of Energy
EITF Emerging Issues Task Force of the
Financial Accounting Standards Board
EMF Electric and Magnetic Fields
EPS Earnings Per Share
ESOP Employees' Stock Ownership Plan
FAS Statement of Financial
Accounting Standards
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fuel Company Illinois Power Fuel Company
HB 362 House Bill 362, An Act in Relation
to the Competitive Provision of
Utility Services
ICC Illinois Commerce Commission
IEP Illinova Energy Partners, Inc.
IGC Illinova Generating Company
IIC Illinova Insurance Company
Illinova Illinova Corporation
IP Illinois Power Company
IPFI Illinois Power Financing I
IPMI Illinova Power Marketing, Inc.
ISA Integrated Safety Assessment
kw Kilowatt
kwh Kilowatt-Hour
MGP Manufactured-Gas Plant
MIPS Monthly Income Preferred Securities
MW Megawatt
MWH Megawatt-Hour
NOPR Notice of Proposed Rulemaking
NOx Nitrogen Oxide
NRC Nuclear Regulatory Commission
PCA Power Coordination Agreement
PECO PECO Energy Company
S&P Standard & Poor's
SO2 Sulfur Dioxide
Soyland Soyland Power Cooperative, Inc.
TOPrS Trust Originated Preferred Securities
UFAC Uniform Fuel Adjustment Clause
UGAC Uniform Gas Adjustment Clause
U.S. EPA United States Environmental
Protection Agency
Vermilion Vermilion Power Station
Wood River Wood River Power Station
<PAGE>
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 Illinois Power Company Statistics for information concerning
consolidated financial position and results of operations. This report contains
estimates, projections and other forward-looking statements that involve risks
and uncertainties. Actual results or outcomes could differ materially as a
result of such important factors as: the outcome of state and federal regulatory
proceedings affecting the restructuring of the electric and gas utility
industries; the impacts new laws and regulations relating to restructuring,
environmental, and other matters have on Illinova and its subsidiaries; the
effects of increased competition on the utility businesses; risks of owning and
operating a nuclear facility; changes in prices and cost of fuel; factors
affecting non-utility investments, such as the risk of doing business in foreign
countries; construction and operation risks; and increases in financing costs.
Below is discussion of the factors having significant impact on consolidated
financial position and results of operations since January 1, 1995.
Illinova Subsidiaries
The Consolidated Financial Statements include the accounts of Illinova
Corporation, a holding company; Illinois Power Company, a combination electric
and gas utility; Illinova Generating Company, which invests in energy-related
projects throughout the world; Illinova Energy Partners, Inc., which develops
and markets energy-related services throughout the United States and Canada; and
Illinova Insurance Company, whose purpose is to insure the risks of the
subsidiaries of Illinova and risks related to or associated with their business
enterprises. On February 12, 1997, the Illinova Board of Directors approved a
merger of Illinova Energy Partners, Inc. and Illinova Power Marketing, Inc.,
another Illinova subsidiary. In the merger, Illinova Power Marketing, Inc. was
the surviving entity but changed its name to Illinova Energy Partners, Inc.
Illinova Generating Company and Illinova Energy Partners, Inc. are wholly owned
subsidiaries of Illinova. Illinois Power has preferred shares outstanding, but
its common stock is wholly owned by Illinova. See "Note 2 - Illinova
Subsidiaries" for additional information.
Open Access and Wheeling
On March 29, 1995, the FERC issued a NOPR initiating the process of mandating
non-discriminatory open access to public utility transmission facilities 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 all public utilities under FERC jurisdiction that own
transmission facilities to file transmission service tariffs that comply with
Pro Forma Tariffs attached to the Orders. FERC also requires that all wholesale
sales made by a utility provide for transmission of the power under the
prescribed terms and conditions. IP made a compliance filing as required on July
9, 1996, which has been accepted by FERC.
Public utilities serving customers at retail are not required, at this
time, to use FERC-mandated terms and conditions. FERC does not require public
utilities to give retail customers access to alternate energy suppliers or
direct transmission service.
The move to open access transmission service likely will increase
competition in the wholesale energy market, but this alone is not expected to
have a significant financial impact.
Competition
On December 16, 1997, Illinois Governor Edgar signed electric deregulation
legislation. HB 362 guarantees IP's residential customers a 15 percent decrease
in base electric rates beginning August 1, 1998, and an additional 5 percent
decrease effective on May 1, 2002. The rate decreases are expected to result in
revenue reductions of approximately $40 million in 1998, approximately $80
million in each of the years 1999 through 2001 and approximately $100 million in
2002, based on current consumption. Customers with demand greater than 4 MW at a
single site will be free to choose their electric generation supplier ("direct
access") starting October 1999. Customers with at least 10 sites which aggregate
at least 9.5 MW in total demand also will have direct access starting October
1999. Direct access for the remaining non-residential customers will occur in
two phases: customers representing one-third of the remaining load in the
non-residential class in October 1999 and customers representing the entire
remaining non-residential load on December 31, 2000. Direct access will be
available to all residential customers in May 2002. IP remains obligated to
serve all customers who continue to take service from IP at tariff rates, and
remains obligated to provide delivery service to all at regulated rates.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, HB 362 is designed
to protect the financial integrity of electric utilities in three principal
ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer, adjusted to deduct: 1) delivery
charges the utility will continue to receive from the customer, and 2) the
market value of the freed-up energy net of a mitigation factor (i.e.,
percentage reduction of the transition charge amount). The mitigation
factor is designed to provide incentive for management to continue cost
reduction efforts and generate new sources of revenue;
<PAGE>
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds; and
3) Utilities are permitted to seek rate relief in the event that the change in
law leads to their return on equity falling below a specified minimum based
on a prescribed test.
The extent to which revenues are lowered will depend on a number of factors
including future market prices for wholesale and retail energy, and load growth
and demand levels in the current IP service territory. The impact on net income
will depend on, among other things, the amount of revenues earned and the
ongoing costs of doing business.
In 1996, IP received approval from both the ICC and FERC 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. Currently, 17 customers are participating
in the experiment. Since its inception, the experiment has cost IP approximately
$11.2 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 $2.7 million in transmission service charges.
Accounting Matters
Prior to the passage of HB 362, IP prepared its consolidated financial
statements in accordance with FAS 71, "Accounting for the Effects of Certain
Types of Regulation." Reporting under FAS 71 allows companies whose service
obligations and prices are regulated to maintain on their balance sheets assets
representing costs they expect to recover from customers, through inclusion of
such costs in their future rates. In July 1997, the EITF concluded that
application of FAS 71 accounting should be discontinued at the date of enactment
of deregulation legislation for business segments for which a plan of
deregulation has been established. The EITF further concluded that regulatory
assets and liabilities that originated in the portion of the business being
deregulated should be written off unless their recovery is specifically provided
for through future cash flows from the regulated portion of the business.
Because HB 362 provides for market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment. IP
evaluated its regulatory assets and liabilities associated with its generation
segment and determined that recovery of these costs was not probable through
rates charged to transmission and distribution customers, the regulated portion
of the business.
IP wrote off generation-related regulatory assets and liabilities of
approximately $195 million (net of income taxes) in December 1997. These net
assets related to previously incurred costs that were expected to be collected
through future revenues, including deferred costs for Clinton, unamortized
losses on reacquired debt, recoverable income taxes and other generation-related
regulatory assets. At December 31, 1997, IP's net investment in generation
facilities was $3.5 billion and was reflected in "Utility Plant, at Original
Cost" on IP's balance sheet.
In addition, IP evaluated its generation segment plant investments to
determine if they had been impaired as defined in FAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This
evaluation determined that future revenues were expected to be sufficient to
recover the costs of its generation segment plant investments and as a result,
no plant write-downs were necessary. However, ultimate recovery depends on a
number of factors and variables including market conditions and IP's ability to
operate its generation assets efficiently.
The provisions of HB 362 allow an acceleration in the rate at which any
utility-owned assets are expensed without regulatory approval provided such
charges are consistent with generally accepted accounting principles. Under this
legislation, up to an aggregate of $1.5 billion in additional expense for the
generation-related assets could be accelerated through the year 2008. This
reduction in the net book value of IP's generation- related assets should help
position IP to operate competitively and profitably in the changing business
environment. This accelerated charge would have a direct impact on earnings but
not on cash flows.
The FASB continues to review the accounting for liabilities related to
closure and removal of long-lived assets, including decommissioning. See "Note 4
- - Commitments and Contingencies" for a discussion of decommissioning.
See "Note 1 - Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
Regulatory Matters
In September 1996, a leak in a recirculation pump seal caused IP operations
personnel to shut down Clinton. Clinton has not resumed operation.
In January 1997 and again in June 1997, the NRC named Clinton among plants
having a trend of declining performance. In June 1997, IP committed to conduct
an ISA to thoroughly assess Clinton's performance. The ISA was conducted by a
team of 30 individuals with extensive nuclear experience and no substantial
previous involvement at Clinton. Their report concluded that the underlying
reasons for the performance problems at Clinton were ineffective leadership
throughout the organization in providing standards of excellence, complacency
throughout the organization, barrier weaknesses and weaknesses in teamwork. In
late October, a team commissioned by the NRC performed an evaluation to validate
the ISA results. In December, this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.
<PAGE>
On January 5, 1998, IP and PECO announced an agreement under which PECO
will provide management services for Clinton. Although a PECO team will help
manage the plant, IP will continue to maintain the operating license for Clinton
and retain ultimate oversight of the plant. PECO employees will assume senior
positions at Clinton, but the plant will remain primarily staffed by IP
employees. IP made this decision based on a belief that bringing in PECO's
experienced management team would be the most efficient way to get Clinton back
on line and operating at a superior level as quickly as possible.
On January 21, 1998, the NRC placed Clinton on its Watch List of nuclear
plants that require additional regulatory oversight because of declining
performance. Twice a year the NRC evaluates the performance of nuclear power
plants in the United States and identifies those which require additional
regulatory oversight. Once placed on the Watch List a plant must demonstrate
consistent improved performance before it is removed from the list. The NRC will
monitor Clinton more closely than plants not on the Watch List. This may include
increased inspections, additional required documentation, NRC-required approval
of processes and procedures, and higher-level NRC oversight.
The NRC has advised IP that it must submit a written report to the NRC at
least two weeks prior to restarting Clinton, giving the agency reasonable
assurance that IP's actions to correct recurring weaknesses in the corrective
action program have been effective. After the report is submitted, the NRC staff
plans to meet with IP's management to discuss the plant's readiness for restart.
In March 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership, in connection
with the transfer from Soyland to IP of all of Soyland's interest in Clinton.
Soyland's title to the plant and directly related assets such as nuclear fuel
was transferred to IP in May 1997. Soyland's nuclear decommissioning trust
assets were transferred to IP in May 1997, consistent with IP's assumption of
all of Soyland's ownership obligations including those related to
decommissioning.
The FERC approved an amended PCA between IP and Soyland in July 1997. The
amended PCA obligates Soyland to purchase all of its capacity and energy needs
from IP for at least 10 years. The amended PCA provides that a contract
cancellation fee will be paid by Soyland to IP in the event that a Soyland
Cooperative member terminates its membership from Soyland. On May 31, 1997,
three distribution cooperative members terminated membership by buying out of
their long-term wholesale power contracts with Soyland. This action resulted in
Soyland paying a fee of $20.8 million to IP in June 1997 to reduce its base
capacity charges. Fee proceeds of $2.9 million were used to offset the costs of
acquiring Soyland's share of Clinton with the remaining $17.9 million recorded
as interchange revenue. In December 1997, Soyland signed a letter of intent to
pay in advance the remainder of its base capacity charges in the PCA. The fee of
approximately $70 million will be deferred and recognized as interchange revenue
over the initial term of the PCA. The payment is contingent on Soyland obtaining
the necessary financing and regulatory approvals in 1998.
In September 1997, the ICC approved a petition filed by IP which stipulates
customers will not be charged for certain additional costs of energy incurred as
a result of Clinton being out of service. IP did not collect from its customers
$36.3 million for higher-cost replacement power in 1997. IP will forego recovery
of additional fuel costs as the Clinton outage continues into 1998. Under the
petition, fuel costs charged to customers will be no higher than average 1995 -
1996 levels until Clinton is back in service operating at least at a 65%
capacity factor for two consecutive months.
Under HB 362, IP may choose to eliminate application of the UFAC. IP's base
rates will still include a component for some level of recovery of fuel costs,
but IP would not be able to pass through to customers increased costs of
purchasing fuel, emission allowances, or replacement power. On elimination of
the UFAC, base rates will include a fixed fuel-cost factor equivalent to the
average 1995 - 1996 fuel cost levels. Future recovery of fuel costs is uncertain
as IP will decrease base electric rates to residential customers beginning
August 1998 and certain customers will be free to choose their electric
generation supplier beginning in October 1999. The extent to which fuel costs
are recovered will depend on a number of factors including the future market
prices for wholesale and retail energy, when Clinton returns to service, and
whether IP elects to eliminate the UFAC.
Year 2000
In November 1996, Illinova deployed a project team to coordinate the
identification, evaluation, and implementation of changes to computer systems
and applications necessary to achieve a year 2000 date conversion with no effect
on customers or disruption to business operations.
These actions are necessary to ensure that systems and applications will
recognize and process coding for the year 2000 and beyond. Major areas of
potential business impact have been identified and initial conversion efforts
are underway. Illinova also is communicating with third parties with whom it
does business to ensure continued business operations. The cost of achieving
year 2000 compliance is estimated to be at least $14 million through 1999.
Contingency plans for operating without year 2000 compliance have not been
developed. Such activity will depend on assessment of progress. Project
completion is planned for the fourth quarter of 1999.
<PAGE>
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 (loss) applicable to common stock were $(90) million for 1997, $190
million for 1996, and $148 million for 1995. Basic and diluted earnings (loss)
per common share were $(1.22) for 1997 ($1.41 before the extraordinary item
related to discontinued application of FAS 71 for the generation segment), $2.51
for 1996, and $1.96 for 1995 ($2.26 before the one-time charge of $38 million
for enhanced retirement and severance). The decrease in 1997 earnings compared
to 1996 was due primarily to the extraordinary item related to discontinued
application of FAS 71 for the generation segment, higher operation and
maintenance expenses due to Clinton, higher power purchased costs due to Clinton
and Wood River outages, IEP losses and an increase in uncollectible accounts
expense. The increase in 1996 earnings per share 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 basic and diluted earnings per share include $(.30) net-of-tax
for the enhanced retirement and severance program and $(.05) for the carrying
amount under consideration paid for IP preferred stock redeemed in December
1995.
Regulators historically have determined IP's rates for electric service,
the ICC at the retail level and the FERC at the wholesale level. The ICC
determines IP's rates for gas service. These rates have been designed to recover
the cost of service and allow shareholders the opportunity to earn a fair rate
of return. As described under "Competition" above, Illinois electric
deregulation legislation phases in a competitive marketplace for electric
generation while maintaining cost-based regulation for electric delivery service
and gas service, protecting the financial integrity of the company during the
transition period. 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.
Illinova and Illinois Power - Results of Operations
Electric Operations For the years 1995 through 1997, electric revenues including
interchange increased 3.7% and the gross electric margin decreased 6.4% as
follows:
(Millions of dollars) 1997 1996 1995
Electric revenues $ 1,244.4 $ 1,202.9 $ 1,252.6
Interchange revenues 175.6 137.6 116.3
Fuel cost & power
purchased (450.3) (313.3) (333.4)
Electric margin $ 969.7 $ 1,027.2 $ 1,035.5
The components of annual changes in electric revenues were:
(Millions of dollars) 1997 1996 1995
Price $ (11.5) $ (7.2) $ 13.3
Volume and other 9.7 6.4 42.7
Fuel cost recoveries 43.3 (48.9) 19.1
Revenue increase
(decrease) $ 41.5 $ (49.7) $ 75.1
1997 Electric revenues excluding interchange sales increased 3.4%, primarily due
to an increase in revenues under the UFAC and increased wheeling revenues.
Interchange revenues increased 27.6% due to the receipt of an opt-out fee from
Soyland per the amended PCA and increased interchange activity. Electric margin
decreased primarily due to increased power purchased costs as a result of
outages at the nuclear and fossil facilities.
<PAGE>
1996 Electric revenues excluding interchange sales decreased 4.0%, primarily due
to reduction in revenues under the UFAC. Volume changes by customer class were
insignificant, as kwh sales 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 kwh 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.
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:
(Millions of dollars) 1997 1996 1995
Fuel for electric plants
Volume and other $ (37.7) $ 15.4 $ 9.8
Price (8.5) (12.0) (35.5)
Emission allowances 12.3 .8 18.5
Fuel cost recoveries 18.2 (30.0) 14.5
(15.7) (25.8) 7.3
Power purchased 152.7 5.7 6.9
Total increase (decrease) $ 137.0 $ (20.1) $ 14.2
Weighted average system
generating fuel cost
($/MWH) $ 12.06 $ 11.01 $ 11.41
System load requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities, emission allowance
costs and fuel cost recovery through UFAC caused changes in these costs.
Changes in factors affecting the cost of fuel for electric generation are
below:
1997 1996 1995
Increase (decrease)
in generation (25.4)% 5.4% .7%
Generation mix
Coal and other 100% 78% 73%
Nuclear 0% 22% 27%
1997 The cost of fuel decreased 6.3% and electric generation decreased 25.4%.
The decrease in fuel cost was primarily attributable to decreased generation and
a favorable price variance. These factors were partially offset by effects of
the UFAC and increased emission allowance costs. Power purchased increased
$152.7 million primarily due to Clinton and Wood River being out of service.
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.
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.
Gas Operations For the years 1995 through 1997, gas revenues including
transportation increased 29.9%, while the gross margin on gas revenues increased
9.3% as follows:
(Millions of dollars) 1997 1996 1995
Gas revenues $ 345.2 $ 341.4 $ 264.5
Gas cost (207.7) (202.6) (138.8)
Transportation revenues 8.7 6.8 8.0
Gas margin $ 146.2 $ 145.6 $ 133.7
(Millions of therms)
Therms sold 537 703 588
Therms transported 309 251 273
Total consumption 846 954 861
Changes in the cost of gas purchased for resale were:
(Millions of dollars) 1997 1996 1995
Gas purchased for resale
Cost $ 8.0 $ 49.0 $ (43.5)
Volume (30.0) 8.5 25.3
Gas cost recoveries 27.1 6.3 (15.4)
Total increase (decrease) $ 5.1 $ 63.8 $ (33.6)
Average cost per therm
delivered $ .28 $ .267 $ .201
<PAGE>
The 1997 increase in gas costs was due to slightly higher prices from
suppliers and effects of the UGAC, offset by a decrease in volume. The 1996
increase in gas costs was primarily due to higher prices from suppliers and the
effects of the UGAC. The 1995 decrease in the cost of gas purchased was due to
lower gas prices caused by unusually warm winter weather nationwide. Also
contributing to the higher gas margins in 1995 was the 6.1% increase in gas base
rates approved by the ICC in April 1994.
Diversified Enterprises Due primarily to increased power sales activity at IEP,
diversified enterprises revenues increased $678 million for 1997. However,
diversified enterprises expenses increased $705 million, offsetting the growth
in revenues. Diversified expenses primarily reflect the cost of power purchased
for resale.
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:
(Millions of dollars) 1997 1996 1995
Other operating expenses $ 40.6 $ (9.8) $ (.3)
Maintenance 12.0 (.3) 10.4
Depreciation and
amortization 8.8 3.5 7.2
The increase in operating and maintenance expenses for 1997 is primarily
due to increased company and contractor labor at the nuclear and fossil plants.
An increase in uncollectible accounts expense and disposal of surplus inventory
also contributed to the increase.
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 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 expenses for 1995 is primarily due to the
refueling and maintenance outage at Clinton. The increases in depreciation and
amortization for each of the three years were due to increases in utility plant
balances.
Miscellaneous - Net The 1997 decrease of $5.1 million in Miscellaneous-net
deductions is due primarily to 1996 accruals recorded for the planned
disposition of property. The 1996 and 1995 change in Miscellaneous-net
deductions was negligible.
Equity Earnings in Affiliates The increase of $11.1 million in 1997 and $3.7
million in 1996 in equity earnings in affiliates is primarily due to increased
earnings from IGC investments.
Interest Charges Total interest charges, including AFUDC and preferred dividend
requirements, increased $2.8 million in 1997, decreased $15.8 million in 1996,
and increased $2.4 million in 1995. The 1997 increase is primarily due to higher
Illinova debt expenses, increased IP short-term borrowings and lower AFUDC,
partially offset by the continued benefits of IP refinancing efforts and
capitalization reductions. The 1996 decrease was due to lower short-term
interest rates and the impact of IP refinancing efforts and capitalization
reduction during 1996. The 1995 increase was due to increased short-term
borrowings at higher interest rates.
Inflation Inflation, as measured by the Consumer Price Index, was 2.3%, 3.3%,
and 2.5% in 1997, 1996, and 1995, respectively. IP recovers historical rather
than current plant costs in its regulated rates.
Liquidity and Capital Resources
Dividends
On December 10, 1997, Illinova declared the quarterly common stock dividend at
$.31 per share payable February 1, 1998, to stockholders of record as of January
9, 1998. On December 11, 1996, Illinova increased the quarterly common stock
dividend by 11% declaring the common stock dividend for the first quarter of
1997 at $.31 per share. On December 13, 1995, Illinova increased the quarterly
common stock dividend 12%, declaring the common stock dividend for the first
quarter of 1996 at $.28 per share.
<PAGE>
Capital Resources and Requirements
Illinova and IP need cash for operating expenses, interest and dividend
payments, debt and certain IP preferred stock retirements, construction programs
and non-regulated subsidiary funding requirements. To meet these needs, Illinova
and IP have used internally generated funds and external financings, including
the issuance of 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.
IP cash flows from operations during 1997 provided sufficient working
capital to meet ongoing operating requirements, to service existing common and
IP preferred stock dividends and debt requirements and to meet all of IP's
construction requirements. Additionally, Illinova expects that future cash flows
and external financings will enable it to meet operating requirements and
continue to service IP's and Illinova's existing debt, IP's preferred and
Illinova's common stock dividends, IP's sinking fund requirements and all of
IP's anticipated construction requirements. Continued sufficiency of cash flows
for these purposes will depend on a number of factors and variables, including
market conditions, business expenses and the ability to compete.
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 Illinova's and IP's securities by three
principal securities rating agencies are as follows:
Standard Duff &
Moody's & Poor's Phelps
Illinova long-term debt Baa3 BBB- -
IP first/new mortgage bonds Baa1 BBB BBB+
IP preferred stock baa2 BBB- BBB-
IP commercial paper P-2 A-2 D-2
Under current market conditions, these ratings would afford Illinova and IP
the ability to issue additional securities through external financing. Illinova
and IP have adequate short-term and intermediate-term bank borrowing capacity.
Based on its 1993 revised standards for review of utility business and
financial risks, 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. Duff & Phelps 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. Illinova did not petition
Duff & Phelps for a rating of its long-term debt.
For the years 1997, 1996 and 1995, changes in long-term debt, IP preferred
stock and Illinova common stock outstanding, including normal maturities and
elective redemptions, were as follows:
(Millions of dollars) 1997 1996 1995
Illinova long-term debt $ 100 $ - $ -
IP long-term debt (11) (154) (5)
Preferred stock (39) 71 (135)
Common stock (90) - -
Total decrease $ (40) $ (83) $(140)
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 and the 1992 New Mortgage. For additional
information, see "Note 9 - Long-Term Debt" and "Note 10 - Preferred Stock of
Subsidiary."
During 1997, IP redeemed $34.9 million (all of the remaining) Adjustable
Rate Series A serial preferred stock. IP also redeemed $4.2 million of various
issues of serial preferred stock. In addition, $10.5 million of medium-term
notes matured and were retired. During the year IP issued $150 million of
Adjustable Rate Pollution Control Revenue Bonds, due April 1, 2032. The proceeds
were used on June 2, 1997, to retire $150 million of IP's 7 5/8% Pollution
Control First Mortgage Bonds due 2016.
In January 1997, a $300 million shelf registration statement for Illinova
debt securities became effective. On February 5, 1997, Illinova issued $100
million of 7 1/8% Senior Notes due 2004. The proceeds were used to redeem $77
million of short-term borrowings, and to invest in Illinova's non-regulated
subsidiaries. On January 28, 1998, Illinova issued (under its $300 million shelf
registration statement) $40 million of 6.46% medium-term notes due October 1,
2002. During 1997, Illinova repurchased four million shares of its common stock
through an open market program.
<PAGE>
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 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 redeemed $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.
IPFI is a statutory business trust in which IP serves as sponsor. IPFI
issued $100 million of 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.
In 1992, IP executed a 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. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The New Mortgage provides IP with increased
financial flexibility.
At December 31, 1997, based on the most restrictive earnings test contained
in the New Mortgage, IP could issue approximately $800 million of additional New
Mortgage bonds for other than refunding purposes. Also at December 31, 1997, the
unused portion of Illinova and IP total bank lines of credit was $465 million.
The amount of available IP unsecured borrowing capacity totaled $168 million at
December 31, 1997.
On February 12, 1997, the IP 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 change will be voted on by the preferred
stockholders at a special meeting planned to be held in 1998.
Under HB 362, IP may issue transitional funding instruments for up to 25%
of its December 31, 1996, capitalization on or after August 1, 1998. IP is
continuing to review its refinancing plans but could issue up to $864 million of
transitional funding instruments on or after August 1, 1998, under this
provision. In addition, IP would be eligible to issue up to an additional $864
million of transitional funding instruments on or after August 1, 1999. Of the
proceeds from the issuance of transitional funding instruments, 80% or more must
be used to retire and repurchase IP debt and equity while 20% or less can be
used to fund certain other transition costs.
Construction expenditures for the years 1995 through 1997 were
approximately $620.5 million, including $17.5 million of AFUDC. Illinova
estimates that it will spend approximately $225 million for construction
expenditures for IP in 1998. IP construction expenditures for the period
1998-2002 are expected to total about $1 billion. Additional expenditures may be
required during this period to accommodate transitional expenditures related to
a competitive environment, environmental compliance costs and system upgrades,
which cannot be determined at this time.
Illinova's capital expenditures for the years 1998 through 2002, in
addition to the IP construction expenditures, are expected to include $129
million for nuclear fuel, $331 million for mandatory debt retirement and $762
million for investments by the non-regulated subsidiaries.
See "Note 4 - Commitments and Contingencies" for additional information.
Internal cash generation will meet substantially all construction and capital
requirements.
Environmental Matters
See "Note 4 - Commitments and Contingencies" for a discussion of environmental
matters that impact or could potentially impact Illinova and IP.
Tax Matters
See "Note 7 - Income Taxes" for a discussion of effective tax rates and other
tax issues.
<PAGE>
ILLINOVA CORPORATION
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 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 Illinova's financial position, results of operations and cash
flows.
Illinova 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 Illinova'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, Illinova 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 Illinova. 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, Illinova'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.
Larry D. Haab
Chairman, President
and Chief Executive Officer
Larry F. Altenbaumer
Chief Financial Officer,
Treasurer and Controller
ILLINOVA CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
To the Board of Directors and Shareholders of Illinova Corporation
In our opinion, the consolidated financial statements of Illinova Corporation
and its subsidiaries appearing on pages a-11 through a-31 of this report present
fairly, in all material respects, the financial position of Illinova Corporation
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulations,"
for its generation segment of the business in December 1997.
Price Waterhouse LLP
St. Louis, Missouri
February 12, 1998
<PAGE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C>
(Millions of dollars except per share amounts)
For the Years Ended December 31, 1997 1996 1995
Operating Revenues
Electric $ 1,244.4 $1,202.9 $ 1,252.6
Electric interchange 175.6 137.6 116.3
Gas 353.9 348.2 272.5
Diversified enterprises 735.6 57.6 2.0
Total 2,509.5 1,746.3 1,643.4
Operating Expenses
Fuel for electric plants 232.4 248.1 273.9
Power purchased 217.9 65.2 59.5
Gas purchased for resale 207.7 202.6 138.8
Diversified enterprises 792.3 87.5 15.2
Other operating expenses 290.5 249.9 259.7
Maintenance 111.7 99.7 100.0
Enhanced retirement and severance - - 37.8
Depreciation and amortization 198.8 190.0 186.5
General taxes 133.8 131.3 135.0
Total 2,185.1 1,274.3 1,206.4
Operating income 324.4 472.0 437.0
Other Income and Deductions
Miscellaneous-net (3.9) (9.0) (7.8)
Equity earnings in affiliates 17.5 6.4 2.7
Total 13.6 (2.6) (5.1)
Income before interest charges and income taxes 338.0 469.4 431.9
Interest Charges
Interest expense 136.8 134.7 148.6
Allowance for borrowed funds used during construction (5.0) (6.5) (6.0)
Preferred dividend requirements of subsidiary 21.5 22.3 23.7
Total 153.3 150.5 166.3
Income before income taxes 184.7 318.9 265.6
Income taxes 80.3 127.9 114.0
Net income before extraordinary item 104.4 191.0 151.6
Extraordinary item net of income tax benefit of $118.0 million (Note 1) (195.0) - -
Net income (loss) (90.6) 191.0 151.6
Carrying amount over (under) consideration paid
for redeemed preferred stock of subsidiary .2 (.7) (3.5)
Net income (loss) applicable to common stock $ (90.4) $ 190.3 $ 148.1
Earnings per common share before extraordinary item (basic and diluted) $ 1.41 $ 2.51 $ 1.96
Extraordinary item per common share (basic and diluted) $ (2.63) - $ -
Earnings (loss) per common share (basic and diluted) $ (1.22 $ 2.51 $ 1.96
Cash dividends declared per common share $ 1.24 $ 1.15 $ 1.03
Cash dividends paid per common share $ 1.24 $ 1.12 $ 1.00
Weighted average common shares 73,991,651 75,681,937 75,643,937
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements. Prior years restated to conform to new financial format.
<PAGE>
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Millions of dollars)
<S> <C> <C>
December 31, 1997 1996
Assets
Utility Plant, at original cost
Electric (includes construction work in progress of $214.3 million and $212.5 million, respectively) $ 6,690.4 $ 6,335.4
Gas (includes construction work in progress of $10.7 million and $21.2 million, respectively) 663.0 646.1
7,353.4 6,981.5
Less - accumulated depreciation 2,808.1 2,419.7
4,545.3 4,561.8
Nuclear fuel in process 6.3 5.3
Nuclear fuel under capital lease 126.7 96.4
4,678.3 4,663.5
Investments and Other Assets 198.8 146.2
Current Assets
Cash and cash equivalents 33.0 24.6
Accounts receivable (less allowance for doubtful accounts of $5.5 million and $3.0 million, respectively)
Service 115.6 138.8
Other 102.3 62.0
Accrued unbilled revenue 86.3 106.0
Materials and supplies, at average cost
Fossil fuel 12.6 7.9
Gas in underground storage 29.3 27.2
Operating materials 76.7 78.1
Prepayments and other 64.4 24.1
520.2 468.7
Deferred Charges
Deferred Clinton costs - 103.9
Recoverable income taxes - 101.3
Other 185.7 229.2
185.7 434.4
$ 5,583.0 $ 5,712.8
Capital and Liabilities
Capitalization
Common stock - No par value, 200,000,000 shares authorized; 71,681,937 and 75,681,937 shares outstanding,
respectively, stated at $ 1,425.7 $ 1,425.7
Less - Deferred compensation - ESOP 10.2 14.3
Retained earnings 51.7 233.0
Less - Capital stock expense 7.3 8.2
Less - 4,000,000 shares of common stock in treasury at cost 90.4 -
Total common stock equity 1,369.5 1,636.2
Preferred stock of subsidiary 57.1 96.2
Mandatorily redeemable preferred stock of subsidiary 197.0 197.0
Long-term debt 1,717.5 1,636.4
Total capitalization 3,341.1 3,565.8
Current Liabilities
Accounts payable 177.3 166.7
Notes payable 415.3 387.0
Long-term debt and lease obligations of subsidiary maturing within one year 87.5 47.7
Dividends declared 22.9 24.7
Taxes accrued 26.7 43.9
Interest accrued 36.0 34.3
Other 96.0 43.7
861.7 748.0
Deferred Credits
Accumulated deferred income taxes 969.0 1,034.9
Accumulated deferred investment tax credits 208.3 215.5
Other 202.9 148.6
1,380.2 1,399.0
$ 5,583.0 $ 5,712.8
</TABLE>
(Commitments and Contingencies Note 4)
See notes to consolidated financial statements which are an integral part of
these statements.
<PAGE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(Millions of dollars)
<S> <C> <C> <C>
For the Years Ended December 31, 1997 1996 1995
Cash Flows from Operating Activities
Net income (loss) $ (90.6) $ 191.0 $ 151.6
Items not requiring (providing) cash -
Depreciation and amortization 202.1 195.3 190.0
Allowance for funds used during construction (5.0) (6.5) (6.0)
Deferred income taxes 30.8 57.4 39.1
Enhanced retirement and severance - - 37.8
Extraordinary item 195.0 - -
Changes in assets and liabilities -
Accounts receivable (19.4) (52.2) (7.8)
Accrued unbilled revenue 19.7 (16.9) (10.2)
Materials and supplies (5.4) (2.1) 22.8
Accounts payable 26.4 46.8 (13.6)
Interest accrued and other, net 14.7 (5.4) 9.5
Net cash provided by operating activities 368.3 407.4 413.2
Cash Flows from Investing Activities
Construction expenditures (223.9) (187.3) (209.3)
Allowance for funds used during construction 5.0 6.5 6.0
Other investing activities (33.5) (75.0) (34.9)
Net cash used in investing activities (252.4) (255.8) (238.2)
Cash Flows from Financing Activities
Dividends on common stock (92.4) (84.7) (75.6)
Repurchase of common stock (90.4) - -
Redemptions -
Short-term debt (241.1) (355.8) (213.6)
Long-term debt (160.8) (153.7) (5.2)
Preferred stock of subsidiary (39.0) (29.5) (134.5)
Issuances -
Short-term debt 269.5 383.2 209.5
Long-term debt 250.0 - -
Preferred stock of subsidiary - 100.0 -
Common stock - 1.1 -
Other financing activities (3.3) 1.1 5.0
Net cash used in financing activities (107.5) (138.3) (214.4)
Net change in cash and cash equivalents 8.4 13.3 (39.4)
Cash and cash equivalents at beginning of year 24.6 11.3 50.7
Cash and cash equivalents at end of year $ 33.0 $ 24.6 $ 11.3
</TABLE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
(Millions of dollars)
For the Years Ended December 31, 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 233.0 $ 129.6 $ 58.8
Net income (loss) before dividends and carrying amount adjustment (69.1) 213.3 175.3
163.9 342.9 234.1
Less -
Dividends -
Preferred stock of subsidiary 21.7 22.6 23.6
Common stock 90.7 86.6 77.4
Plus -
Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary .2 (.7) (3.5)
(112.2) (109.9) (104.5)
Balance at end of year $ 51.7 $ 233.0 $ 129.6
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant
Accounting Policies
Principles of Consolidation The consolidated financial statements include the
accounts of Illinova, a holding company, and its subsidiaries: IP, IGC, IIC, and
IEP. IP is a combination electric and gas utility. IGC invests in energy-related
projects and competes in the independent power market. IIC's purpose is to
insure the risks of the subsidiaries of Illinova and risks related to or
associated with their business enterprises. IEP develops and markets
energy-related services to the unregulated energy market throughout the United
States and Canada, and engages in the brokering and marketing of electric power
and gas. On February 12, 1997, the Illinova Board of Directors approved a merger
of IEP and IPMI, another Illinova subsidiary. In the merger, IPMI was the
surviving entity but changed its name to IEP. See "Note 2 - Illinova
Subsidiaries" for additional information.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. All nonutility operating
transactions are included in the sections "Diversified enterprises," "Interest
expense," "Income taxes" and "Other Income and Deductions," in Illinova's
Consolidated Statements of Income. Preparation of financial statements in
conformity with generally accepted accounting principles requires the use of
management's estimates. Actual results could differ from those estimates.
Regulation IP is subject to regulation by the ICC and the FERC. Prior to the
passage of HB 362, IP prepared its consolidated financial statements in
accordance with FAS 71, "Accounting for the Effects of Certain Types of
Regulation." Reporting under FAS 71 allows companies whose service obligations
and prices are regulated to maintain on their balance sheets assets which
represent costs they expect to recover from customers through inclusion of such
costs in their future rates. In July 1997, the EITF concluded that application
of FAS 71 accounting should be discontinued at the date of enactment of
deregulation legislation for business segments for which a plan of deregulation
has been established. The EITF further concluded that regulatory assets and
liabilities that originated in the portion of the business being deregulated
should be written off unless their recovery is specifically provided for through
future cash flows from the regulated portion of the business.
Because HB 362 provides for market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment in
December 1997 when HB 362 was signed by Illinois Governor Edgar. IP evaluated
its regulatory assets and liabilities associated with its generation segment and
determined that recovery of these costs was not probable through rates charged
to transmission and distribution customers, the regulated portion of its
business. Therefore, IP wrote off generation-related regulatory assets and
liabilities of approximately $195 million (net of income taxes) in December
1997. These net assets related to previously incurred costs that had been
expected to be collected through future revenues, including deferred Clinton
post construction costs, unamortized losses on reacquired debt, recoverable
income taxes and other generation-related regulatory assets. At December 31,
1997, IP's net investment in generation facilities was $3.5 billion and was
included in "Utility Plant, at Original Cost" on IP's Consolidated Balance
Sheets.
Illinova'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:
(Millions of dollars) 1997 1996
Deferred Clinton
post-construction costs $ - $ 103.9
Recoverable income taxes $ - $ 101.3
Unamortized losses on reacquired debt $ 32.3 $ 87.7
Manufactured-gas plant site cleanup costs $ 64.8 $ 69.1
DOE decontamination and
decommissioning fees $ 6.3 $ 5.4
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 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.
<PAGE>
Allowance for Funds Used During Construction The FERC Uniform System of Accounts
defines AFUDC as the net costs for the period of construction of borrowed funds
used for construction purposes and a reasonable rate on other funds when so
used. AFUDC is capitalized as a component of construction work in progress by
those business segments applying the provisions of FAS 71. In 1997, 1996 and
1995, the pre-tax rate used for all construction projects was 5.6%, 5.8% and
6.5%, respectively. Although cash is not currently realized from the allowance,
it is realized under the ratemaking process over the service life of the related
property through increased revenues resulting from a higher rate base and higher
depreciation expense. Non-regulated business segments capitalize interest under
the guidelines in FAS 34, "Capitalization of Interest Cost."
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 1997, 1996 and 1995, provisions for
depreciation were 2.8%, 2.8% and 2.8%, respectively, of the average depreciable
cost for Clinton. Provisions for depreciation for all other electric plant were
2.8%, 2.6% and 2.6% in 1997, 1996 and 1995, respectively. Provisions for
depreciation of gas utility plant, as a percentage of the average depreciable
cost, were 3.3%, 3.9% and 3.9% in 1997, 1996 and 1995, respectively.
Amortization of Nuclear Fuel IP leases nuclear fuel from the 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 kwh generated. See "Note 4 -
Commitments and Contingencies" for discussion of decommissioning and nuclear
fuel disposal costs.
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 for business segments applying the
provisions of FAS 71 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. Costs related to
refunded debt for the generating segment are expensed when incurred.
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 $71 million in 1997, $68 million in 1996 and $66 million in 1995. The costs
of fuel for the generation of electricity, purchased power and gas purchased for
resale are 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. In September 1997, IP filed a petition with the ICC that stipulated
customers will not be charged for certain additional costs of energy incurred as
a result of Clinton being out of service. During 1997, as a result of this
stipulation, IP did not collect $36.3 million of fuel costs. IP will also forego
recovery of additional fuel costs in 1998 for the duration of the Clinton
outage. Under the petition, fuel costs charged to customers will be no higher
than average 1995 - 1996 levels until Clinton is back in service operating at
least at a 65% capacity factor for two consecutive months.
Income Taxes Deferred income taxes result from temporary differences between
book income and taxable income, and the tax bases of assets and liabilities on
the balance sheet. The temporary differences relate principally to plant in
service and depreciation.
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.
Illinova and its subsidiaries file a consolidated federal income tax
return. Income taxes are allocated to the individual companies based on their
respective taxable income or loss. See "Note 7 - Income Taxes" for additional
discussion.
Preferred Dividend Requirements of Subsidiary Preferred dividend requirements of
IP 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
$30 million, $31 million and $19 million during 1997, 1996 and 1995,
respectively. Income taxes and interest paid are as follows:
Years ended December 31,
(Millions of dollars) 1997 1996 1995
Income taxes $ 96.2 $ 65.9 $ 64.7
Interest $ 145.3 $ 148.5 $ 152.4
<PAGE>
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 accrued and recognized as a reduction in interest expense.
Forward Contracts of Subsidiary In the normal course of business, IEP enters
into contracts for the purchase and sale (physical delivery) of electricity.
When, through use of a market price analysis, it is deemed probable that a loss
will occur on fulfillment of a contract, a loss (contingent liability) is
recorded. When markets allow, IEP will hedge price exposure through the use of
electricity futures contracts and swaps.
New Pronouncements The FASB issued FAS 128, "Earnings Per Share" in February
1997, effective for financial statements issued after December 15, 1997. FAS 128
establishes standards for computing and presenting EPS and replaces the
presentation of primary EPS and fully diluted EPS with a presentation of basic
EPS and diluted EPS, respectively. Reconciliations of the income (loss) and
number of shares for the basic and diluted EPS calculations are as follows:
(Millions of dollars) 1997 1996 1995
Net income before
extraordinary item
(basic and diluted) $ 104.6 $ 190.3 $ 148.1
Extraordinary item
(basic and diluted) $(195.0) $ - $ -
Net income (loss)
applicable to common
stock (basic and diluted) $ (90.4) $ 190.3 $ 148.1
Weighted average common
shares for basic EPS 73,991,651 75,681,937 75,643,937
Effect of dilutive securities -
stock options 7,745 33,745 19,914
Adjusted weighted average
common shares for
diluted EPS 73,999,396 75,715,682 75,663,851
The FASB issued FAS 129, "Disclosure of Information about Capital
Structure" in February 1997, effective for financial statements for periods
ending after December 15, 1997. FAS 129 establishes standards for disclosing
information about an entity's capital structure and contains no change in
disclosure requirements for entities that were previously subject to the
requirements of Accounting Principles Board Opinions 10 and 15 and FAS 47. No
new requirements are imposed on Illinova by FAS 129.
The FASB issued FAS 130, "Reporting Comprehensive Income" in June 1997,
effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Illinova continues to analyze FAS 130 and does
not currently expect it to have a significant impact on its financial statement
presentation.
The FASB issued FAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997, effective for periods beginning after
December 15, 1997. FAS 131 supersedes FAS 14, "Financial Reporting for Segments
of a Business Enterprise." FAS 131 establishes standards for the way public
business enterprises report financial and descriptive information about their
reportable operating segments in their financial statements. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Illinova continues to evaluate the provisions of FAS 131
and determine the impact of the revised disclosure requirements on its 1998
financial statements.
Note 2 - Illinova Subsidiaries
Illinova, a holding company, is the parent of IP, IGC, IEP and IIC. IP 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. IGC invests in energy-related projects throughout the world and
competes in the independent power market. IEP develops and markets
energy-related services to the unregulated energy market throughout the United
States and Canada. On February 12, 1997, the Illinova Board of Directors
approved a merger of IEP and IPMI, another wholly owned subsidiary of Illinova.
IPMI formerly engaged in the brokering and marketing of electric power and gas.
In the merger, IPMI was the surviving entity but changed its name to IEP. IIC is
a captive insurance company whose primary business is to insure the risks of the
subsidiaries of Illinova and risks related to or associated with their business
enterprises. IGC and IEP are wholly owned subsidiaries of Illinova. IP has
preferred shares outstanding, but its common stock is wholly owned by Illinova.
<PAGE>
IGC has investments in power-producing facilities throughout the world,
some operating and some under construction. The following table summarizes its
investments:
Year of Fuel Total In Service
Location Investment Type MW Date
Domestic & England
Teesside, England 1993 Natural Gas 1875 1993
Ferndale, Washington 1994 Natural Gas 245 1994
Paris, Texas 1994 Natural Gas 230 1989
Cleburne, Texas 1994 Natural Gas 258 1996
Long Beach, California 1995 Natural Gas 70 1989
Pepperell, Massachusetts 1995 Natural Gas 38 1995
Joppa, Illinois 1996 Coal 1015 1955
Latin America
Puerto Cortez, Honduras 1994 Diesel 80 1994/95
Old Harbour, Jamaica 1995 Diesel 74 1995
Aguaytia, Peru 1995 Natural Gas 155 1998
Barranquilla, Colombia 1996 Natural Gas 400 1995/96/98
Asia
Zhejiang Province, China 1995 Coal 24 1996
Balochistan, Pakistan 1996 Natural Gas 586 1998
Hunan Province, China 1997 Coal 24 1999
IGC's ownership interest totals 440 MW for the domestic and English plants,
259 MW for the Latin American plants, and 130 MW for the Asian plants. As of
December 31, 1997, IGC has approximately $160 million invested in the 829 MW it
owns. IGC's investments are primarily accounted for under the equity method.
At December 31, 1997, Illinova's net investment in IGC was $180 million.
IEP focuses on the development and sale of energy and energy-related
services primarily in the Midwestern and Western regions of North America. IEP
develops and sells energy-related services designed to assist target customers
in assessing current energy consumption patterns, and to enable customers to
reduce energy usage through increased efficiency by changing practices and
upgrading equipment and facilities. Currently IEP is developing and marketing a
series of energy-related information collection and analysis tools, collectively
known as EQ services. These services include software tools that a customer may
utilize to conduct its own analysis as well as a service bureau that will
perform these services and bill consolidation for the customer. IEP has also
expanded the project management and engineered solutions business, formerly
known as Illinova Energy Services, to provide delivery capability for
energy-related equipment and facilities improvements throughout the Midwestern
and Western United States.
IEP owns 50% of Tenaska Marketing Ventures, in partnership with Tenaska
Marketing, Inc. Tenaska Marketing Ventures focuses on natural gas marketing in
the Midwestern United States. In the Western United States, IEP is one of the
largest power marketers, purchasing and selling electricity in the wholesale
market. In the Midwest, IEP has developed a retail natural gas business, serving
industrial and commercial customers.
During 1997, IEP incurred losses of $30 million (before taxes) associated
with the wholesale power marketing business, including accrued losses of $13.5
million (before taxes) for contracts not yet settled. These losses were
primarily caused by a single contract entered into by IEP during 1996. See "Note
4 - Commitments and Contingencies" for information about IEP contingencies.
At December 31, 1997, Illinova's net investment in IEP was $28 million.
In 1997, IIC insured certain risks of IP for a premium of $16.7 million. In
turn, IIC will reinsure this risk with a reinsurer. At December 31, 1997,
Illinova's net investment in IIC was approximately $1.5 million.
Note 3 - Clinton Power Station
Clinton Operations
In September 1996, a leak in a recirculation pump seal caused IP operations
personnel to shut down Clinton. Clinton has not resumed operation.
In January 1997 and again in June 1997, the NRC named Clinton among plants
having a trend of declining performance. In June 1997, IP committed to conduct
an ISA to thoroughly assess Clinton's performance. The ISA was conducted by a
team of 30 individuals with extensive nuclear experience and no substantial
previous involvement at Clinton. Their report concluded that the underlying
reasons for the performance problems at Clinton were ineffective leadership
throughout the organization in providing standards of excellence, complacency
throughout the organization, barrier weaknesses and weaknesses in teamwork. In
late October, a team commissioned by the NRC performed an evaluation to validate
the ISA results. In December, this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.
<PAGE>
In September 1997, the NRC advised IP that it must submit a written report
to the NRC at least two weeks prior to restarting Clinton, giving the agency
reasonable assurance that IP's actions to correct recurring weaknesses in the
corrective action program have been effective. After the report is submitted,
the NRC staff plans to meet with IP's management to discuss the plant's
readiness for restart.
In November 1997, Larry Haab, Chief Executive Officer of IP, publicly
pledged to address the findings of the ISA, to improve Clinton, and provide the
resources necessary to restart the plant. Further, in January 1998, IP and PECO
announced an agreement under which PECO will provide management services for
Clinton. The new management team initially will consist of nine people in key
positions, including chief nuclear officer and plant manager.
Although a PECO team will help manage the plant, IP will continue to
maintain the operating license for Clinton and retain ultimate oversight of the
plant. The plant will remain staffed primarily by IP employees.
PECO operates two stations, Limerick and Peach Bottom, each with two
boiling water reactors similar to the one at Clinton. Although PECO's Peach
Bottom Station was a troubled plant that experienced a two-year outage, it was
turned around, and both plants have set performance records for long operating
runs and short refueling outages, receiving excellent performance ratings from
the NRC and the Institute of Nuclear Power Operations.
On January 21, 1998, the NRC placed Clinton on its Watch List. Nuclear
plants are placed on the Watch List when the NRC believes additional regulatory
oversight is required because of declining performance. Clinton will remain on
the Watch List until consistent improved performance is demonstrated. During the
period Clinton remains on the Watch List, the NRC will monitor it more closely
than plants not on the Watch List. This may include increased inspections,
additional required documentation, NRC-required approval of processes and
procedures and higher-level NRC oversight.
Transfer of Soyland's Ownership Share to IP
In March 1997, the NRC issued an order approving transfer to IP of the Clinton
operating license related to Soyland's 13.2% ownership in connection with the
transfer from Soyland to IP of all of Soyland's interest in Clinton. Soyland's
title to the plant and directly related assets such as nuclear fuel was
transferred to IP in May 1997. Soyland's nuclear decommissioning trust assets
were transferred to IP in May 1997, consistent with IP's assumption of all of
Soyland's ownership obligations, including those related to decommissioning.
The FERC approved an amended PCA in July 1997. The amended PCA obligates
Soyland to purchase all of its capacity and energy needs from IP for at least 10
years. The amended PCA provides that a contract cancellation fee be paid by
Soyland to IP in the event that a Soyland member terminates its membership from
Soyland. In May 1997, three distribution cooperative members terminated
membership by buying out of their long-term wholesale power contracts with
Soyland. As a result, Soyland paid a fee of $20.8 million to IP in June 1997 to
reduce its future base capacity charges. Fee proceeds of $2.9 million were used
to offset the costs of acquiring Soyland's share of Clinton with the remaining
$17.9 million recorded as interchange revenue.
In December 1997, Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA. The fee of approximately $70
million will be deferred and recognized as interchange revenue over the initial
term of the PCA. The payment is contingent on Soyland obtaining the necessary
financing and regulatory approvals in 1998.
Clinton Cost and Risks
Clinton was placed in service in 1987 and represents approximately 20.3% of IP's
installed generation capacity. The investment in Clinton represented
approximately 54% of Illinova's total assets at December 31, 1997. See "Note 1 -
Summary of Significant Accounting Policies" for additional information.
IP's Clinton-related costs represented 38% of Illinova's total 1997 other
operating, maintenance and depreciation expenses. Clinton's equivalent
availability was 0%, 66% and 76% for 1997, 1996 and 1995, respectively.
Ownership of an operating nuclear generating unit exposes IP to significant
risks, including increased and changing regulatory, safety and environmental
requirements and the uncertain future cost of closing and dismantling the unit.
IP expects to be allowed to continue to operate Clinton; however, if any
unforeseen or unexpected developments would prevent it from doing so, IP would
be materially adversely affected. See "Note 4 - Commitments and Contingencies"
for additional information.
<PAGE>
Note 4 - Commitments and Contingencies
Commitments
Illinova estimates that it will spend approximately $225 million for
construction expenditures for IP in 1998. IP construction expenditures for the
period 1998-2002 are expected to total about $1 billion. Additional expenditures
may be required during this period to accommodate transitional expenditures
related to a competitive environment, environmental compliance costs and system
upgrades, which cannot be determined at this time.
Illinova's capital expenditures for the years 1998 through 2002, in
addition to the IP construction expenditures, are expected to include $129
million for nuclear fuel, $331 million for mandatory debt retirement and $762
million for investments by the non-regulated subsidiaries.
In addition, IP has substantial commitments for the purchase of coal under
long-term contracts. Estimated coal contract commitments for 1998 through 2002
are $619 million (excluding price escalation provisions.) Total coal purchases
for 1997, 1996 and 1995 were $181 million, $184 million and $168 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 1998 through 2002 total $56 million.
Total natural gas purchased for 1997, 1996 and 1995 was $185 million, $207
million and $150 million, respectively. IP's estimated nuclear fuel commitments
for Clinton are approximately $11 million for uranium concentrates through 2001,
$3 million for conversion services through 2002, $35 million for enrichment
services through 1999 and $232 million for fabrication services through 2019. IP
is committed to purchase approximately $20 million of emission allowances
through 1999. IP anticipates that all gas-related costs will be recoverable
under IP's UGAC. See the subcaption "Fuel Cost Recovery" below for discussion of
the UFAC.
Fuel Cost Recovery On September 29, 1997, the ICC approved an IP petition that
stipulates customers will not be charged for certain additional costs of energy
incurred as a result of Clinton being out of service. Under the petition, fuel
costs charged to customers will be no higher than average 1995 - 1996 levels
until Clinton is back in service operating at least at a 65% capacity factor for
two consecutive months. See "Note 3 - Clinton Power Station" for additional
information about Clinton.
As a result of Illinois deregulation legislation, IP may choose to
eliminate application of the UFAC. IP's base rates would still include a
component for some level of recovery of fuel costs, but IP would not be able to
pass through to customers increased costs of purchasing fuel, emission
allowances or replacement power. Upon elimination of the UFAC, base rates will
include a fixed fuel cost factor equivalent to the average 1995 - 1996 fuel cost
levels. Future recovery of fuel costs is uncertain, as IP will decrease base
electric rates to residential customers beginning August 1998 and certain
customers will be free to choose their electric generation supplier beginning in
October 1999. The extent to which fuel costs are recovered will depend on a
number of factors including the future market prices for wholesale and retail
energy, when Clinton returns to service, and whether IP elects to eliminate the
UFAC.
Insurance IP maintains insurance 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 incident
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 $1.5 million per week of business interruption insurance
coverage through an industry-owned mutual insurance company. This insurance does
not provide coverage until Clinton has been out of service for 21 weeks.
<PAGE>
All United States nuclear reactor licensees 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 nuclear
reactor licensees 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 due to the nuclear energy hazard 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 Illinova's and IP's financial positions.
Decommissioning and Nuclear Fuel Disposal IP is responsible for the costs of
decommissioning Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent with IP's assumption of all of Soyland's ownership obligations of
Clinton, Soyland's nuclear decommissioning trust assets were transferred to IP.
Future decommissioning costs related to Soyland's former share of Clinton will
be provided through the PCA between Soyland and IP. IP is collecting future
decommissioning costs for the remaining portion of Clinton through its electric
rates based on an ICC-approved formula that allows IP to adjust rates annually
for changes in decommissioning cost estimates. Illinois deregulation legislation
provides for the continued recovery of decommissioning costs from IP's delivery
customers.
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 $538 million (1996 dollars) or $969 million (2026
dollars, assuming a 2% inflation factor.) Regulatory approval of this increased
decommissioning cost level was received in August 1997. This estimate is the
basis used for funding decommissioning costs through rates charged to IP's
customers and through the PCA with Soyland.
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 1997,
1996 and 1995, IP contributed $5.3 million, $3.9 million and $5.0 million,
respectively, to its external nuclear decommissioning trust funds. The balances
in these nuclear decommissioning funds at December 31, 1997 and 1996 were $62.5
million and $41.4 million, respectively. Decommissioning funds are recorded as
assets on the balance sheet. A decommissioning liability approximately
equivalent to trust assets is also recorded. IP recognizes earnings and expenses
from the trust fund as changes in its assets and liabilities relating to these
funds occur.
The 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, management
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.
Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the
permanent storage and disposal of spent nuclear fuel. The DOE currently charges
one mill ($0.001) per net kwh (one dollar per MWH) generated and sold for future
disposal of spent fuel. IP is recovering these charges through rates. In 1996,
the District of Columbia Circuit Court of Appeals issued an order, at the
request 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.
<PAGE>
Environmental Matters
Clean Air Act To comply with the SO2 emission reduction requirements of Phase I
(1995-1999) of the Acid Rain Program of the 1990 Clean Air Act Amendments, IP
continues to purchase emission allowances. An emission allowance is the
authorization by the U.S. EPA to emit one ton of SO2. The ICC approved IP's
Phase I Acid Rain 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 1998 and 1999 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 UFAC. See the
subcaption "Fuel Cost Recovery" above for discussion of the UFAC. 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 reduction requirements of the Acid Rain Program could
require additional actions and may result in capital expenditures and the
purchase of emission allowances.
To comply with the Phase I 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 costs for compliance; however, capital expenditures for IP's
NOx Compliance Plan are expected to be $100 million prior to the year 2000. The
majority of this investment will be directed to Baldwin Units 1 and 2 and will
occur in conjunction with replacement of the air heaters on these units.
In addition, regulators are continuing to examine potential approaches for
compliance with current federal ozone air quality standards. On November 7,
1997, the U.S. EPA proposed air pollution rules which would require substantial
reductions of NOx emissions in Illinois and 21 other states. The proposal would
require the installation of NOx controls by September 2002. This proposal is
expected to be finalized by November 1998 with Illinois utility reduction
requirements specified in 1999. Preliminary cost estimates to comply with the
proposed NOx limitations are $130 to $150 million beyond what is already needed
to comply with the NOx requirements of Phase II of the Acid Rain Program. The
legality of this proposal along with its technical feasibility is expected to be
challenged by a number of utilities and utility groups, including IP.
Global Warming On December 11, 1997, international negotiations to reduce
greenhouse gas emissions concluded with the adoption of the Kyoto Protocol. This
Protocol requires the United States to reduce greenhouse gas emissions to 7%
below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. This Protocol must be ratified by the United States
Senate. United States Senate Resolution 98 (passed 95 - 0) indicates the Senate
would not ratify an agreement that fails to involve all countries or would
damage the United States economy. Ratification will be a major political issue
since the Protocol does not contain key elements that Senate Resolution 98 said
would be necessary for ratification. It is anticipated that ratification will be
delayed until after 1998.
IP will face major changes in how it generates electricity if the Kyoto
Protocol is ratified, or if the Protocol's reduction goals are incorporated into
other environmental regulations. IP would have to repower some generating units
and change from coal to natural gas in other units to reduce greenhouse gas
emissions. IP estimates that compliance with these proposed regulations may
require significant capital outlays and annual operating expenses which could
have a material adverse impact on Illinova and IP.
Manufactured-Gas Plant IP's estimated liability for MGP site remediation is $65
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.
<PAGE>
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 $65 million as of December 31, 1997. 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 continue to be credited to IP's customers
through the tariff rider mechanism which the ICC previously approved.
Electric and Magnetic Fields 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 number of
EMF cases has declined in the last few years as more national and international
science commissions have concluded that an EMF health risk has not been
established. Additional research is being conducted to attempt to resolve
continuing scientific uncertainties. On July 3, 1997, President Clinton signed
legislation extending the National EMF Research and Public Information
Dissemination Program through 1998. Research results, policy decisions and
public information developments will continue into 1999. It is too soon to tell
what, if any, impact these actions may have on IP's and Illinova's consolidated
financial positions. IP continues its commitment to address customer and
employee concerns related to the EMF issue.
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, 1997,
72%, 17% and 11% 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. During 1997, IP increased its reserve for doubtful accounts from
$3.0 million to $5.5 million.
Contingencies
Soyland In March 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership in connection
with the transfer from Soyland to IP of all of Soyland's interest in Clinton.
The FERC approved an amended PCA in July 1997. The amended PCA obligates
Soyland to purchase all of its capacity and energy needs from IP for at least
ten years (the initial term of the PCA) and includes a provision that allows
Soyland to pay its base capacity charges in advance. The amended PCA also
provides that a contract cancellation fee will be paid by Soyland to IP in the
event that a Soyland Cooperative member terminates its membership from Soyland.
In May 1997, three distribution cooperative members terminated their membership
by buying out of their respective long-term wholesale power contracts with
Soyland. As a result, Soyland paid a fee of $20.8 million to IP in June 1997 to
reduce its future base capacity charges.
In December 1997, Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA. The fee of approximately $70
million will be deferred and recognized as interchange revenue over the initial
term of the PCA. The payment will be contingent on Soyland obtaining the
necessary financing and regulatory approvals in 1998.
Nuclear Fuel Lease See "Note 8 - Capital Leases" for discussion of contingencies
related to IP's nuclear fuel lease.
Internal Revenue Service 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 and
Illinova's consolidated financial positions or results of operations. For a
detailed discussion of income taxes, see "Note 7 - Income Taxes."
Illinova Energy Partners, Inc. IEP buys and sells electricity in the Western
United States. In the normal course of business, IEP is required to incur price
exposure on the electricity bought or sold. Where the markets allow, IEP will
hedge such exposure through the use of electricity futures contracts or through
swaps with qualified counterparties. The aggregate notional value, fair value
and unrealized gain related to futures contracts outstanding at December 31,
1997, are immaterial. In addition, IEP considers the risk of counterparty
non-performance to be remote.
At December 31, 1997, IEP had electricity sales and purchase contracts
which exposed the company to risk as a result of price volatility. For the year
ended December 31, 1997, IEP accrued losses of $13.5 million (before taxes)
<PAGE>
relating to contracts not yet settled. Illinova guarantees the performance of
IEP and Tenaska Marketing Ventures up to an aggregate of $80 million for credit
support. The level of credit support in place at December 31, 1997, was $45
million. See "Note 2 - Illinova Subsidiaries" for additional information about
IEP.
Note 5 - 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, 1997. These lines of credit
are renewable in May 1998, August 1998 and May 2002. 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. In addition, Illinova's total lines of credit represented by bank
commitments amount to $150 million, of which $111.5 million was unused at
December 31, 1997. Illinova's letters of credit total $31.1 million.
IP pays facility fees up to .10% 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 the Fuel Company each have a short-term financing
option to obtain funds not to exceed $30 million. IP and the Fuel Company pay no
fees for this uncommitted facility and funding is subject to availability upon
request.
Illinova had $38.5 million of borrowings against its lines of credit at
December 31, 1997. For the years 1997, 1996 and 1995, Illinova (including IP)
had short-term borrowings consisting of bank loans, commercial paper, extendible
floating rate notes and other short-term debt outstanding at various times as
follows:
(Millions of dollars, except rates) 1997 1996 1995
Short-term borrowings
at December 31, $ 415.3 $ 387.0 $ 359.6
Weighted average interest
rate at December 31, 6.1% 5.8% 6.0%
Maximum amount
outstanding
at any month end $ 415.3 $ 387.0 $ 359.6
Average daily borrowings
outstanding during
the year $ 298.5 $ 261.9 $ 306.5
Weighted average interest
rate during the year 5.8% 5.7% 6.2%
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate debt. IP's two variable rate
interest rate cap agreements cover up to $114.6 million of commercial paper.
These agreements entitle IP to receive from a counterparty on a quarterly 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, 1997,
the cap rates were set at 7.75% and 8.0% while the current market rate available
to IP was 5.8%.
IP also has a $50 million interest rate swap in effect through October 1998
where IP pays 5.92% and receives the LIBOR variable rate, payable quarterly.
Note 6 - Facilities Agreements
On March 13, 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership obligations in
connection with the transfer from Soyland to IP of all of Soyland's interest in
Clinton pursuant to an agreement reached in 1996. Soyland's title to the plant
and directly related assets such as nuclear fuel was transferred to IP on May 1,
1997. Soyland's nuclear decommissioning trust assets were transferred to IP on
May 19, 1997, consistent with IP's assumption of all of Soyland's ownership
obligations including those related to decommissioning.
The FERC approved an amended PCA between Soyland and IP in July 1997. The
amended PCA obligates Soyland to purchase all of its capacity and energy needs
from IP for at least ten years. The amended PCA provides that a contract
cancellation fee will be paid by Soyland to IP in the event that a Soyland
member terminates its membership in Soyland. In May 1997, three distribution
cooperative members terminated their membership by buying out of their
respective long-term wholesale power contracts with Soyland. This action
resulted in Soyland paying a fee of $20.8 million to IP in June 1997, to reduce
its future base capacity charges. Fee proceeds of $2.9 million were used to
offset the costs of acquiring Soyland's share of Clinton with the remaining
$17.9 million recorded as interchange revenue. In December 1997, Soyland signed
a letter of intent to pay in advance the remainder of its base capacity charges
in the PCA. The fee of approximately $70 million is deferred and recognized as
interchange revenue over the initial term of the PCA. The payment will be
contingent on Soyland obtaining the necessary financing and regulatory approvals
in 1998.
<PAGE>
Note 7 - Income Taxes
Deferred tax assets and liabilities were comprised of the following:
Balances as of December 31,
(Millions of dollars) 1997 1996
Deferred tax assets:
Current:
Misc. book/tax recognition differences $ 11.2 $ 7.7
Noncurrent:
Depreciation and other property related 46.2 42.0
Alternative minimum tax 156.8 198.5
Tax credit and net operating loss
carryforward - 32.8
Unamortized investment tax credit 116.9 120.9
Misc. book/tax recognition differences 51.9 78.9
371.8 473.1
Total deferred tax assets $ 383.0 $ 480.8
Deferred tax liabilities:
Current:
Misc. book/tax recognition differences $ .9 $ 11.3
Noncurrent:
Depreciation and other property related 1,348.0 1,350.1
Deferred Clinton costs - 58.2
Misc. book/tax recognition differences (7.1) 99.7
1,340.9 1,508.0
Total deferred tax liabilities $ 1,341.8 $ 1,519.3
Income taxes included in the Consolidated Statements of Income consist of the
following components:
Years Ended December 31,
(Millions of dollars) 1997 1996 1995
Current taxes $ 70.3 $ 64.7 $ 78.3
Deferred taxes-
Property related differences 8.8 70.6 71.9
Alternative minimum tax 41.7 1.1 2.9
Gain/loss on reacquired debt .4 (1.6) (1.9)
Net operating loss
carryforward - - (.2)
Enhanced retirement
and severance .5 2.6 (15.0)
Misc. book/tax recognition
differences (34.1) (2.2) (15.1)
Investment tax credit (7.3) (7.3) (6.9)
Total deferred taxes 10.0 63.2 35.7
Total income taxes from
continuing operations $ 80.3 $ 127.9 $ 114.0
Income tax -
Extraordinary item
Current tax expense (17.8) - -
Deferred tax expense (100.2) - -
Total extraordinary item (118.0) - -
Total income taxes $ (37.7) $ 127.9 $ 114.0
<PAGE>
The reconciliations of income tax expense to amounts computed by applying
the statutory tax rate to reported pretax income from continuing operations for
the period are set below:
Years Ended December 31,
(Millions of dollars) 1997 1996 1995
Income tax expense at the
federal statutory tax rate $ 64.7 $ 111.4 $ 92.9
Increases/(decreases) in taxes
resulting from-
State taxes,
net of federal effect 8.7 11.4 12.4
Investment tax credit
amortization (7.3) (7.3) (6.9)
Depreciation not normalized 11.3 9.4 7.4
Preferred dividend requirement
of subsidiary 1.7 2.5 5.8
Other-net 1.2 .5 2.4
Total income taxes from
continuing operations $ 80.3 $ 127.9 $ 114.0
Combined federal and state effective income tax rates were 43.4%, 40.2% and
42.9% for the years 1997, 1996 and 1995, respectively.
Illinova is subject to the provisions of the Alternative Minimum Tax
System. As a result, Illinova has an Alternative Minimum Tax credit carryforward
at December 31, 1997, of approximately $156.8 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 Illinova's consolidated
financial position or results of operations.
Because of the passage of HB 362, IP's electric generation business no
longer meets the criteria for application of FAS 71. As required by FAS 101,
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71," the income tax effects of the write-off of regulatory
assets and liabilities related to electric generation are reflected in the
extraordinary item for the cumulative effect of a change in accounting
principle.
Note 8 - Capital Leases
The 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 1997, 1996 and
1995 were $4 million, $35 million and $41 million, respectively, including
financing costs of $4 million, $5 million and $7 million, respectively. IP is
required to pay financing costs whether or not fuel is consumed. 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. Lease terms stipulate that in the event that Clinton is out of service
for 24 consecutive months, IP will be obligated to purchase Clinton's in-core
nuclear fuel for $62 million from the Fuel Company. IP has an obligation for
nuclear fuel disposal costs of leased nuclear fuel. See "Note 4 - Commitments
and Contingencies" for discussion of decommissioning and nuclear fuel disposal
costs. Nuclear fuel lease payments are included with "Fuel for electric plants"
on Illinova's Consolidated Statements of Income.
At December 31, 1997 and 1996, current obligations under capital lease for
nuclear fuel are $18.7 million and $36.9 million, respectively.
Over the next five years estimated payments under capital leases are as
follows:
(Millions of dollars)
1998 $ 23.5
1999 44.3
2000 23.9
2001 21.5
2002 16.7
Thereafter 12.8
142.7
Less - Interest 16.0
Total $ 126.7
<PAGE>
Note 9 - Long-Term Debt
<TABLE>
(Millions of dollars)
December 31, 1997 1996
<S> <C> <C>
First mortgage bonds of subsidiary-
6 1/2% series due 1999 $ 72.0 $ 72.0
6.60% series due 2004 (Pollution Control Series A) 6.3 6.5
7.95% series due 2004 72.0 72.0
6% series due 2007 (Pollution Control Series B) 18.7 18.7
7 5/8% series due 2016 (Pollution Control Series F, G and H) - 150.0
8.30% series due 2017 (Pollution Control Series I) 33.8 33.8
7 3/8% series due 2021 (Pollution Control Series J) 84.7 84.7
8 3/4% series due 2021 57.1 57.1
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 of subsidiary 464.3 614.5
New mortgage bonds of subsidiary-
6 1/8% series due 2000 40.0 40.0
5.625% series due 2000 110.0 110.0
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
8% series due 2023 229.0 229.0
7 1/2% series due 2025 177.0 177.0
Adjustable rate series due 2028 (Pollution Control Series M, N and O) 111.8 111.8
Adjustable rate series due 2032 (Pollution Control Series P, Q and R) 150.0 -
Total new mortgage bonds of subsidiary 987.8 837.8
Total mortgage bonds of subsidiary 1,452.1 1,452.3
Medium-term notes of subsidiary, series A 68.0 78.5
Variable rate long-term debt of subsidiary due 2017 75.0 75.0
Illinova 7 1/8% Senior Notes due 2004 100.0 -
Total other long-term debt 243.0 153.5
1,695.1 1,605.8
Unamortized discount on debt (16.8) (18.1)
Total long-term debt excluding capital lease obligations 1,678.3 1,587.7
Obligations under capital leases of subsidiary 126.7 96.4
1,805.0 1,684.1
Long-term debt and lease obligations of subsidiary maturing within one year (87.5) (47.7)
Total long-term debt $ 1,717.5 $ 1,636.4
</TABLE>
In February 1997, Illinova issued $100 million of 7 1/8% Senior Notes due 2004.
In April 1997, IP refinanced $150 million of 7 5/8% First Mortgage Bonds due
2016 as Adjustable Rate New Mortgage Bonds due 2032.
In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At
December 31, 1997, these notes had interest rates ranging from 9% to 9.31% and
will mature at various dates in 1998. Interest rates on variable rate long-term
debt due 2017 are adjusted weekly and ranged from 4.35% to 4.6% at December 31,
1997.
For the years 1998, 1999, 2000, 2001 and 2002, IP has long-term debt maturities
and cash sinking fund requirements in the aggregate of (in millions) $68.8,
$72.8, $150.8, $.8 and $.8, respectively. These amounts exclude capital lease
requirements. See "Note 8 - Capital Leases."
At December 31, 1997, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $50.4 million.
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. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The remaining balance of net bondable
additions at December 31, 1997, was approximately $1.8 billion.
<PAGE>
Note 10 - Preferred Stock of Subsidiary
<TABLE>
(Millions of dollars)
<S> <C> <C>
December 31, 1997 1996
Serial Preferred Stock of Subsidiary, cumulative, $50 par value-
Authorized 5,000,000 shares; 1,139,110 and 1,221,700 shares outstanding, respectively
Series Shares Redemption Prices
4.08% 283,290 $ 51.50 $ 14.1 $ 15.0
4.26% 136,000 51.50 6.8 7.5
4.70% 176,000 51.50 8.8 10.0
4.42% 134,400 51.50 6.7 7.5
4.20% 167,720 52.00 8.4 9.0
7.75% 241,700 50.00 after July 1, 2003 12.1 12.1
Net premium on preferred stock .2 .2
Total Preferred Stock of Subsidiary, $50 par value $ 57.1 $ 61.3
Serial Preferred Stock of Subsidiary, cumulative, without par value-
Authorized 5,000,000 shares; 0 and 698,200 shares outstanding, respectively
Series Shares Redemption Prices
A - - $ - $ 34.9
Total Preferred Stock of Subsidiary, without par value $ - $ 34.9
Preference Stock of Subsidiary, cumulative, without par value-
Authorized 5,000,000 shares; none outstanding - -
Total Serial Preferred Stock, Preference Stock and Preferred Securities of Subsidiary $ 57.1 $ 96.2
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 100.0 100.0
Total Mandatorily Redeemable Preferred Stock of Subsidiary $ 197.0 $ 197.0
</TABLE>
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. The MIPS are redeemable at the option in whole or in
part on or after October 6, 1999 with not less than 30 days and not more than 60
days notice by publication. The TOPrS mature on January 31, 2045 and may be
redeemed in whole or in part at any time on or after January 31, 2001.
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 1997 and 1996 were $.75 per share per quarter.
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 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 is a statutory business trust in which IP serves as
sponsor. IPFI issued (1996) $100 million of TOPrS at 8% (4.8% after-tax rate).
IP consolidates the accounts of IPFI.
On September 29, 1997, IP issued a notice of redemption to all holders of its
Adjustable Rate Series A Preferred Stock. All 698,200 shares outstanding were
redeemed on November 1, 1997, at the price of $50 per share. In 1997, IP
redeemed $4.2 million of various issues of Serial Preferred Stock. The carrying
amount was $.2 million over consideration paid and was recorded in equity and
included in Net income applicable to common stock.
<PAGE>
Note 11 - Common Stock and Retained Earnings
In 1997, Illinova repurchased 4,000,000 shares of its common stock on the open
market. Illinova holds the common stock as treasury stock and deducts it from
common equity at the cost of the shares.
In 1996, Illinova amended the Automatic Reinvestment and Stock Purchase
Plan and the ESOP. These plans were replaced with the Illinova Investment Plus
Plan for which 5,000,000 shares of common stock were designated for issuance.
Illinova administers the Illinova Investment Plus Plan. The Illinova Investment
Plus Plan provides investors a convenient way to purchase shares of common stock
and reinvest all or a portion of the cash dividends paid on eligible securities
in additional shares of common stock. It allows purchases of common stock on the
open market, as well as purchases of new issue shares directly from Illinova.
Under this plan, 4,608,712 shares of common stock were designated for issuance
at December 31, 1997. All accounts, elections, notices, instructions and
authorizations under the Automatic Reinvestment and Stock Purchase Plan and the
ESOP automatically continue under the Illinova Investment Plus Plan, and
participants in the Automatic Reinvestment and Stock Purchase Plan and the ESOP
continue as participants in the Illinova Investment Plus Plan.
The ESOP includes an incentive compensation feature which is tied to
employee 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, 1997, 91,282 common shares were allocated
to salaried employees and 83,418 shares to employees covered under the
Collective Bargaining Agreement through the matching contribution feature of the
ESOP arrangement. Under the incentive compensation feature, 70,720 common shares
were allocated to employees for the year ended December 31, 1997. During 1997,
IP contributed $5.0 million to the ESOP and using the shares allocated method,
recognized $3.3 million of expense. Interest paid on the ESOP debt was
approximately $1.3 million in 1997 and dividends used for debt service were
approximately $2.3 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.
Restricted stock, incentive stock options, non-qualified stock options, stock
appreciation rights, dividend equivalents and other stock-based awards may be
granted under the plan, for up to 1,500,000 shares of Illinova's common stock.
The following table outlines the activity under this plan at December 31, 1997.
Of the options granted in 1992, 1993, 1994 and 1995 in the table below, 7,500,
10,500, 4,400 and 6,500 options, respectively, have been forfeited and are not
exercisable. An additional 20,000 options were exercised in January 1998.
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 6/09/02 -
1994 82,650 $20 7/8 1997 6/08/03 -
1995 69,300 $24 7/8 1998 6/14/04 -
1996 80,500 $29 3/4 1999 2/07/05 -
1997 82,000 $26 1/8 2000 2/12/07 -
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current period and is not envisioned to be material in
any future period. Illinova 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, 1997. Under the Restated Articles of Incorporation,
common stock dividends are subject to the preferential rights of the holders of
preferred and preference stock.
Note 12 - 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 of the benefit plans. IP is
reimbursed by the other Illinova subsidiaries for their share 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 has defined-benefit pension plans covering all officers and employees.
Benefits are based on years of service and compensation. IP's funding policy is
to contribute annually at least the minimum amount required by government
funding standards, but not more than can be deducted for federal income tax
purposes.
<PAGE>
Pension costs, a portion of which have been capitalized for 1997, 1996 and
1995, include the following components:
Years Ended December 31,
(Millions of dollars) 1997 1996 1995
Service cost on benefits
earned during the year $ 10.1 $ 10.2 $ 10.4
Interest cost on projected
benefit obligation 27.9 26.8 23.6
Return on plan assets (95.6) (42.2) (58.3)
Net amortization and deferral 61.5 9.4 29.6
Effect of enhanced retirement
program - - 15.7
Net periodic pension cost $ 3.9 $ 4.2 $ 21.0
The estimated funded status of the plans at December 31, 1997 and 1996, using
discount rates of 7.5% and 8.0%, respectively, and future compensation increases
of 4.5% was as follows:
Balances as of December 31,
(Millions of dollars) 1997 1996
Actuarial present value of:
Vested benefit obligation $ (329.7) $ (291.7)
Accumulated benefit obligation (350.6) (312.5)
Projected benefit obligation (412.8) (361.5)
Plan assets at fair value 432.1 357.2
Funded status 19.3 (4.3)
Unrecognized net (gain)/loss (39.1) (13.8)
Unrecognized net asset at transition (26.1) (30.3)
Unrecognized prior service cost 17.4 19.3
Accrued pension cost included in
deferred credits $ (28.5) $ (29.1)
The plans' assets consist primarily of common stocks, fixed income
securities, cash equivalents, alternative investments and real estate. The
actuarial present value of accumulated plan benefits at January 1, 1997 and
1996, were $375 million and $361 million, respectively, including vested
benefits of $353 million and $337 million, respectively. The pension cost for
1997, 1996 and 1995 was calculated using a discount rate of 8.0%, 7.75% and
8.75%, respectively; future compensation increases of 4.5% for 1997, 1996 and
1995; and a return on assets of 9.5% for 1997 and 1996, and 9.0% for 1995. The
unrecognized net asset at transition and the 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 $5 million in 1997, $6 million in 1996 and $2 million in 1995.
IP provides health care and life insurance benefits to certain retired
employees, including their eligible dependents, who attain specified ages and
years of service under the terms of the defined-benefit plans. Postretirement
benefits, a portion of which have been capitalized, for 1997 and 1996 included
the following components:
Years Ended December 31,
(Millions of dollars) 1997 1996
Service cost on benefits earned
during the year $ 1.9 $ 2.2
Interest cost on projected
benefit obligation 5.9 6.1
Return on plan assets (8.0) (5.9)
Amortization of unrecognized
transition obligation 7.4 6.4
Net periodic postretirement
benefit cost $ 7.2 $ 8.8
The net periodic postretirement benefit cost in the preceding table
includes amortization of the previously unrecognized accumulated postretirement
benefit obligation, which was $41.4 million and $44.2 million as of January 1,
1997 and 1996, 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, 1997 and 1996. The estimated
funded status of the plans at December 31, 1997 and 1996, using weighted average
discount rates of 7.0% and 8.0%, respectively, and a return on assets of 9.0%
was as follows:
Balances as of December 31,
(Millions of dollars) 1997 1996
Accumulated postretirement
benefit obligation
Current retirees $ (51.1) $ (49.6)
Current employees - fully eligible (5.5) (3.5)
Current employees - not fully eligible (32.8) (28.6)
Total benefit obligation (89.4) (81.7)
Plan assets at fair value 49.7 34.4
Funded status (39.7) (47.3)
Unrecognized transition obligation 38.7 41.4
Unrecognized net (gain)/loss (6.3) (7.1)
Accrued postretirement benefit cost
included in deferred credits $ (7.3) $ (13.0)
The pre-65 health-care-cost trend rate decreases from 7.1% to 5.5% over
nine years and the post-65 health-care-cost trend rate is level at 1.5%. A 1.0%
increase in each future year's assumed health-care-cost trend rates increases
the service and interest cost from $7.8 million to $8.7 million and the
accumulated postretirement benefit obligation from $89.4 million to $99.9
million.
<PAGE>
Note 13 - Segments of Business
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Millions of dollars)
1997 1996 1995
Diversified Diversified Diversified
Enterprises Total Enterprises Total Enterprises Total
Electric Gas Corp. Electric Gas Corp. Electric Gas Corp.
Operation information -
Operating revenues $1,420.0 $353.9 $735.6 $2,509.5 $1,340.5 $348.2 $57.6 $1,746.3 $1,368.9 $272.5 $1.9 $1,643.3
Operating expenses,
excluding provision
for income taxes 1,081.3 311.5 792.3 2,185.1 886.2 300.5 87.5 1,274.2 946.2 245.0 15.1 1,206.3
Pre-tax operating income 338.7 42.4 (56.7) 324.4 454.3 47.7 (29.9) 472.1 422.7 27.5 (13.2) 437.0
AFUDC 4.9 .1 - 5.0 6.3 .2 - 6.5 5.5 .5 - 6.0
Pre-tax operating income,
including AFUDC $ 343.6 $ 42.5 $(56.7) $ 329.4 $ 460.6 $47.9 $(29.9) $ 478.6 $ 428.2 $ 28.0 $(13.2) $ 443.0
Other deductions, net (13.6) 2.6 5.1
Interest charges 136.8 134.7 148.6
Provision for
income taxes 80.3 128.0 114.0
Preferred dividend
requirements
of subsidiary 21.5 22.3 23.7
Net income 104.4 191.0 151.6
Extraordinary item
(net of taxes) (195.0) - -
Carrying value over
(under) consideration
paid for redeemed
preferred stock
of subsidiary .2 (.7) (3.5)
Net income (loss)
applicable
to common stock $ (90.4) $190.3 $ 148.1
Other information -
Depreciation $171.5 $24.1 $ - $ 195.6 $164.0 $ 22.5 $ - $186.5 $161.4 $ 21.6 $ - $ 183.0
Capital expenditures $201.3 $22.6 $ - $ 223.9 $164.0 $ 23.3 $ - $187.3 $185.7 $ 23.6 $ - $ 209.3
Investment information -
Identifiable assets* $4,508.1 $453.8 $1.2 $4,963.1 $4,578.1 $481.9 $ - $5,060.0 $4,580.4 $446.3 $ - $5,026.7
Nonutility plant and
other investments 184.0 132.4 65.5
Assets utilized for
overall operations 435.9 520.4 517.6
Total assets $5,583.0 $5,712.8 $5,609.8
</TABLE>
<PAGE>
Note 14 - Fair Value of Financial Instruments
1997 1996
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
Nuclear decommissioning
trust funds $ 62.5 $ 62.5 $ 41.4 $ 41.4
Cash and cash equivalents 33.0 33.0 24.6 24.6
Mandatorily redeemable
preferred stock
of subsidiary 197.0 202.7 197.0 199.3
Long-term debt 1,678.3 1,730.1 1,587.7 1,629.3
Notes payable 415.3 415.3 387.0 387.0
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 Preferred Stock of Subsidiary and Long-Term Debt The fair
value of IP mandatorily redeemable preferred stock and Illinova (including IP)
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 to Illinova
for debt of the same remaining maturities, as advised by Illinova's bankers.
Notes Payable The carrying amount of notes payable approximates fair value due
to the short maturity of these instruments.
Note 15 - Quarterly Consolidated Financial Information and Common Stock Data
(unaudited)
<TABLE>
(Millions of dollars except per common share amounts)
<S> <C> <C> <C> <C>
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1997 1997 1997
Operating revenues $ 570.4 $ 542.9 $ 841.8 $ 554.4
Operating income (loss) 114.4 95.1 144.2 (29.3)
Net income (loss) before extraordinary item 44.0 31.4 63.3 (34.3)
Net income (loss) after extraordinary item 44.0 31.4 63.3 (229.3)
Net income (loss) applicable to common stock 44.0 31.4 64.4 (230.2)
Earnings (loss) per common share
before extraordinary item (basic and diluted) $ .58 $ .42 $ .87 $ (.46)
Earnings (loss) per common share
after extraordinary item (basic and diluted) $ .58 $ .42 $ .87 $ (3.09)
Common stock prices and dividends
High $ 27 1/2 $ 23 3/4 $ 23 3/4 $ 27 3/16
Low $ 22 3/4 $ 20 1/8 $ 21 1/2 $ 20 3/8
Dividends declared $ .31 $ .31 $ .31 $ .31
First Quarter Second Quarter Third Quarter Fourth Quarter
1996 1996 1996 1996
Operating revenues (1) $ 453.1 $ 373.4 $ 479.1 $ 440.7
Operating income (1) 121.4 89.7 189.6 71.3
Net income 43.3 36.7 91.0 20.0
Net income applicable to common stock 43.3 36.2 90.7 20.1
Earnings per common share (basic and diluted) $ .57 .48 $ 1.20 $ .26
Common stock prices and dividends
High $ 30 3/8 $ 29 $ 29 1/4 $ 28 5/8
Low $ 27 $ 24 5/8 $ 25 1/4 $ 26 1/4
Dividends declared $ .28 $ .28 $ .28 $ .31
</TABLE>
(1) Amounts have been restated to conform with 1997 changes in income statement
format.
Illinova common stock is listed on the New York Stock Exchange and the Chicago
Stock Exchange. The stock prices above are the prices reported on the Composite
Tape. There were 35,123 registered holders of common stock at January 10, 1998.
<PAGE>
ILLINOVA CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA*
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Millions of dollars)
1997 1996 1995 1994 1993 1987
Operating revenues
Electric $ 1,244.4 $ 1,202.9 $ 1,252.6 $1,177.5 $1,135.6 $ 910.8
Electric interchange 175.6 137.6 116.3 110.0 130.8 92.4
Gas 353.9 348.2 272.5 302.0 314.8 308.7
Diversified enterprises 735.6 57.6 1.9 - - -
Total operating revenues $ 2,509.5 $ 1,746.3 $ 1,643.3 $1,589.5 $1,581.2 $ 1,311.9
Extraordinary item net of income tax benefit $ (195.0) $ - $ - $ - $ - $ -
Net income (loss) after extraordinary item $ (90.6) $ 191.0 $ 151.6 $ 151.8 $ (81.9) $ 251.9
Effective income tax rate 43.4% 40.2% 42.9% 42.0% (39.8)% 21.3%
Net income (loss) applicable to common stock $ (90.4) $ 190.3 $ 148.1 $ 158.2 $ (81.9) $ 251.9
Earnings (loss) per common share
(basic and diluted) $ (1.22) $ 2.51 $ 1.96 $ 2.09 $ (1.08) $ 3.75
Cash dividends declared per common share $ 1.24 $ 1.15 $ 1.03 $ .65 $ .40 $ 2.64
Dividend payout ratio (declared) N/A 45.5% 52.3% 30.7% N/A 70.9%
Book value per common share $ 19.11 $ 21.62 $ 20.19 $ 19.17 $ 17.46 $ 26.85
Price range of common shares
High $ 27 1/2 $ 30 3/8 $ 30 $ 22 5/8 $ 25 7/8 $ 31 1/2
Low $ 20 1/8 $ 24 5/8 $ 21 1/4 $ 18 1/8 $ 20 1/8 $ 21 1/4
Weighted average number of common shares
outstanding during the period (thousands) 73,992 75,682 75,644 75,644 75,644 67,251
Total assets $ 5,583.0 $ 5,712.8 $ 5,609.8 $ 5,576.7 $ 5,423.5 $ 5,922.7
Capitalization
Common stock equity $ 1,369.5 $ 1,636.2 $ 1,527.0 $ 1,450.2 $ 1,321.0 $ 1,841.4
Preferred stock of subsidiary 57.1 96.2 125.6 224.7 303.7 315.2
Mandatorily redeemable
preferred stock of subsidiary 197.0 197.0 97.0 133.0 48.0 160.0
Long-term debt 1,717.5 1,636.4 1,739.3 1,946.1 1,926.3 2,279.2
Total capitalization $ 3,341.1 $ 3,565.8 $ 3,488.9 $ 3,754.0 $ 3,599.0 $ 4,595.8
Retained earnings (deficit) $ 51.7 $ 233.0 $ 129.6 $ 58.8 $ (64.6) $ 554.8
Capital expenditures $ 223.9 $ 187.3 $ 209.3 $ 193.7 $ 277.7 $ 263.5
Cash flows from operations $ 368.4 $ 407.4 $ 413.2 $ 268.6 $ 369.7 $ 232.3
AFUDC as a percent of earnings
applicable to common stock N/A 3.4% 4.1% 5.9% N/A 80.2%
Return on average common equity (6.0)% 12.0% 9.9% 11.4% (6.0)% 14.3%
Ratio of earnings to fixed charges .93 3.07 2.56 2.56 .66 2.51
</TABLE>
* Millions of dollars except earnings (loss) per common share, cash dividends
declared per common share, book value per common share and price range of common
shares.
<PAGE>
ILLINOVA CORPORATION
SELECTED ILLINOIS POWER COMPANY STATISTICS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1987
Electric Sales in KWH (Millions)
Residential 4,734 4,782 4,754 4,537 4,546 4,241
Commercial 3,943 3,894 3,804 3,517 3,246 2,862
Industrial 8,403 8,493 8,670 8,685 8,120 7,323
Other 426 367 367 536 337 910
Sales to ultimate consumers 17,506 17,536 17,595 17,275 16,249 15,336
Interchange 7,230 5,454 4,444 4,837 6,015 3,682
Wheeling 3,253 928 642 622 569 -
Total electric sales 27,989 23,918 22,681 22,734 22,833 19,018
Electric Revenues (Millions)
Residential $ 489 $ 483 $ 500 $ 471 $ 463 $ 352
Commercial 325 318 321 295 269 209
Industrial 376 360 392 378 360 325
Other 40 38 37 30 40 25
Revenues from ultimate consumers 1,230 1,199 1,250 1,174 1,132 911
Interchange 176 138 116 110 131 92
Wheeling 14 4 3 3 3 -
Total electric revenues $ 1,420 $ 1,341 $ 1,369 $ 1,287 $ 1,266 $ 1,003
Gas Sales in Therms (Millions)
Residential 343 427 356 359 371 332
Commercial 147 177 144 144 148 137
Industrial 47 99 88 81 78 96
Sales to ultimate consumers 537 703 588 584 597 565
Transportation of customer-owned gas 309 251 273 262 229 327
Total gas sold and transported 846 954 861 846 826 892
Interdepartmental sales 19 9 21 5 7 5
Total gas delivered 865 963 882 851 833 897
Gas Revenues (Millions)
Residential $ 238 $ 216 $ 173 $ 192 $ 200 $ 192
Commercial 77 79 60 66 68 66
Industrial 20 40 24 31 34 35
Revenues from ultimate consumers 335 335 257 289 302 293
Transportation of customer-owned gas 9 7 8 9 8 15
Miscellaneous 10 6 7 4 5 2
Total gas revenues $ 354 $ 348 $ 272 $ 302 $ 315 $ 310
System peak demand (native load) in kw (thousands) 3,532 3,492 3,667 3,395 3,415 3,083
Firm peak demand (native load) in kw (thousands) 3,469 3,381 3,576 3,232 3,254 2,923
Net generating capability in kw (thousands) 3,289 4,148 3,862 4,121 4,045 3,400
Electric customers (end of year) 580,257 549,957 529,966 553,86 554,270 542,848
Gas customers (end of year) 405,710 389,223 374,299 388,170 394,379 384,091
Employees (end of year) 3,655 3,635 3,559 4,350 4,540 4,616
</TABLE>
500 south 27th street, decatur, illinois 62521 n http://www.illinova.com
unlocking the power 1997
This entire report is printed on recycled paper
1997 INFORMATION STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
UNLOCKING THE POWER 1997
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Information Statement Table of Contents
Notice of Annual Meeting 2
Information Statement 3
Appendix: 1997 Annual Report to Shareholders a-1
To the Shareholders of Illinois Power:
Notice is Hereby Given that the Annual Meeting of Shareholders of Illinois Power
Company ("Illinois Power") will be at 10 a.m. Wednesday, April 8, 1998, 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 9, 1998, will
be entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice President, General Counsel and Corporate Secretary
Decatur, Illinois
March 10, 1998
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.
<PAGE>
INFORMATION STATEMENT
March 10, 1998
(Date first sent or given to security holders)
We are not asking you for a proxy and you are requested not to send us a proxy.
This Information Statement is furnished in connection with the Annual Meeting of
Shareholders of Illinois Power. The Annual Meeting will be held at 10 a.m.
Wednesday, April 8, 1998, 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 9, 1998 ("Record Date"), Illinova Corporation ("Illinova")
beneficially owned all of the 66,215,292 shares of Illinois Power Common Stock
then outstanding and there were 1,139,110 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 11 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 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 1997. This
Information Statement and accompanying documents are first being mailed to
shareholders on or about March 10, 1998.
<PAGE>
Board of Directors
Information Regarding the Board of Directors
The Board of Directors held 10 Board meetings in 1997. Other than Mr. Adorjan,
who joined the Board in August 1997, and Mr. Berry, who retired from the Board
December 1, 1997, all directors attended at least 75% of the aggregate meetings
of the Board and Committees of which they were members during 1997. 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 1997.
This Committee consists of the following non-employee directors ("Outside
Directors"): Robert M. Powers, Chairman, Richard R. Berry, C. Steven McMillan,
Sheli Z. Rosenberg, Walter M. Vannoy, and Marilou von Ferstel.
Finance Committee
(1) Review management's cash flow forecasts, financial forecasts and financing
program, and make recommendations to the Board regarding the approval of such
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 1997.
This Committee consists of the following members of the Board: Walter D.
Scott, Chairman, J. Joe Adorjan, Richard R. Berry, Larry D. Haab, C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel, and John D. Zeglis.
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. The recommendation should include 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
must 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 1997.
This Committee consists of the following Outside Directors: Ronald L.
Thompson, Chairman, J. Joe Adorjan, C. Steven McMillan, Robert M. Powers, Walter
D. Scott, 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 for nuclear operations; (4) review various nuclear reports; and
(5) report its findings to the Board.
The Nuclear Operations Committee met four times during 1997.
This Committee consists of the following members of the Board: Walter M.
Vannoy, Chairman, Richard R. Berry, Larry D. Haab, Robert M. Powers, Walter D.
Scott, and Ronald L. Thompson.
<PAGE>
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, increased in February 1998 to $2,500, 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 terms 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 of Illinois Power 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 these
amounts are converted into additional stock units. On termination of the
participating directors' services as directors, payment of their deferred fees
and stock grants was made in shares of Illinova Common Stock in an amount equal
to the aggregate number of stock units credited to their accounts. The plan was
amended in 1997 to provide for a payout in cash instead of shares of Common
Stock. Deferred amounts are still converted into stock units representing shares
of Common Stock with the value of each stock unit based on the last reported
sales price of such stock. Payment is made in cash, in a lump sum or
installments, as soon as practical following a director's termination. The cash
paid on termination equals the number of stock units times the share price at
the close of market on the last business day of the month preceding termination.
No other payments are made after service on the Board ceases.
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 11 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. Walter M.
Vannoy normally would have not been eligible for election as a director at the
Annual Meeting of Shareholders pursuant to a Bylaw provision which mandates
retirement from Board service at age 70. Because there is a current need for his
nuclear expertise, the Board of Directors has elected to waive this requirement
in Mr. Vannoy's case, and he has agreed to serve if elected.
<PAGE>
BOARD OF DIRECTORS
Name of Director Nominee, Age, Year in Which First
Business Experience and Elected a Director
Other Information of Illinois Power
J. Joe Adorjan, 59 1997
Chairman and Chief Executive Officer of Borg-Warner Security Corporation,
Chicago, Ill., a security systems services firm, since 1995. He was President of
Emerson Electric Company from 1993 to 1995. Prior to that, he was Chairman and
Chief Executive Officer of ESCO Electronics Corporation. He is a director of The
Earthgrains Company, ESCO Electronics Corporation and Goss Graphics Systems,
Inc.
Larry D. Haab, 60 1986
Chairman, President, and Chief Executive Officer of Illinova since December
1993, and of Illinois Power since June 1991, and an employee of Illinois Power
since 1965. He is a director of First Decatur Bancshares, Inc.; The First
National Bank of Decatur; and Firstech, Incorporated.
C. Steven McMillan, 52 1996
President, Chief Operating Officer, and Director of Sara Lee Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was Executive Vice President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy Development from 1986 to 1993. He is Chairman of the Board of
Electrolux Corporation.
Robert M. Powers, 66 1984
From 1980 until retirement in December 1988, Mr. Powers was President and Chief
Executive Officer of A. E. Staley Manufacturing Company, Decatur, Ill., a
processor of grain and oil seeds. He is a director of A. E. Staley Manufacturing
Company.
Sheli Z. Rosenberg, 56 1997
President and Chief Executive Officer since 1994 and General Counsel 1980 to
1994 of Equity Group Investments, Inc., Chicago, Ill., a privately held business
conglomerate holding controlling interests in nine publicly traded corporations
involved in basic manufacturing, radio stations, retail, insurance, and real
estate. She is a director of American Classic Voyages Company; Quality Food
Centers, Inc.; Jacor Communications, Inc.; Anixter International , Inc.; Equity
Office Properties Trust; Equity Residential Properties Trust; CVS Corporation;
and Manufactured Home Communities, Inc.
Walter D. Scott, 66 1990
Professor of Management and Senior Austin Fellow, J. L. Kellogg Graduate School
of Management, Northwestern University, 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, Neodesic Corporation,
Orval Kent Holding Company, Inc., and Intermatic Incorporated.
Joe J. Stewart, 59
President of BWX Technologies, Inc., formerly The Babcock & Wilcox Government
Group, Lynchburg, Va., a diversified energy equipment and services company, and
Executive Vice President of McDermott International, Inc. (parent of BWX
Technologies, Inc. and The Babcock & Wilcox Company), since 1995. He was
President and Chief Operating Officer of The Babcock & Wilcox Company and
Executive Vice President of McDermott International, Inc., from 1993 to 1995 and
Executive Vice President of the Power Generation Group of The Babcock & Wilcox
Company from 1987 to 1993.
<PAGE>
Ronald L. Thompson, 48 1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing Co.,
Bowling Green, Ohio, a manufacturer of automotive parts, since 1993. He was
President and Chief Executive Officer and a director of The GR Group, Inc., St.
Louis, Mo., from 1980 to 1993. He is a director of Teachers Insurance and
Annuity Association, and Ryerson Tull.
Walter M. Vannoy, 70 1990
Chairman until retirement in May 1995 and Chief Executive Officer from May 1994
until January 1995 of Figgie 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, The Babcock & Wilcox Company, and Vice Chairman of McDermott
International, Inc.
Marilou von Ferstel, 60 1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. 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, 50 1993
President of AT&T, Basking Ridge, N.J., a diversified communications company,
since October 1997. He was Vice Chairman from June 1997 to October 1997, Senior
Executive Vice President and General Counsel, from 1995 to June 1997 and 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 table below shows shares of Illinova Common Stock beneficially owned as of
January 31, 1998, by each director nominee and executive officers named in the
Summary Compensation Table. All of Illinois Power's Common Stock is owned by
Illinova. To the best of Illinois Power's knowledge, no owner holds more than 5
percent of Illinois Power Preferred Stock.
Number Number of Stock
of Shares Units in Deferred
Name of Beneficially Compensation Percent
Beneficial Owner Owned (1)(2) Plans of Class
J. Joe Adorjan 0 0 (3)
Larry D. Haab 68,250 0 (3)
C. Steven McMillan 1,300 289 (3)
Robert M. Powers 8,550 289 (3)
Sheli Z. Rosenberg 0 1,539 (3)
Walter D. Scott 5,150 289 (3)
Joe J. Stewart 0 0 (3)
Ronald L. Thompson 3,677 3,275 (3)
Walter M. Vannoy 5,010 289 (3)
Marilou von Ferstel 4,420 1,603 (3)
John D. Zeglis 2,626 1,603 (3)
Paul L. Lang 21,216 0 (3)
Larry F. Altenbaumer 13,092 0 (3)
John G. Cook 11,894 0 (3)
David W. Butts 8,817 0 (3)
(1) With sole voting and/or investment power.
(2) Includes the following shares issuable pursuant to stock options
exercisable March 31, 1998: Mr. Haab, 56,900; Mr. Lang, 17,800; Mr.
Altenbaumer, 17,800; Mr. Cook, 9,900; and Mr. Butts, 7,900.
(3) No director or executive officer owns any other equity securities of
Illinova or as much as 1% of the Common Stock. As a group, directors
and executive officers of Illinova and Illinois Power own 187,021
shares of Common Stock (less than 1%).
<PAGE>
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 for the years indicated. The compensation shown includes all
compensation paid for service to Illinois Power, its parent and subsidiaries.
<TABLE>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (3)
<S> <C> <C> <C> <C> <C> <C> <C>
Larry D. Haab 1997 $514,952 $ 41,840 $ 16,557 $ 41,840 20,000 shs. $ 2,614
Chairman, President and 1996 493,709 69,267 15,973 69,267 22,000 shs. 2,615
Chief Executive Officer of 1995 472,250 91,144 19,088 91,144 20,000 shs. 2,550
Illinova and Illinois Power
Paul L. Lang 1997 $242,325 $ 10,602 $ 8,305 $ 10,601 6,500 shs. $ 2,615
Senior Vice President 1996 233,450 19,747 8,863 19,747 6,500 shs. 2,595
of Illinois Power 1995 222,812 23,841 8,265 23,841 6,500 shs. 2,510
Larry F. Altenbaumer 1997 $232,048 $ 8,992 $ 9,521 $ 8,992 6,500 shs. $ 1,985
Chief Financial Officer, 1996 222,374 19,832 8,459 19,832 7,500 shs. 1,976
Treasurer and Controller 1995 204,937 20,391 7,686 20,391 6,500 shs. 2,378
of Illinova, and Senior
Vice President and Chief
Financial Officer of
Illinois Power
John G. Cook 1997 $203,413 $ - $ 7,642 $ - 6,000 shs. $ 2,575
Senior Vice President 1996 196,474 16,293 7,409 16,293 6,500 shs. 2,575
and former Chief Nuclear 1995 179,069 16,620 6,930 16,620 4,500 shs. 2,530
Officer of Illinois Power
David W. Butts 1997 $188,227 $ 7,529 $ 7,185 $ 7,529 6,000 shs. $ 2,595
President of Illinova 1996 181,402 17,314 7,350 17,314 6,500 shs. 2,595
Energy Partners, formerly 1995 153,333 18,132 6,990 18,132 5,000 shs. 2,540
Senior Vice President of
Illinois Power
</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 1997, 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 1997 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, 1997, 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 price of Common Stock on December 31, 1997: Mr. Haab, 7,619
units valued at $205,241; Mr. Lang, 2,044 units valued at $55,071; Mr.
Altenbaumer, 1,862 units valued at $50,151; Mr. Cook, 1,250 units
valued at $33,685; Mr. Butts, 1,626 units valued at $43,787. 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).
<PAGE>
The following tables summarize grants during 1997 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>
<S> <C> <C> <C> <C> <C>
Option Grants In 1997
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Grant Date
Granted (1) in 1997 Price Per Share (1) Expiration Date Present Value (2)
Larry D. Haab 20,000 24% $26.125 2/12/2007 $107,200
Paul L. Lang 6,500 8% 26.125 2/12/2007 34,840
Larry F. Altenbaumer 6,500 8% 26.125 2/12/2007 34,840
John G. Cook 6,000 7% 26.125 2/12/2007 32,160
David W. Butts 6,000 7% 26.125 2/12/2007 32,160
</TABLE>
(1) Each option becomes exercisable on February 12, 2000. In addition to
the specified expiration date, the grant expires on the first
anniversary of the recipient's death and/or five years following date
of 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
12, 2000, 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 1997 those percentages
ranged between 20 and 45 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 2000, 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 .2248. After
discounting for risk of forfeiture at 3 percent per year over
Illinova's three-year vesting schedule, the ratio is reduced to .2052;
(ii) An annual dividend yield on Illinova Common Stock of 4.11%; (iii)
A risk-free interest rate of 6.57%, based on the yield of a
zero-coupon government bond maturing at the end of the option term;
and (iv) Stock volatility of 19.54%.
<TABLE>
<S> <C> <C>
Aggregated Option and Fiscal Year-End Option Value Table
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 56,900 shs./62,000 shs. $237,414/$57,400
Paul L. Lang 17,800 shs./19,500 shs. $75,148/$18,655
Larry F. Altenbaumer 17,800 shs./20,500 shs. $75,148/$18,655
John G. Cook 9,900 shs./17,000 shs. $43,634/$14,130
David W. Butts 7,900 shs./17,500 shs. $37,384/$13,100
</TABLE>
<PAGE>
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 certain 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.
Estimated Annual Benefits (rounded)
Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Average Credited Credited Credited Credited Credited
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
700,000 210,000 280,000 350,000 420,000 490,000
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, 1997, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Haab, Lang, Altenbaumer, Cook and Butts had completed
32, 16, 25, 23 and 19 years of credited service, respectively.
<PAGE>
Employee Retention Agreements
Illinova has entered into Employee Retention Agreements with each of its
executive officers and with 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) or terminated prior to a change of
control at the request of a potential acquirer. 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 and/or Illinois
Power. 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 and its subsidiaries who elect early retirement.
Compensation and Nominating Committee
Report on Officer Compensation
The seven-member Compensation and Nominating Committee of the Board of Directors
(the "Committee") is composed entirely of Outside Directors. The Committee's
role includes an assessment of Illinova's and Illinois Power's Compensation
Strategy, 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 while rewarding executives for achieving
levels of operational and financial excellence consistent with continuous
improvement. Illinova's current compensation policy is to provide a total
compensation opportunity targeted to the median of all utilities in the Edison
Electric Institute (EEI) database. All but one of the electric power companies
in the S&P Utilities Index are also in the EEI database. The S&P index covers
the industry broadly including electric and gas utilities. After careful
consideration, the Committee has decided to maintain a separate compensation
peer group limited to electric or combination electric and gas companies for
reference purposes. While the philosophy described above was used by Illinova in
1997 as an indicator of future utility pay practices, as the industry migrates
toward deregulation and diversification, it is anticipated that the company will
broaden its competitive reference beyond the regulated utility industry in order
to compete sufficiently for talent in the deregulated environment of the future.
<PAGE>
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 similarly sized utilities. Officer salaries
correspond to approximately the median 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 participants 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. Maximum awards under the plan may be up to 150 percent of
target; threshold awards are 50 percent of target.
For Illinois Power officers, 1997 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 50 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 1997 were based on achievement of officers' individual goals. There were
no payouts for the identified performance areas.
<PAGE>
Long-Term Incentive Compensation (LTIC) Plan
Awards under the LTIC plan are based on corporate performance as well as
individual officers' contributions to corporate performance subject to the
review of this Committee. In 1997, 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 1997 represent an award based on
Illinova, Illinois Power, 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 Shareholder Value-Added
(SVA) performance relative to a peer group of utility companies, as measured in
overlapping three-year periods. SVA measures Illinova's return on the Company's
weighted average cost of capital. SVA performance at the median of the peer
group will result in target award levels. Performance above the median will
result in payouts greater than target to a maximum of two times target;
performance significantly below the median results in no payouts. Since 1996
represented the first year of the SVA plan's first three-year 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 1997
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 and Illinois Power. 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 1997,
the Committee, with the participation of all Outside Directors determined that
Mr. Haab had provided very strong leadership in promoting electric deregulation
in the State of Illinois. The continuing outage at the Clinton Power Station was
a major setback. Significant progress was made in advancing other strategic
objectives of the Company.
The 1997 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 1,539 stock units which vest over a
three-year period as described above.
The 20,000 option shares granted to the CEO reflect the Committee's
recognition of this work in directing Illinova and Illinois Power towards its
long-term objectives.
Compensation and Nominating Committee
Ronald L. Thompson, Chairman
J. Joe Adorjan
C. Steven McMillan
Robert M. Powers
Walter D. Scott
Marilou von Ferstel
John D. Zeglis
<PAGE>
Independent Auditors
The Board of Directors of Illinois Power has selected Price Waterhouse LLP as
independent auditors for the Company for 1998. 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 1997 Summary Annual Report to Shareholders was mailed to Illinois
Power's shareholders commencing on or about March 10, 1998. 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, 1998.
Requests should be addressed to Investor Relations, G-21, Illinois Power
Company, 500 South 27th Street, Decatur, Illinois 62521-2200.
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
12, 1998.
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 10, 1998
<PAGE>
APPENDIX: 1997 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 Illinois Power Company Statistics a-33
Abbreviations Used Throughout this Report
AFUDC Allowance for Funds Used
During Construction
Baldwin Baldwin Power Station
Clinton Clinton Power Station
DOE Department of Energy
EITF Emerging Issues Task Force of the
Financial Accounting Standards Board
EMF Electric and Magnetic Fields
EPS Earnings Per Share
ESOP Employees' Stock Ownership Plan
FAS Statement of Financial
Accounting Standards
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fuel Company Illinois Power Fuel Company
HB 362 House Bill 362, An Act in Relation
to the Competitive Provision of
Utility Services
ICC Illinois Commerce Commission
Illinova Illinova Corporation
IP Illinois Power Company
IPFI Illinois Power Financing I
ISA Integrated Safety Assessment
kw Kilowatt
kwh Kilowatt-Hour
MGP Manufactured-Gas Plant
MIPS Monthly Income Preferred Securities
MW Megawatt
MWH Megawatt-Hour
NOPR Notice of Proposed Rulemaking
NOx Nitrogen Oxide
NRC Nuclear Regulatory Commission
PCA Power Coordination Agreement
PECO PECO Energy Company
S&P Standard & Poor's
SO2 Sulfur Dioxide
Soyland Soyland Power Cooperative, Inc.
TOPrS Trust Originated Preferred Securities
UFAC Uniform Fuel Adjustment Clause
UGAC Uniform Gas Adjustment Clause
U.S. EPA United States Environmental
Protection Agency
Vermilion Vermilion Power Station
Wood River Wood River Power Station
<PAGE>
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. This report contains estimates, projections and other
forward-looking statements that involve risks and uncertainties. Actual results
or outcomes could differ materially as a result of such important factors as:
the outcome of state and federal regulatory proceedings affecting the
restructuring of the electric and gas utility industries; the impacts new laws
and regulations relating to restructuring, environmental, and other matters have
on IP; the effects of increased competition on the utility businesses; risks of
owning and operating a nuclear facility; changes in prices and cost of fuel;
construction and operation risks; and increases in financing costs. Below is
discussion of the factors having significant impact on consolidated financial
position and results of operations since January 1, 1995.
Illinois Power Company is a subsidiary of Illinova Corporation, a holding
company. Illinova Generating Company, Illinova Energy Partners, Inc. and
Illinova Insurance Company are wholly owned subsidiaries of Illinova. IP 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 FERC issued a NOPR initiating the process of mandating
non-discriminatory open access to public utility transmission facilities 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 all public utilities under FERC jurisdiction that own
transmission facilities to file transmission service tariffs that comply with
Pro Forma Tariffs attached to the Orders. FERC also requires that all wholesale
sales made by a utility provide for transmission of the power under the
prescribed terms and conditions. IP made a compliance filing as required on July
9, 1996, which has been accepted by FERC.
Public utilities serving customers at retail are not required, at this
time, to abide by FERC-mandated terms and conditions. FERC does not require
public utilities to give retail customers access to alternate energy suppliers
or direct transmission service.
The move to open access transmission service likely will increase
competition in the wholesale energy market, but this alone is not expected to
have a significant financial impact.
Competition
On December 16, 1997, Illinois Governor Edgar signed electric deregulation
legislation. HB 362 guarantees IP's residential customers a 15 percent decrease
in base electric rates beginning August 1, 1998, and an additional 5 percent
decrease effective on May 1, 2002. The rate decreases are expected to result in
revenue reductions of approximately $40 million in 1998, approximately $80
million in each of the years 1999 through 2001 and approximately $100 million in
2002, based on current consumption. Customers with demand greater than 4 MW at a
single site will be free to choose their electric generation suppliers ("direct
access") starting October 1999. Customers with at least 10 sites which aggregate
at least 9.5 MW in total demand also will have direct access starting October
1999. Direct access for the remaining non-residential customers will occur in
two phases: customers representing one-third of the remaining load in the
non-residential class in October 1999 and customers representing the entire
remaining non-residential load on December 31, 2000. Direct access will be
available to all residential customers in May 2002. IP remains obligated to
serve all customers who continue to take service from IP at tariff rates, and
remains obligated to provide delivery service to all at regulated rates.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, HB 362 is designed
to protect the financial integrity of electric utilities in three principal
ways:
1) Departing customers are obligated to pay transition charges, based on
the utility's lost revenue from that customer, adjusted to deduct: 1)
delivery charges the utility will continue to receive from the
customer, and 2) the market value of the freed-up energy net of a
mitigation factor, which is a percentage reduction of the transition
charge amount. The mitigation factor is designed to provide incentive
for management to continue cost reduction efforts and generate new
sources of revenue.
2) Utilities are provided the opportunity to lower their financing and
capital costs through the issuance of "securitized" bonds; and
3) Utilities are permitted to seek rate relief in the event that the
change in law leads to their return on equity falling below a
specified minimum based on a prescribed test.
<PAGE>
The extent to which revenues are lowered will depend on a number of factors
including future market prices for wholesale and retail energy, and load growth
and demand levels in the current IP service territory. The impact on net income
will depend on, among other things, the amount of revenues earned and the
ongoing costs of doing business.
In 1996, IP received approval from both the ICC and FERC 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. Currently, 17 customers are participating
in the experiment. Since inception, the experiment has cost IP approximately
$11.2 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 $2.7 million in transmission service charges.
Accounting Matters
Prior to the passage of HB 362, IP prepared its consolidated financial
statements in accordance with FAS 71, "Accounting for the Effects of Certain
Types of Regulation." Reporting under FAS 71 allows companies whose service
obligations and prices are regulated to maintain on their balance sheets assets
representing costs they expect to recover from customers, through inclusion of
such costs in their future rates. In July 1997, the EITF concluded that
application of FAS 71 accounting should be discontinued at the date of enactment
of deregulation legislation for business segments for which a plan of
deregulation has been established. The EITF further concluded that regulatory
assets and liabilities that originated in the portion of the business being
deregulated should be written off unless their recovery is specifically provided
for through future cash flows from the regulated portion of the business.
Because HB 362 provides for market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment. IP
evaluated its regulatory assets and liabilities associated with its generation
segment and determined that recovery of these costs was not probable through
rates charged to transmission and distribution customers, the regulated portion
of the business.
IP wrote off generation-related regulatory assets and liabilities of
approximately $195 million (net of income taxes) in December 1997. These net
assets related to previously incurred costs that were expected to be collected
through future revenues, including deferred costs for Clinton, unamortized
losses on reacquired debt, recoverable income taxes and other generation-related
regulatory assets. At December 31, 1997, IP's net investment in generation
facilities was $3.5 billion and was reflected in "Utility Plant, at Original
Cost" on IP's balance sheet.
In addition, IP evaluated its generation segment plant investments to
determine if they had been impaired as defined in FAS 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." This
evaluation determined that future revenues were expected to be sufficient to
recover the costs of its generation segment plant investments and as a result,
no plant write-downs were necessary. However, ultimate recovery depends on a
number of factors and variables including market conditions and IP's ability to
operate its generation assets efficiently.
The provisions of HB 362 allow an acceleration in the rate at which any
utility-owned assets are expensed without regulatory approval, provided such
charges are consistent with generally accepted accounting principles. Under this
legislation, up to an aggregate of $1.5 billion in additional expense for the
generation-related assets could be accelerated through the year 2008. This
reduction in the net book value of IP's generation-related assets should help
position IP to operate competitively and profitably in the changing business
environment. This accelerated charge would have a direct impact on earnings but
not on cash flows.
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" for a discussion of decommissioning.
See "Note 1 - Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
Regulatory Matters
In September 1996, a leak in a recirculation pump seal caused IP operations
personnel to shut down Clinton. Clinton has not resumed operation.
In January and again in June 1997, the NRC named Clinton among plants
having a trend of declining performance. In June 1997, IP committed to conduct
an ISA to thoroughly assess Clinton's performance. The ISA was conducted by a
team of 30 individuals with extensive nuclear experience and no substantial
previous involvement at Clinton. Their report concluded that the underlying
reasons for the performance problems at Clinton were ineffective leadership
throughout the organization in providing standards of excellence, complacency
throughout the organization, barrier weaknesses and weaknesses in teamwork. In
late October, a team commissioned by the NRC performed an evaluation to validate
the ISA results. In December, this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.
<PAGE>
On January 5, 1998, IP and PECO announced an agreement under which PECO
will provide management services for Clinton. Although a PECO team will help
manage the plant, IP will continue to maintain the operating license for Clinton
and retain ultimate oversight of the plant. PECO employees will assume senior
positions at Clinton, but the plant will remain primarily staffed by IP
employees. IP made this decision based on a belief that bringing in PECO's
experienced management team would be the most efficient way to get Clinton back
on line and operating at a superior level as quickly as possible.
On January 21, 1998, the NRC placed Clinton on its Watch List of nuclear
plants that require additional regulatory oversight because of declining
performance. Twice a year the NRC evaluates the performance of nuclear power
plants in the United States and identifies those which require additional
regulatory oversight. Once placed on the Watch List a plant must demonstrate
consistent improved performance before it is removed from the list. The NRC will
monitor Clinton more closely than plants not on the Watch List. This may include
increased inspections, additional required documentation, NRC-required approval
of processes and procedures, and higher-level NRC oversight.
The NRC has advised IP that it must submit a written report to the NRC at
least two weeks prior to restarting Clinton, giving the agency reasonable
assurance that IP's actions to correct recurring weaknesses in the corrective
action program have been effective. After the report is submitted, the NRC staff
plans to meet with IP's management to discuss the plant's readiness for restart.
In March 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership, in connection
with the transfer from Soyland to IP of all of Soyland's interest in Clinton.
Soyland's title to the plant and directly related assets such as nuclear fuel
was transferred to IP in May 1997. Soyland's nuclear decommissioning trust
assets were transferred to IP in May 1997, consistent with IP's assumption of
all of Soyland's ownership obligations including those related to
decommissioning.
The FERC approved an amended PCA between IP and Soyland in July 1997. The
amended PCA obligates Soyland to purchase all of its capacity and energy needs
from IP for at least 10 years. The amended PCA provides that a contract
cancellation fee will be paid by Soyland to IP in the event that a Soyland
Cooperative member terminates its membership from Soyland. On May 31, 1997,
three distribution cooperative members terminated membership by buying out of
their long-term wholesale power contracts with Soyland. This action resulted in
Soyland paying a fee of $20.8 million to IP in June 1997 to reduce its base
capacity charges. Fee proceeds of $2.9 million were used to offset the costs of
acquiring Soyland's share of Clinton with the remaining $17.9 million recorded
as interchange revenue. In December 1997, Soyland signed a letter of intent to
pay in advance the remainder of its base capacity charges in the PCA. The fee of
approximately $70 million will be deferred and recognized as interchange revenue
over the initial term of the PCA. The payment is contingent on Soyland obtaining
the necessary financing and regulatory approvals in 1998.
In September 1997, the ICC approved a petition filed by IP which stipulates
customers will not be charged for certain additional costs of energy incurred as
a result of Clinton being out of service. IP did not collect from its customers
$36.3 million for higher-cost replacement power in 1997. IP will forego recovery
of additional fuel costs as the Clinton outage continues into 1998. Under the
petition, fuel costs charged to customers will be no higher than average
1995-1996 levels until Clinton is back in service operating at least at a 65%
capacity factor for two consecutive months.
Under HB 362, IP may choose to eliminate application of the UFAC. IP's base
rates will still include a component for some level of recovery of fuel costs,
but IP would not be able to pass through to customers increased costs of
purchasing fuel, emission allowances, or replacement power. On elimination of
the UFAC, base rates will include a fixed fuel-cost factor equivalent to the
average 1995 - 1996 fuel cost levels. Future recovery of fuel costs is
uncertain, as IP will decrease base electric rates to residential customers
beginning in August 1998 and certain customers will be free to choose their
electric generation suppliers beginning in October 1999. The extent to which
fuel costs are recovered will depend on a number of factors including the future
market prices for wholesale and retail energy, when Clinton returns to service,
and whether IP elects to eliminate the UFAC.
Year 2000
In November 1996, IP deployed a project team to coordinate the identification,
evaluation, and implementation of changes to computer systems and applications
necessary to achieve a year 2000 date conversion with no effect on customers or
disruption to business operations.
These actions are necessary to ensure that systems and applications will
recognize and process coding for the year 2000 and beyond. Major areas of
potential business impact have been identified and initial conversion efforts
are underway. IP also is communicating with third parties with whom it does
business to ensure continued business operations. The cost of achieving year
2000 compliance is estimated to be at least $14 million through 1999.
Contingency plans for operating without year 2000 compliance have not been
developed. Such activity will depend on assessment of progress. Project
completion is planned for the fourth quarter of 1999.
<PAGE>
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 (loss) applicable to common stock were $(65) million for 1997, $206
million for 1996 and $156 million for 1995. The decrease in 1997 earnings
compared to 1996 was due primarily to the extraordinary item related to
discontinued application of FAS 71 for the generation segment, higher operation
and maintenance expenses due to Clinton, higher power purchased costs due to
Clinton and Wood River outages and an increase in uncollectible accounts
expense. 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.
Regulators historically have determined IP's rates for electric service,
the ICC at the retail level and the FERC at the wholesale level. The ICC
determines IP's rates for gas service. These rates have been designed to recover
the cost of service and allow shareholders the opportunity to earn a fair rate
of return. As described under "Competition" above, Illinois electric
deregulation legislation phases in a competitive marketplace for electric
generation while maintaining cost-based regulation for electric delivery
services and gas service, protecting the financial integrity of the company
during the transition period. 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.
Electric Operations For the years 1995 through 1997, electric revenues including
interchange increased 3.7% and the gross electric margin decreased 6.4% as
follows:
(Millions of dollars) 1997 1996 1995
Electric revenues $ 1,244.4 $ 1,202.9 $ 1,252.6
Interchange revenues 175.6 137.6 116.3
Fuel cost & power
purchased (450.3) (313.3) (333.4)
Electric margin $ 969.7 $ 1,027.2 $ 1,035.5
The components of annual changes in electric revenues were:
(Millions of dollars) 1997 1996 1995
Price $ (11.5) $ (7.2) $ 13.3
Volume and other 9.7 6.4 42.7
Fuel cost recoveries 43.3 (48.9) 19.1
Revenue increase
(decrease) $ 41.5 $ (49.7) $ 75.1
1997 Electric revenues excluding interchange sales increased 3.4%, primarily due
to an increase in revenues under the UFAC and increased wheeling revenues.
Interchange revenues increased 27.6% due to the receipt of an opt-out fee from
Soyland per the amended PCA and increased interchange activity. Electric margin
decreased primarily due to increased power purchased costs as a result of
outages at the nuclear and fossil facilities.
1996 Electric revenues excluding interchange sales decreased 4.0%, primarily due
to reduction in revenues under the UFAC. Volume changes by customer class were
insignificant, as kwh sales 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.
<PAGE>
1995 The 6.4% increase in electric revenues was primarily due to a 1.9% increase
in kwh 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.
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:
(Millions of dollars) 1997 1996 1995
Fuel for electric plants
Volume and other $ (37.7) $ 15.4 $ 9.8
Price (8.5) (12.0) (35.5)
Emission allowances 12.3 .8 18.5
Fuel cost recoveries 18.2 (30.0) 14.5
(15.7) (25.8) 7.3
Power purchased 152.7 5.7 6.9
Total increase (decrease) $ 137.0 $ (20.1) $ 14.2
Weighted average system
generating fuel cost
($/MWH) $ 12.06 $ 11.01 $ 11.41
System load requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities, emission allowance
costs and fuel cost recovery through UFAC caused changes in these costs.
Changes in factors affecting the cost of fuel for electric generation are below:
1997 1996 1995
Increase (decrease)
in generation (25.4)% 5.4% .7%
Generation mix
Coal and other 100% 78% 73%
Nuclear 0% 22% 27%
1997 The cost of fuel decreased 6.3% and electric generation decreased 25.4%.
The decrease in fuel cost was primarily attributable to decreased generation and
a favorable price variance. These factors were partially offset by effects of
the UFAC and increased emission allowance costs. Power purchased increased
$152.7 million primarily due to Clinton and Wood River being out of service.
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.
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.
Gas Operations For the years 1995 through 1997, gas revenues including
transportation increased 29.9%, while the gross margin on gas revenues increased
9.3% as follows:
(Millions of dollars) 1997 1996 1995
Gas revenues $ 345.2 $ 341.4 $ 264.5
Gas cost (207.7) (202.6) (138.8)
Transportation revenues 8.7 6.8 8.0
Gas margin $ 146.2 $ 145.6 $ 133.7
(Millions of therms)
Therms sold 537 703 588
Therms transported 309 251 273
Total consumption 846 954 861
Changes in the cost of gas purchased for resale were:
(Millions of dollars) 1997 1996 1995
Gas purchased for resale
Cost $ 8.0 $ 49.0 $ (43.5)
Volume (30.0) 8.5 25.3
Gas cost recoveries 27.1 6.3 (15.4)
Total increase (decrease) $ 5.1 $ 63.8 $ (33.6)
Average cost per therm
delivered $ .28 $ .267 $ .201
<PAGE>
The 1997 increase in gas costs was due to slightly higher prices from
suppliers and effects of the UGAC, offset by a decrease in volume. The 1996
increase in gas costs was primarily due to higher prices from suppliers and the
effects of the UGAC. The 1995 decrease in the cost of gas purchased was due to
lower gas prices caused by unusually warm winter weather nationwide. Also
contributing to the higher gas margins in 1995 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:
(Millions of dollars) 1997 1996 1995
Other operating expenses $ 40.6 $ (9.8) $ (.3)
Maintenance 12.0 (.3) 10.4
Depreciation and
amortization 8.8 3.5 7.2
The increase in operating and maintenance expenses for 1997 is primarily
due to increased company and contractor labor at the nuclear and fossil plants.
An increase in uncollectible accounts expense and disposal of surplus inventory
also contributed to the increase.
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 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 expenses for 1995 is primarily due to the
refueling and maintenance outage at Clinton. The increases in depreciation and
amortization for each of the three years were due to increases in utility plant
balances.
Other Income and Deductions - Net The 1997 decrease of $2.1 million in Other
Income and Deductions, Net is due primarily to 1996 accruals recorded for the
planned disposition of property. The 1996 increase was due primarily to a
decrease in the credit for allocated income taxes. The 1995 change in Other
Income and Deductions, Net was negligible.
Interest Charges Interest charges, including AFUDC, decreased $2.8 million in
1997, decreased $15.5 million in 1996, and increased $3.6 million in 1995. The
1997 decrease is primarily due to the continued benefits of IP refinancing
efforts and capitalization reductions partially offset by increased IP
short-term borrowings and lower AFUDC. The 1996 decrease was due to lower
short-term interest rates and the impact of IP refinancing efforts and
capitalization reduction during 1996. The 1995 increase was due to increased
short-term borrowings at higher interest rates.
Inflation Inflation, as measured by the Consumer Price Index, was 2.3%, 3.3%,
and 2.5% in 1997, 1996, and 1995, respectively. IP recovers historical rather
than current plant costs in its regulated rates.
Liquidity and Capital Resources
Dividends
On December 10, 1997, IP declared the quarterly common stock dividend for the
first quarter of 1998. On December 11, 1996, IP increased the quarterly common
stock dividend by 11% declaring the common stock dividend for the first quarter
of 1997. On December 13, 1995, IP increased the quarterly common stock dividend
12%, declaring the common stock dividend for the first quarter of 1996.
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 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.
<PAGE>
IP cash flows from operations during 1997 provided sufficient working
capital to meet ongoing operating requirements, to service existing common and
IP 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 operating requirements and continue to service IP's existing
debt, preferred stock dividends, IP's sinking fund requirements and all of IP's
anticipated construction requirements. Continued sufficiency of cash flows for
these purposes will depend on a number of factors and variables, including
market conditions, business expenses and the ability to compete.
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:
Standard Duff &
Moody's & Poor's Phelps
First/New mortgage bonds Baa1 BBB BBB+
Preferred stock baa2 BBB- BBB-
Commercial paper P-2 A-2 D-2
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, 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. Duff & Phelps 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.
For the years 1997, 1996 and 1995, changes in long-term debt and preferred
stock, including normal maturities and elective redemptions, were as follows:
(Millions of dollars) 1997 1996 1995
Long-term debt $ (11) $(154) $ (5)
Preferred stock (39) 71 (135)
Total decrease $ (50) $ (83) $(140)
The amounts shown in the preceding table for debt retirements do not
include all mortgage sinking fund requirements. IP generally has met these
requirements by pledging property additions as permitted under IP's 1943
Mortgage and Deed of Trust and the 1992 New Mortgage. For additional
information, see "Note 8 - Long-Term Debt" an d "Note 9 - Preferred Stock."
During 1997, IP redeemed $34.9 million (all of the remaining) Adjustable
Rate Series A serial preferred stock. IP also redeemed $4.2 million of various
issues of serial preferred stock. In addition, $10.5 million of medium-term
notes matured and were retired. During the year IP issued $150 million of
Adjustable Rate Pollution Control Revenue Bonds, due April 1, 2032. The proceeds
were used on June 2, 1997, to retire $150 million of IP's 7 5/8% Pollution
Control First Mortgage Bonds due 2016.
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 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 redeemed $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.
<PAGE>
IPFI is a statutory business trust in which IP serves as sponsor. IPFI
issued $100 million of 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.
In 1992, IP executed a 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. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The New Mortgage provides IP with increased
financial flexibility.
At December 31, 1997, based on the most restrictive earnings test contained
in the New Mortgage, IP could issue approximately $800 million of additional New
Mortgage bonds for other than refunding purposes. Also at December 31, 1997, the
unused portion of IP total bank lines of credit was $354 million. The amount of
available IP unsecured borrowing capacity totaled $168 million at December 31,
1997.
On February 12, 1997, the IP 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 change will be voted on by the preferred
stockholders at a special meeting planned to be held in 1998.
Under HB 362, IP may issue transitional funding instruments for up to 25%
of its December 31, 1996, capitalization on or after August 1, 1998. IP is
continuing to review its refinancing plans but could issue up to $864 million of
transitional funding instruments on or after August 1, 1998, under this
provision. In addition, IP would be eligible to issue up to an additional $864
million of transition funding instruments on or after August 1, 1999. Of the
proceeds from the issuance of transitional funding instruments, 80% or more must
be used to retire and repurchase IP debt and equity while 20% or less can be
used to fund certain other transition costs.
Construction expenditures for the years 1995 through 1997 were
approximately $620.5 million, including $17.5 million of AFUDC. IP estimates
that it will spend approximately $225 million for construction expenditures in
1998. IP construction expenditures for the period 1998-2002 are expected to
total about $1 billion. Additional expenditures may be required during this
period to accommodate transitional expenditures related to a competitive
environment, environmental compliance costs and system upgrades, which cannot be
determined at this time.
IP's capital expenditures for the years 1998 through 2002, in addition to
its construction expenditures, are expected to include $129 million for nuclear
fuel and $291 million for mandatory debt retirement.
See "Note 3 - Commitments and Contingencies" for additional information.
Internal cash generation will meet substantially all construction and capital
requirements.
Environmental Matters
See "Note 3 - Commitments and Contingencies" for a discussion of environmental
matters that impact or could potentially impact IP.
Tax Matters
See "Note 6 - Income Taxes" for a discussion of effective tax rates and other
tax issues.
<PAGE>
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 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.
Larry D. Haab Chairman, President
and Chief Executive Officer
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 and Shareholders 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of 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.
As discussed in Note 1 to the consolidated financial statements, Illinois Power
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulations,"
for its generation segment of the business in December 1997.
Price Waterhouse LLP
St. Louis, Missouri
February 12, 1998
<PAGE>
Illinois Power Company
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C> <C>
(Millions of dollars)
For the Years Ended December 31, 1997 1996 1995
Operating Revenues
Electric $ 1,244.4 $ 1,202.9 $ 1,252.6
Electric interchange 175.6 137.6 116.3
Gas 353.9 348.2 272.5
Total 1,773.9 1,688.7 1,641.4
Operating Expenses and Taxes
Fuel for electric plants 232.4 248.1 273.9
Power purchased 217.9 65.2 59.5
Gas purchased for resale 207.7 202.6 138.8
Other operating expenses 290.5 249.9 259.7
Maintenance 111.7 99.7 100.0
Enhanced retirement and severance - - 37.8
Depreciation and amortization 198.8 190.0 186.5
General taxes 133.8 131.3 135.0
Income taxes 102.4 140.5 125.8
Total 1,495.2 1,327.3 1,317.0
Operating income 278.7 361.4 324.4
Other Income and Deductions, Net (4.2) (6.3) .3
Income before interest charges 274.5 355.1 324.7
Interest Charges
Interest expense 128.7 133.0 148.0
Allowance for borrowed funds used during construction (5.0) (6.5) (6.0)
Total 123.7 126.5 142.0
Net income before extraordinary item 150.8 228.6 182.7
Extraordinary item net of income tax benefit of $118.0 million (Note 1) (195.0) - -
Net income (loss) (44.2) 228.6 182.7
Less - Preferred dividend requirements 21.5 22.3 23.7
Plus - Carrying amount over (under) consideration paid for redeemed preferred stock .2 (.7) (3.5)
Net income (loss) applicable to common stock $ (65.5) $ 205.6 $ 155.5
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
<PAGE>
Illinois Power company
CONSOLIDATED BALANCE SHEETS
<TABLE>
(Millions of dollars)
December 31, 1997 1996
Assets
Utility Plant, at original cost
<S> <C> <C>
Electric (includes construction work in progress of $214.3 million and $212.5 million, respectively) $ 6,690.4 $ 6,335.4
Gas (includes construction work in progress of $10.7 million and $21.2 million, respectively) 663.0 646.1
7,353.4 6,981.5
Less - accumulated depreciation 2,808.1 2,419.7
4,545.3 4,561.8
Nuclear fuel in process 6.3 5.3
Nuclear fuel under capital lease 126.7 96.4
4,678.3 4,663.5
Investments and Other Assets 5.9 14.5
Current Assets
Cash and cash equivalents 17.8 12.5
Accounts receivable (less allowance for doubtful accounts of $5.5 million and $3.0 million, respectively)
Service 115.6 138.8
Other 16.6 51.1
Accrued unbilled revenue 86.3 106.0
Materials and supplies, at average cost
Fossil fuel 12.6 7.9
Gas in underground storage 29.3 27.2
Operating materials 75.4 77.1
Prepayments and other 61.2 23.7
414.8 444.3
Deferred Charges
Deferred Clinton costs - 103.9
Recoverable income taxes - 101.3
Other 192.5 241.0
192.5 446.2
$ 5,291.5 $ 5,568.5
Capital and Liabilities
Capitalization
Common stock - No par value, 100,000,000 shares authorized; 75,643,937 shares issued, stated at $ 1,424.6 $ 1,424.6
Retained earnings 89.5 245.9
Less - Capital stock expense 7.3 8.2
Less - 9,428,645 and 3,410,897 shares of common stock in treasury, respectively, at cost 207.7 86.2
Total common stock equity 1,299.1 1,576.1
Preferred stock 57.1 96.2
Mandatorily redeemable preferred stock 197.0 197.0
Long-term debt 1,617.5 1,636.4
Total capitalization 3,170.7 3,505.7
Current Liabilities
Accounts payable 102.7 149.7
Notes payable 376.8 310.0
Long-term debt and lease obligations maturing within one year 87.5 47.7
Dividends declared 22.9 24.7
Taxes accrued 27.5 46.0
Interest accrued 33.0 34.3
Other 78.7 43.1
729.1 655.5
Deferred Credits
Accumulated deferred income taxes 980.6 1,048.0
Accumulated deferred investment tax credits 208.3 215.5
Other 202.8 143.8
1,391.7 1,407.3
$ 5,291.5 $ 5,568.5
</TABLE>
(Commitments and Contingencies Note 3)
See notes to consolidated financial statements which are an integral part of
these statements.
<PAGE>
Illinois Power company
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
(Millions of dollars)
For the Years Ended December 31, 1997 1996 1995
Cash Flows from Operating Activities
Net income (loss) $ (44.2) $ 228.6 $ 182.7
Items not requiring (providing) cash - 202.1 195.3 190.0
Depreciation and amortization (5.0) (6.5) (6.0)
Allowance for funds used during construction 29.4 64.2 42.0
Deferred income taxes - - 37.8
Enhanced retirement and severance 195.0 - -
Extraordinary item
Changes in assets and liabilities - 57.7 (35.2) 38.7
Accounts and notes receivable 19.7 (16.9) (10.2)
Accrued unbilled revenue (5.1) (1.2) 22.8
Materials and supplies (31.2) 29.8 (14.0)
Accounts payable .3 (14.8) (10.1)
Interest accrued and other, net 418.7 443.3 473.7
Net cash provided by operating activities
Cash Flows from Investing Activities (223.9) (187.3) (209.3)
Construction expenditures 5.0 6.5 6.0
Allowance for funds used during construction 27.8 5.0 (7.5)
Other investing activities (191.1) (175.8) (210.8)
Net cash used in investing activities
Cash Flows from Financing Activities (114.6) (107.9) (100.5)
Dividends on common stock and preferred stock (121.5) (18.9) (67.3)
Repurchase of common stock
Redemptions - (164.1) (355.8) (213.6)
Short-term debt (160.8) (153.7) (5.2)
Long-term debt (39.0) (29.5) (134.5)
Preferred stock
Issuances - 231.0 306.2 209.5
Short-term debt 150.0 - -
Long-term debt - 100.0 -
Preferred stock (3.3) .3 5.1
Other financing activities (222.3) (259.3) (306.5)
Net cash used in financing activities 5.3 8.2 (43.6)
Net change in cash and cash equivalents 12.5 4.3 47.9
Cash and cash equivalents at beginning of year $ 17.8 $ 12.5 $ 4.3
Cash and cash equivalents at end of year
</TABLE>
Illinois Power company
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<S> <C> <C> <C>
(Millions of dollars)
For the Years Ended December 31, 1997 1996 1995
Balance at beginning of year $ 245.9 $ 129.6 $ 51.1
Net income (loss) before dividends and carrying amount adjustment (44.2) 228.6 182.7
201.7 358.2 233.8
Less -
Dividends -
Preferred stock 21.7 22.6 23.6
Common stock 90.7 86.6 77.1
Investment transfer to Illinova - 2.4 -
Plus -
Carrying amount over (under) consideration paid for redeemed preferred stock .2 (.7) (3.5)
(112.2) (112.3) (104.2)
Balance at end of year $ 89.5 $ 245.9 $ 129.6
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation IP is a subsidiary of Illinova, a holding company.
IP 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 IPFI. See
"Note 9 - Preferred Stock" for additional information.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. Preparation of financial statements
in conformity with generally accepted accounting principles requires the use of
management's estimates. Actual results could differ from those estimates.
Regulation IP is subject to regulation by the ICC and the FERC. Prior to the
passage of HB 362, IP prepared its consolidated financial statements in
accordance with FAS 71, "Accounting for the Effects of Certain Types of
Regulation." Reporting under FAS 71 allows companies whose service obligations
and prices are regulated to maintain on their balance sheets assets which
represent costs they expect to recover from customers through inclusion of such
costs in their future rates. In July 1997, the EITF concluded that application
of FAS 71 accounting should be discontinued at the date of enactment of
deregulation legislation for business segments for which a plan of deregulation
has been established. The EITF further concluded that regulatory assets and
liabilities that originated in the portion of the business being deregulated
should be written off unless their recovery is specifically provided for through
future cash flows from the regulated portion of the business.
Because HB 362 provides for market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment in
December 1997 when HB 362 was signed by Illinois Governor Edgar. IP evaluated
its regulatory assets and liabilities associated with its generation segment and
determined that recovery of these costs was not probable through rates charged
to transmission and distribution customers, the regulated portion of its
business. Therefore, IP wrote off generation-related regulatory assets and
liabilities of approximately $195 million (net of income taxes) in December
1997. These net assets related to previously incurred costs that had been
expected to be collected through future revenues, including deferred Clinton
post construction costs, unamortized losses on reacquired debt, recoverable
income taxes and other generation-related regulatory assets. At December 31,
1997, IP's net investment in generation facilities was $3.5 billion and was
included in "Utility Plant, at Original Cost" on IP's Consolidated Balance
Sheets.
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:
(Millions of dollars) 1997 1996
Deferred Clinton
post-construction costs $ - $ 103.9
Recoverable income taxes $ - $ 101.3
Unamortized losses on reacquired debt $ 32.3 $ 87.7
Manufactured-gas plant site cleanup costs $ 64.8 $ 69.1
DOE decontamination and
decommissioning fees $ 6.3 $ 5.4
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 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.
<PAGE>
Allowance for Funds Used During Construction The FERC Uniform System of Accounts
defines AFUDC as the net costs for the period of construction of borrowed funds
used for construction purposes and a reasonable rate on other funds when so
used. AFUDC is capitalized as a component of construction work in progress by
those business segments applying the provisions of FAS 71. In 1997, 1996 and
1995, the pre-tax rate used for all construction projects was 5.6%, 5.8% and
6.5%, respectively. Although cash is not currently realized from the allowance,
it is realized under the ratemaking process over the service life of the related
property through increased revenues resulting from a higher rate base and higher
depreciation expense. Non-regulated business segments capitalize interest under
the guidelines in FAS 34, "Capitalization of Interest Cost."
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 1997, 1996 and 1995, provisions for
depreciation were 2.8%, 2.8% and 2.8%, respectively, of the average depreciable
cost for Clinton. Provisions for depreciation for all other electric plant were
2.8%, 2.6% and 2.6% in 1997, 1996 and 1995, respectively. Provisions for
depreciation of gas utility plant, as a percentage of the average depreciable
cost, were 3.3%, 3.9% and 3.9% in 1997, 1996 and 1995, respectively.
Amortization of Nuclear Fuel IP leases nuclear fuel from the 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 kwh generated. See "Note 3 -
Commitments and Contingencies" for discussion of decommissioning and nuclear
fuel disposal costs.
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 for business segments under the
provisions of FAS 71 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. Costs related to
refunded debt for the generating segment are expensed when incurred.
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 $71 million in 1997, $68 million in 1996 and $66 million in 1995. The costs
of fuel for the generation of electricity, purchased power and gas purchased for
resale are 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. In September 1997, IP filed a petition with the ICC that stipulated
customers will not be charged for certain additional costs of energy incurred as
a result of Clinton being out of service. During 1997, as a result of this
stipulation, IP did not collect $36.3 million of fuel costs. IP will also forego
recovery of additional fuel costs in 1998 for the duration of the Clinton
outage. Under the petition, fuel costs charged to customers will be no higher
than average 1995-1996 levels until Clinton is back in service operating at
least at a 65% capacity factor for two consecutive months.
Income Taxes Deferred income taxes result from temporary differences between
book income and taxable income, and the tax bases of assets and liabilities on
the balance sheet. The temporary differences relate principally to plant in
service and depreciation.
Investment tax credits used to reduce federal income taxes have been
deferred and are being amortized to income over the service life of the property
that gave rise to the credits.
IP is included in Illinova's consolidated federal income tax return. Income
taxes are allocated to the individual companies based on their respective
taxable income or loss. See "Note 6 - Income Taxes" for additional discussion.
<PAGE>
Preferred Dividend Requirements 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
$30 million, $31 million and $19 million during 1997, 1996 and 1995,
respectively. Income taxes and interest paid are as follows:
Years ended December 31,
(Millions of dollars) 1997 1996 1995
Income taxes $ 94.3 $ 65.9 $ 65.7
Interest $ 140.0 $ 147.4 $ 152.4
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 accrued and 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 $122
million, $81 million and $34 million in funds to Illinova for operations and
investments during 1997, 1996 and 1995, 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 $10.2 million, $14.3 million and $18.4 million in 1997, 1996 and
1995, 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" for additional information.
New Pronouncements The FASB issued FAS 128, "Earnings Per Share" in February
1997, effective for financial statements issued after December 15, 1997. FAS 128
establishes standards for computing and presenting EPS and replaces the
presentation of primary EPS and fully diluted EPS with a presentation of basic
EPS and diluted EPS, respectively. No new requirements are imposed on IP by FAS
128.
The FASB issued FAS 129, "Disclosure of Information about Capital
Structure" in February 1997, effective for financial statements for periods
ending after December 15, 1997. FAS 129 establishes standards for disclosing
information about an entity's capital structure and contains no change in
disclosure requirements for entities that were previously subject to the
requirements of Accounting Principles Board Opinions 10 and 15 and FAS 47. No
new requirements are imposed on IP by FAS 129.
The FASB issued FAS 130, "Reporting Comprehensive Income" in June 1997,
effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. IP continues to analyze FAS 130 and does not
expect it to have a significant impact on its financial statements presentation.
The FASB issued FAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997, effective for periods beginning after
December 15, 1997. FAS 131 supersedes FAS 14, "Financial Reporting for Segments
of a Business Enterprise." FAS 131 establishes standards for the way public
business enterprises report financial and descriptive information about their
reportable operating segments in their financial statements. Generally,
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. IP continues to evaluate the provisions of FAS 131 and
determine the impact of the revised disclosure requirements on its 1998
financial statements.
<PAGE>
Note 2 - Clinton Power Station
Clinton Operations
In September 1996, a leak in a recirculation pump seal caused IP operations
personnel to shut down Clinton. Clinton has not resumed operation.
In January and again in June 1997, the NRC named Clinton among plants
having a trend of declining performance. In June 1997, IP committed to conduct
an ISA to thoroughly assess Clinton's performance. The ISA was conducted by a
team of 30 individuals with extensive nuclear experience and no substantial
previous involvement at Clinton. Their report concluded that the underlying
reasons for the performance problems at Clinton were ineffective leadership
throughout the organization in providing standards of excellence, complacency
throughout the organization, barrier weaknesses and weaknesses in teamwork. In
late October, a team commissioned by the NRC performed an evaluation to validate
the ISA results. In December, this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.
In September 1997, the NRC advised IP that it must submit a written report
to the NRC at least two weeks prior to restarting Clinton, giving the agency
reasonable assurance that IP's actions to correct recurring weaknesses in the
corrective action program have been effective. After the report is submitted,
the NRC staff plans to meet with IP's management to discuss the plant's
readiness for restart.
In November 1997, Larry Haab, Chief Executive Officer of IP, publicly
pledged to address the findings of the ISA, to improve Clinton, and provide the
resources necessary to restart the plant. Further, in January 1998, IP and PECO
announced an agreement under which PECO will provide management services for
Clinton. The new management team initially will consist of nine people in key
positions, including chief nuclear officer and plant manager.
Although a PECO team will help manage the plant, IP will continue to
maintain the operating license for Clinton and retain ultimate oversight of the
plant. The plant will remain staffed primarily by IP employees.
PECO operates two stations, Limerick and Peach Bottom, each with two
boiling water reactors similar to the one at Clinton. Although PECO's Peach
Bottom Station was a troubled plant that experienced a two-year outage, it was
turned around, and both plants have set performance records for long operating
runs and short refueling outages, receiving excellent performance ratings from
the NRC and the Institute of Nuclear Power Operations.
On January 21, 1998, the NRC placed Clinton on its Watch List. Nuclear
plants are placed on the Watch List when the NRC believes additional regulatory
oversight is required because of declining performance. Clinton will remain on
the Watch List until consistent improved performance is demonstrated. During the
period Clinton remains on the Watch List, the NRC will monitor it more closely
than plants not on the Watch List. This may include increased inspections,
additional required documentation, NRC-required approval of processes and
procedures and higher-level NRC oversight.
<PAGE>
Transfer of Soyland's Ownership Share to IP
In March 1997, the NRC issued an order approving transfer to IP of the Clinton
operating license related to Soyland's 13.2% ownership in connection with the
transfer from Soyland to IP of all of Soyland's interest in Clinton. Soyland's
title to the plant and directly related assets such as nuclear fuel was
transferred to IP in May 1997. Soyland's nuclear decommissioning trust assets
were transferred to IP in May 1997, consistent with IP's assumption of all of
Soyland's ownership obligations, including those related to decommissioning.
The FERC approved an amended PCA in July 1997. The amended PCA obligates
Soyland to purchase all of its capacity and energy needs from IP for at least 10
years. The amended PCA provides that a contract cancellation fee be paid by
Soyland to IP in the event that a Soyland member terminates its membership from
Soyland. In May 1997, three distribution cooperative members terminated
membership by buying out of their long-term wholesale power contracts with
Soyland. As a result, Soyland paid a fee of $20.8 million to IP in June 1997.
Fee proceeds of $2.9 million were used to offset the costs of acquiring
Soyland's share of Clinton with the remaining $17.9 million recorded as
interchange revenue.
In December 1997, Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA. The fee of approximately $70
million will be deferred and recognized as interchange revenue over the initial
term of the PCA. The payment is contingent on Soyland obtaining the necessary
financing and regulatory approvals in 1998.
Clinton Cost and Risks
Clinton was placed in service in 1987 and represents approximately 20.3% of IP's
installed generation capacity. The investment in Clinton represented
approximately 57% of IP's total assets at December 31, 1997. See "Note 1 -
Summary of Significant Accounting Policies" for additional information.
IP's Clinton-related costs represented 38% of its total 1997 other
operating, maintenance and depreciation expenses. Clinton's equivalent
availability was 0%, 66% and 76% for 1997, 1996 and 1995, respectively.
Ownership of an operating nuclear generating unit exposes IP to significant
risks, including increased and changing regulatory, safety and environmental
requirements and the uncertain future cost of closing and dismantling the unit.
IP expects to be allowed to continue to operate Clinton; however, if any
unforeseen or unexpected developments would prevent it from doing so, IP would
be materially adversely affected. See "Note 3 - Commitments and Contingencies"
for additional information.
Note 3 - Commitments and Contingencies
Commitments
IP estimates that it will spend approximately $225 million for construction
expenditures in 1998. IP construction expenditures for the period 1998-2002 are
expected to total about $1 billion. Additional expenditures may be required
during this period to accommodate transitional expenditures related to a
competitive environment, environmental compliance costs and system upgrades,
which cannot be determined at this time.
IP's capital expenditures for the years 1998 through 2002, in addition to
its construction expenditures, are expected to include $129 million for nuclear
fuel and $291 million for mandatory debt retirement.
In addition, IP has substantial commitments for the purchase of coal under
long-term contracts. Estimated coal contract commitments for 1998 through 2002
are $619 million (excluding price escalation provisions). Total coal purchases
for 1997, 1996 and 1995 were $181 million, $184 million and $168 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 1998 through 2002 total $56 million.
Total natural gas purchased for 1997, 1996 and 1995 was $185 million, $207
million and $150 million, respectively.
<PAGE>
IP's estimated nuclear fuel commitments for Clinton are approximately $11
million for uranium concentrates through 2001, $3 million for conversion
services through 2002, $35 million for enrichment services through 1999 and $232
million for fabrication services through 2019. IP is committed to purchase
approximately $20 million of emission allowances through 1999. IP anticipates
that all gas-related costs will be recoverable under IP's UGAC. See the
subcaption "Fuel Cost Recovery" below for discussion of the UFAC.
Fuel Cost Recovery On September 29, 1997, the ICC approved an IP petition that
stipulates customers will not be charged for certain additional costs of energy
incurred as a result of Clinton being out of service. Under the petition, fuel
costs charged to customers will be no higher than average 1995 - 1996 levels
until Clinton is back in service operating at least at a 65% capacity factor for
two consecutive months. See "Note 2 - Clinton Power Station" for additional
information about Clinton.
As a result of Illinois deregulation legislation, IP may choose to
eliminate application of the UFAC. IP's base rates would still include a
component for some level of recovery of fuel costs, but IP would not be able to
pass through to customers increased costs of purchasing fuel, emission
allowances or replacement power. On elimination of the UFAC, base rates will
include a fixed fuel cost factor equivalent to the average 1995 - 1996 fuel cost
levels. Future recovery of fuel costs is uncertain, as IP will decrease base
electric rates to residential customers beginning August 1998 and certain
customers will be free to choose their electric generation suppliers beginning
in October 1999. The extent to which fuel costs are recovered will depend on a
number of factors including the future market prices for wholesale and retail
energy, when Clinton returns to service, and whether IP elects to eliminate the
UFAC.
Insurance IP maintains insurance 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 incident
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 $1.5 million per week of business interruption insurance
coverage through an industry-owned mutual insurance company. This insurance does
not provide coverage until Clinton has been out of service for 21 weeks.
All United States nuclear reactor licensees 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 nuclear
reactor licensees 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 due to the nuclear energy hazard 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.
<PAGE>
Decommissioning and Nuclear Fuel Disposal IP is responsible for the costs of
decommissioning Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent with IP's assumption of all of Soyland's ownership obligations of
Clinton, Soyland's nuclear decommissioning trust assets were transferred to IP.
Future decommissioning costs related to Soyland's former share of Clinton will
be provided through the PCA between Soyland and IP. IP is collecting future
decommissioning costs for the remaining portion of Clinton through its electric
rates based on an ICC-approved formula that allows IP to adjust rates annually
for changes in decommissioning cost estimates. Illinois deregulation legislation
provides for the continued recovery of decommissioning costs from IP's delivery
customers.
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 $538 million (1996 dollars) or $969 million (2026
dollars, assuming a 2% inflation factor). Regulatory approval of this increased
decommissioning cost level was received in August 1997. This estimate is the
basis used for funding decommissioning costs through rates charged to IP's
customers and through the PCA with Soyland.
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 1997,
1996 and 1995, IP contributed $5.3 million, $3.9 million and $5.0 million,
respectively, to its external nuclear decommissioning trust funds. The balances
in these nuclear decommissioning funds at December 31, 1997 and 1996, were $62.5
million and $41.4 million, respectively. Decommissioning funds are recorded as
assets on the balance sheet. A decommissioning liability approximately
equivalent to trust assets is also recorded. IP recognizes earnings and expenses
from the trust fund as changes in its assets and liabilities relating to these
funds occur.
The 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, management
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.
Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the
permanent storage and disposal of spent nuclear fu el. The DOE currently charges
one mill ($0.001) per net kwh (one dollar per MWH) generated and sold for future
disposal of spent fuel. IP is recovering these charges through rates. In 1996,
the District of Columbia Circuit Court of Appeals issued an order, at the
request 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.
<PAGE>
Environmental Matters
Clean Air Act To comply with the SO2 emission reduction requirements of Phase I
(1995 - 1999) of the Acid Rain Program of the 1990 Clean Air Act Amendments, IP
continues to purchase emission allowances. An emission allowance is the
authorization by the U.S. EPA to emit one ton of SO2. The ICC approved IP's
Phase I Acid Rain 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 1998 and 1999 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 UFAC. See the
subcaption "Fuel Cost Recovery" above for discussion of the UFAC. 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 reduction requirements of the Acid Rain Program could
require additional actions and may result in capital expenditures and the
purchase of emission allowances.
To comply with the Phase I 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 costs for compliance; however, capital expenditures for IP's
NOx Compliance Plan are expected to be $100 million prior to the year 2000. The
majority of this investment will be directed to Baldwin Units 1 and 2 and will
occur in conjunction with replacement of the air heaters on these units.
In addition, regulators are continuing to examine potential approaches for
compliance with current federal ozone air quality standards. On November 7,
1997, the U.S. EPA proposed air pollution rules which would require substantial
reductions of NOx emissions in Illinois and 21 other states. The proposal would
require the installation of NOx controls by September 2002. This proposal is
expected to be finalized by November 1998 with Illinois utility reduction
requirements specified in 1999. Preliminary cost estimates to comply with the
proposed NOx limitations are $130 to $150 million beyond what is already needed
to comply with the NOx requirements of Phase II of the Acid Rain Program. The
legality of this proposal along with its technical feasibility is expected to be
challenged by a number of utilities and utility groups, including IP.
Global Warming On December 11, 1997, international negotiations to reduce
greenhouse gas emissions concluded with the adoption of the Kyoto Protocol. This
Protocol requires the United States to reduce greenhouse gas emissions to 7%
below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. This Protocol must be ratified by the United States
Senate. United States Senate Resolution 98 (passed 95-0) indicates the Senate
would not ratify an agreement that fails to involve all countries or would
damage the United States economy. Ratification will be a major political issue
as the Protocol does not contain key elements that Senate Resolution 98 said
would be necessary for ratification. It is anticipated that ratification will be
delayed until after 1998.
IP will face major changes in how it generates electricity if the Kyoto
Protocol is ratified, or if the Protocol's reduction goals are incorporated into
other environmental regulations. IP would have to repower some generating units
and change from coal to natural gas in other units to reduce greenhouse gas
emissions. IP estimates that compliance with these proposed regulations may
require significant capital outlays and annual operating expenses which could
have a material adverse impact on IP.
<PAGE>
Manufactured-Gas Plant IP's estimated liability for MGP site remediation is $65
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 $65 million as of December 31, 1997. 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 continue to be credited to IP's customers
through the tariff rider mechanism which the ICC previously approved.
Electric and Magnetic Fields 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 also have 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 number of
EMF cases has declined in the last few years as more national and international
science commissions have concluded that an EMF health risk has not been
established. Additional research is being conducted to attempt to resolve
continuing scientific uncertainties. On July 3, 1997, President Clinton signed
legislation extending the National EMF Research and Public Information
Dissemination Program through 1998. Research results, policy decisions and
public information developments will continue into 1999. It is too soon to tell
what, if any, impact these actions may have on IP's financial position. IP
continues its commitment to address customer and employee concerns related to
the EMF issue.
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, 1997,
72%, 17% and 11% 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. During 1997, IP increased its reserve for doubtful accounts from
$3.0 million to $5.5 million.
Contingencies
Soyland In March 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership in connection
with the transfer from Soyland to IP of all of Soyland's interest in Clinton.
The FERC approved an amended PCA in July 1997. The amended PCA obligates
Soyland to purchase all of its capacity and energy needs from IP for at least 10
years (the initial term of the PCA) and includes a provision that allows Soyland
to pay its base capacity charges in advance. The amended PCA also provides that
a contract cancellation fee will be paid by Soyland to IP in the event that a
Soyland Cooperative member terminates its membership from Soyland. In May 1997,
three distribution cooperative members terminated their membership by buying out
of their respective long-term wholesale power contracts with Soyland. As a
result, Soyland paid a fee of $20.8 million to IP in June 1997 to reduce its
future base capacity charges.
In December, 1997, Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA. The fee of approximately $70
million will be deferred and recognized as interchange revenue over the initial
term of the PCA. The payment will be contingent on Soyland obtaining the
necessary financing and regulatory approvals in 1998.
Nuclear Fuel Lease See "Note 7 - Capital Leases" for discussion of contingencies
related to IP's nuclear fuel lease.
Internal Revenue Service 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
financial position or results of operations. For a detailed discussion of income
taxes, see "Note 6 - Income Taxes."
<PAGE>
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, 1997. These lines of credit
are renewable in May 1998, August 1998 and May 2002. 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 .10% 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 the Fuel Company each have a short-term financing
option to obtain funds not to exceed $30 million. IP and the Fuel Company pay no
fees for this uncommitted facility and funding is subject to availability upon
request.
For the years 1997, 1996 and 1995, IP had short-term borrowings consisting
of bank loans, commercial paper, extendible floating rate notes and other
short-term debt outstanding at various times as follows:
(Millions of dollars, except rates) 1997 1996 1995
Short-term borrowings
at December 31, $ 376.8 $ 310.0 $ 359.6
Weighted average interest
rate at December 31, 6.0% 5.7% 6.0%
Maximum amount
outstanding
at any month end $ 376.8 $ 310.0 $ 359.6
Average daily borrowings
outstanding during
the year $ 284.4 $ 261.9 $ 306.5
Weighted average interest
rate during the year 5.8% 5.6% 6.2%
Interest rate cap agreements are used to reduce the potential impact of
increases in interest rates on floating-rate debt. IP has two variable rate
interest rate cap agreements covering up to $114.6 million of commercial paper.
These agreements entitle IP to receive from a counterparty on a quarterly 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, 1997,
the cap rates were set at 7.75% and 8.0% while the current market rate available
to IP was 5.8%.
IP also has a $50 million interest rate swap in effect through October 1998
where IP pays 5.92% and receives the LIBOR variable rate, payable quarterly.
Note 5 - Facilities Agreements
On March 13, 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership obligations in
connection with the transfer from Soyland to IP of all of Soyland's interest in
Clinton pursuant to an agreement reached in 1996. Soyland's title to the plant
and directly related assets such as nuclear fuel was transferred to IP on May 1,
1997. Soyland's nuclear decommissioning trust assets were transferred to IP on
May 19, 1997, consistent with IP's assumption of all of Soyland's ownership
obligations including those related to decommissioning.
The FERC approved an amended PCA between Soyland and IP in July 1997. The
amended PCA obligates Soyland to purchase all of its capacity and energy needs
from IP for at least 10 years. The amended PCA provides that a contract
cancellation fee will be paid by Soyland to IP in the event that a Soyland
member terminates its membership in Soyland. In May 1997, three distribution
cooperative members terminated their membership by buying out of their
respective long-term wholesale power contracts with Soyland. This action
resulted in Soyland paying a fee of $20.8 million to IP in June 1997 to reduce
its future base capacity charges. Fee proceeds of $2.9 million were used to
offset the costs of acquiring Soyland's share of Clinton with the remaining
$17.9 million recorded as interchange revenue. In December 1997, Soyland signed
a letter of intent to pay in advance the remainder of its base capacity charges
in the PCA. The fee of approximately $70 million will be deferred and recognized
as interchange revenue over the initial term of the PCA. The payment will be
contingent on Soyland obtaining the necessary financing and regulatory approvals
in 1998.
<PAGE>
Note 6 - Income Taxes
Deferred tax assets and liabilities were comprised of the following:
Balances as of December 31,
(Millions of dollars) 1997 1996
Deferred tax assets:
Current:
Misc. book/tax recognition differences $ 11.2 $ 7.7
Noncurrent:
Depreciation and other property related 46.2 42.0
Alternative minimum tax 156.8 198.5
Tax credit and net operating loss
carryforward - 32.8
Unamortized investment tax credit 116.9 120.9
Misc. book/tax recognition differences 40.3 65.8
360.2 460.0
Total deferred tax assets $ 371.4 $ 467.7
Deferred tax liabilities:
Current:
Misc. book/tax recognition differences $ .9 $ 11.3
Noncurrent:
Depreciation and other property related 1,348.0 1,350.1
Deferred Clinton costs - 58.2
Misc. book/tax recognition differences (7.1) 99.7
1,340.9 1,508.0
Total deferred tax liabilities $ 1,341.8 $ 1,519.3
Income taxes included in the Consolidated Statements of Income consist of the
following components:
Years Ended December 31,
(Millions of dollars) 1997 1996 1995
Current taxes-
Included in operating
expenses and taxes $ 72.7 $ 79.2 $ 98.6
Included in other income
and deductions (.7) (14.5) (20.3)
Total current taxes 72.0 64.7 78.3
Deferred taxes-
Included in operating
expenses and taxes
Property related differences 9.2 60.4 62.2
Alternative minimum tax 41.7 1.1 2.9
Gain/loss on reacquired debt .4 (1.6) (1.9)
Net operating loss
carryforward - - (.2)
Enhanced retirement
and severance .5 2.6 (15.0)
Misc. book/tax recognition
differences (16.7) 6.1 (13.9)
Included in other income
and deductions
Property related differences (.4) 10.2 9.7
Misc. book/tax recognition
differences 1.5 1.7 2.2
Total deferred taxes 36.2 80.5 46.0
Deferred investment
tax credit-net
Included in operating
expenses and taxes (7.3) (7.3) (6.9)
Total investment tax credit (7.3) (7.3) (6.9)
Total income taxes from
continuing operations $ 100.9 $ 137.9 $ 117.4
Income tax -
Extraordinary item
Current tax expense (17.8) - -
Deferred tax expense (100.2) - -
Total extraordinary item (118.0) - -
Total income taxes $ (17.1) $ 137.9 $ 117.4
<PAGE>
The reconciliations of income tax expense to amounts computed by applying
the statutory tax rate to reported pretax income from continuing operations for
the period are set below:
Years Ended December 31,
(Millions of dollars) 1997 1996 1995
Income tax expense at the
federal statutory tax rate $ 88.1 $ 128.3 $ 105.0
Increases/(decreases) in taxes resulting from-
State taxes,
net of federal effect 11.8 13.7 14.0
Investment tax credit
amortization (7.3) (7.3) (6.9)
Depreciation not normalized 11.3 9.4 7.4
Interest expense on
preferred securities (6.9) (6.9) (3.7)
Other-net 3.9 .7 1.6
Total income taxes from
continuing operations $ 100.9 $ 137.9 $ 117.4
Combined federal and state effective income tax rates were 40.1%, 37.6% and
39.1% for the years 1997, 1996 and 1995, respectively.
IP is subject to the provisions of the Alternative Minimum Tax System. As a
result, IP has an Alternative Minimum Tax credit carryforward at December 31,
1997, of approximately $156.8 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.
Because of the passage of HB 362, IP's electric generation business no
longer meets the criteria for application of FAS 71. As required by FAS 101,
"Regulated Enterprises - Accounting for the Discontinuation of Application of
FASB Statement No. 71", the income tax effects of the write-off of regulatory
assets and liabilities related to electric generation are reflected in the
extraordinary item for the cumulative effect of a change in accounting
principle.
Note 7 - Capital Leases
The 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 1997, 1996 and
1995 were $4 million, $35 million and $41 million, respectively, including
financing costs of $4 million, $5 million and $7 million, respectively. IP is
required to pay financing costs whether or not fuel is consumed. 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. Lease terms stipulate that in the event that Clinton is out of service
for 24 consecutive months, IP will be obligated to purchase Clinton's incore
nuclear fuel for $62 million from the Fuel Company. IP has an obligation for
nuclear fuel disposal costs of leased nuclear fuel. See "Note 3 - Commitments
and Contingencies" for discussion of decommissioning and nuclear fuel disposal
costs. Nuclear fuel lease payments are included with "Fuel for electric plants"
on IP's Consolidated Statements of Income.
At December 31, 1997 and 1996, current obligations under capital lease for
nuclear fuel are $18.7 million and $36.9 million, respectively.
Over the next five years estimated payments under capital leases are as
follows:
(Millions of dollars)
1998 $ 23.5
1999 44.3
2000 23.9
2001 21.5
2002 16.7
Thereafter 12.8
142.7
Less-Interest 16.0
Total $ 126.7
<PAGE>
Note 8 - Long-Term Debt
<TABLE>
<S> <C> <C>
(Millions of dollars)
December 31, 1997 1996
First mortgage bonds-
6 1/2% series due 1999 $ 72.0 $ 72.0
6.60% series due 2004 (Pollution Control Series A) 6.3 6.5
7.95% series due 2004 72.0 72.0
6% series due 2007 (Pollution Control Series B) 18.7 18.7
7 5/8% series due 2016 (Pollution Control Series F, G and H) - 150.0
8.30% series due 2017 (Pollution Control Series I) 33.8 33.8
7 3/8% series due 2021 (Pollution Control Series J) 84.7 84.7
8 3/4% series due 2021 57.1 57.1
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 464.3 614.5
New mortgage bonds-
6 1/8% series due 2000 40.0 40.0
5 5/8% series due 2000 110.0 110.0
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
8% series due 2023 229.0 229.0
7 1/2% series due 2025 177.0 177.0
Adjustable rate series due 2028 (Pollution Control Series M, N and O) 111.8 111.8
Adjustable rate series due 2032 (Pollution Control Series P, Q and R) 150.0 -
Total new mortgage bonds 987.8 837.8
Total mortgage bonds 1,452.1 1,452.3
Medium-term notes, series A 68.0 78.5
Variable rate long-term debt due 2017 75.0 75.0
Total other long-term debt 143.0 153.5
1,595.1 1,605.8
Unamortized discount on debt (16.8) (18.1)
Total long-term debt excluding capital lease obligations 1,578.3 1,587.7
Obligations under capital leases 126.7 96.4
1,705.0 1,684.1
Long-term debt and lease obligations maturing within one year (87.5) (47.7)
Total long-term debt $ 1,617.5 $ 1,636.4
</TABLE>
In April 1997, IP refinanced $150 million of 7 5/8% First Mortgage Bonds due
2016 as Adjustable Rate New Mortgage Bonds due 2032.
In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At
December 31, 1997, these notes had interest rates ranging from 9% to 9.31% and
will mature at various dates in 1998. Interest rates on variable rate long-term
debt due 2017 are adjusted weekly and ranged from 4.35% to 4.6% at December 31,
1997.
For the years 1998, 1999, 2000, 2001 and 2002, IP has long-term debt maturities
and cash sinking fund requirements in the aggregate of (in millions) $68.8,
$72.8, $150.8, $.8 and $.8, respectively. These amounts exclude capital lease
requirements. See "Note 7 - Capital Leases."
At December 31, 1997, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $50.4 million.
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. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The remaining balance of net bondable
additions at December 31, 1997, was approximately $1.8 billion.
<PAGE>
Note 9 - Preferred Stock
<TABLE>
<S> <C> <C>
(Millions of dollars)
December 31, 1997 1996
Serial Preferred Stock, cumulative, $50 par value-
Authorized 5,000,000 shares; 1,139,110 and 1,221,700 shares outstanding, respectively
Series Shares Redemption Prices
4.08% 283,290 $ 51.50 $ 14.1 $ 15.0
4.26% 136,000 51.50 6.8 7.5
4.70% 176,000 51.50 8.8 10.0
4.42% 134,400 51.50 6.7 7.5
4.20% 167,720 52.00 8.4 9.0
7.75% 241,700 50.00 after July 1, 2003 12.1 12.1
Net premium on preferred stock .2 .2
Total Preferred Stock, $50 par value $ 57.1 $ 61.3
Serial Preferred Stock, cumulative, without par value-
Authorized 5,000,000 shares; 0 and 698,200 shares outstanding, respectively
Series Shares Redemption Prices
A - - $ - $ 34.9
Total Preferred Stock, without par value $ - $ 34.9
Preference Stock, cumulative, without par value-
Authorized 5,000,000 shares; none outstanding - -
Total Serial Preferred Stock, Preference Stock and Preferred Securities $ 57.1 $ 96.2
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 100.0 100.0
Total Mandatorily Redeemable Preferred Stock $ 197.0 $ 197.0
</TABLE>
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. The MIPS are redeemable at the option in whole or in
part on or after October 6, 1999 with not less than 30 days and not more than 60
days notice by publication. The TOPrS mature on January 31, 2045 and may be
redeemed in whole or in part at any time on or after January 31, 2001.
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 1997 and 1996 were $.75 per share per quarter.
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 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 is a statutory business trust in which IP serves as
sponsor. IPFI issued (1996) $100 million of TOPrS at 8% (4.8% after-tax rate).
IP consolidates the accounts of IPFI.
On September 29, 1997, IP issued a notice of redemption to all holders of its
Adjustable Rate Series A Preferred Stock. All 698,200 shares outstanding were
redeemed on November 1, 1997, at the price of $50 per share. In 1997, IP
redeemed $4.2 million of various issues of Serial Preferred Stock. The carrying
amount was $.2 million over consideration paid and was recorded in equity and
included in Net income applicable to common stock.
<PAGE>
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 1997, IP repurchased 6,017,748 shares of its common stock from Illinova.
In 1996 and 1995, IP repurchased 714,811 shares and 2,696,086 shares,
respectively, 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
canceled 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 employees participate in an 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, 1997, 91,282 common shares were allocated
to salaried employees and 83,418 shares to employees covered under the
Collective Bargaining Agreement through the matching contribution feature of the
ESOP arrangement. Under the incentive compensation feature, 70,720 common shares
were allocated to employees for the year ended December 31, 1997. During 1997,
IP contributed $5.0 million to the ESOP and, using the shares allocated method,
recognized $3.3 million of expense. Interest paid on the ESOP debt was
approximately $1.3 million in 1997 and dividends used for debt service were
approximately $2.3 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 under this
plan at December 31, 1997. Of the options granted in 1992, 1993, 1994 and 1995
in the table below, 7,500, 10,500, 4,400 and 6,500 options, respectively, have
been forfeited and are not exercisable. An additional 20,000 options were
exercised in January 1998.
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 6/09/02 -
1994 82,650 $ 20 7/8 1997 6/08/03 -
1995 69,300 $ 24 7/8 1998 6/14/04 -
1996 80,500 $ 29 3/4 1999 2/07/05 -
1997 82,000 $ 26 1/8 2000 2/12/07 -
In October 1995, the FASB issued FAS 123, "Accounting for Stock-Based
Compensation" effective for fiscal years beginning after December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current period and is not envisioned to 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, 1997. Under the Restated Articles of Incorporation,
common stock dividends are subject to the preferential rights of the holders of
preferre d 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 of the benefit plans. IP is
reimbursed by the other Illinova subsidiaries for their share of the expenses of
the benefit plans. The discussion and amounts below represent the plans in
total, including the amounts attributable to the other subsidiaries.
IP has defined-benefit pension plans covering all officers and employees.
Benefits are based on years of service and compensation. IP's funding policy is
to contribute annually at least the minimum amount required by government
funding standards, but not more than can be deducted for federal income tax
purposes.
<PAGE>
Pension costs, a portion of which have been capitalized for 1997, 1996 and
1995, include the following components:
Years Ended December 31,
(Million of dollars) 1997 1996 1995
Service cost on benefits
earned during the year $ 10.1 $ 10.2 $ 10.4
Interest cost on projected
benefit obligation 27.9 26.8 23.6
Return on plan assets (95.6) (42.2) (58.3)
Net amortization and deferral 61.5 9.4 29.6
Effect of enhanced retirement
program - - 15.7
Net periodic pension cost $ 3.9 $ 4.2 $ 21.0
The estimated funded status of the plans at December 31, 1997 and 1996,
using discount rates of 7.5% and 8.0%, respectively, and future compensation
increases of 4.5% was as follows:
Balances as of December 31,
(Millions of dollars) 1997 1996
Actuarial present value of:
Vested benefit obligation $ (329.7) $ (291.7)
Accumulated benefit obligation (350.6) (312.5)
Projected benefit obligation (412.8) (361.5)
Plan assets at fair value 432.1 357.2
Funded status 19.3 (4.3)
Unrecognized net (gain)/loss (39.1) (13.8)
Unrecognized net asset at transition (26.1) (30.3)
Unrecognized prior service cost 17.4 19.3
Accrued pension cost included in
deferred credits $ (28.5) $ (29.1)
The plans' assets consist primarily of common stocks, fixed income
securities, cash equivalents, alternative investments and real estate. The
actuarial present values of accumulated plan benefits at January 1, 1997 and
1996, were $375 million and $361 million, respectively, including vested
benefits of $353 million and $337 million, respectively. The pension cost for
1997, 1996 and 1995 was calculated using a discount rate of 8.0%, 7.75% and
8.75%, respectively; future compensation increases of 4.5% for 1997, 1996 and
1995; and a return on assets of 9.5% for 1997 and 1996, and 9.0% for 1995. The
unrecognized net asset at transition and the 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 $5 million in 1997, $6 million in 1996 and $2 million in 1995.
IP provides health care and life insurance benefits to certain retired
employees, including their eligible dependents, who attain specified ages and
years of service under the terms of the defined-benefit plans. Postretirement
benefits, a portion of which have been capitalized, for 1997 and 1996 included
the following components:
Years Ended December 31,
(Millions of dollars) 1997 1996
Service cost on benefits earned
during the year $ 1.9 $ 2.2
Interest cost on projected
benefit obligation 5.9 6.1
Return on plan assets (8.0) (5.9)
Amortization of unrecognized
transition obligation 7.4 6.4
Net periodic postretirement
benefit cost $ 7.2 $ 8.8
The net periodic postretirement benefit cost in the preceding table
includes amortization of the previously unrecognized accumulated postretirement
benefit obligation, which was $41.4 million and $44.2 million as of January 1,
1997 and 1996, 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, 1997 and 1996. The estimated
funded status of the plans at December 31, 1997 and 1996, using weighted average
discount rates of 7.0% and 8.0%, respectively, and a return on assets of 9.0%,
was as follows:
Balances as of December 31,
(Millions of dollars) 1997 1996
Accumulated postretirement
benefit obligation
Current retirees $ (51.1) $ (49.6)
Current employees - fully eligible (5.5) (3.5)
Current employees - not fully eligible (32.8) (28.6)
Total benefit obligation (89.4) (81.7)
Plan assets at fair value 49.7 34.4
Funded status (39.7) (47.3)
Unrecognized transition obligation 38.7 41.4
Unrecognized net (gain)/loss (6.3) (7.1)
Accrued postretirement benefit cost
included in deferred credits $ (7.3) $ (13.0)
The pre-65 health-care-cost trend rate decreases from 7.1% to 5.5% over
nine years and the post-65 health-care-cost trend rate is level at 1.5%. A 1.0%
increase in each future year's assumed health-care-cost trend rates increases
the service and interest cost from $7.8 million to $8.7 million and the
accumulated postretirement benefit obligation from $89.4 million to $99.9
million.
<PAGE>
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>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Millions of dollars)
1997 1996 1995
Total Total Total
Electric Gas Company Electric Gas Company Electric Gas Company
Operation information -
Operating revenues $ 1,420.0 $ 353.9 $ 1,773.9 $ 1,340.5 $ 348.2 $ 1,688.7 $ 1,368.9 $ 272.5 $ 1,641.4
Operating expenses,
excluding provision
for income taxes 1,081.3 311.5 1,392.8 886.2 300.5 1,186.7 946.2 245.0 1,191.2
Pre-tax operating income 338.7 42.4 381.1 454.3 47.7 502.0 422.7 27.5 450.2
AFUDC 4.9 .1 5.0 6.3 .2 6.5 5.5 .5 6.0
Pre-tax operating income,
including AFUDC $ 343.6 $ 42.5 $ 386.1 $ 460.6 $ 47.9 $ 508.5 $ 428.2 $ 28.0 $ 456.2
Other deductions, net 5.7 9.0 8.1
Interest charges 128.7 133.0 148.0
Provision for
income taxes 100.9 137.9 117.4
Net income 150.8 228.6 182.7
Extraordinary item
(net of taxes) (195.0) - -
Preferred dividend
requirements (21.5) (22.3) (23.7)
Carrying value over
(under) consideration
paid for redeemed
preferred stock .2 (.7) (3.5)
Net income (loss) applicable
to common stock $(65.5) $205.6 $155.5
Other information -
Depreciation 171.5 $ 24.1 $ 195.6 $ 164.0 $ 22.5 $ 186.5 $ 161.4 $ 21.6 $183.0
Capital expenditures $ 201.3 $ 22.6 $ 223.9 $ 164.0 $ 23.3 $ 187.3 $ 185.7 $ 23.6 $209.3
Investment information -
Identifiable assets* $4,508.1 $ 453.8 4,961.9 $ 4,577.1 $ 481.9 $ 5,059.0 $ 4,580.4 $ 446.3 $5,026.7
Nonutility plant and
other investments 5.7 14.3 16.2
Assets utilized for
overall operations 323.9 495.2 524.3
Total assets $5,291.5 $5,568.5 $5,567.2
</TABLE>
<PAGE>
Note 13 - Fair Value of Financial Instruments
1997 1996
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
Nuclear decommissioning
trust funds $ 62.5 $ 62.5 $ 41.4 $ 41.4
Cash and cash equivalents 17.8 17.8 12.5 12.5
Mandatorily redeemable
preferred stock 197.0 202.7 197.0 199.3
Long-term debt 1,578.3 1,627.6 1,587.7 1,629.3
Notes payable 376.8 376.8 310.0 310.0
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 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,
as advised by IP's bankers.
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>
<S> <C> <C> <C> <C>
(Millions of dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1997 1997 1997
Operating revenues $ 472.8 $ 415.3 $ 497.1 $ 388.7
Operating income 88.9 82.6 101.8 5.4
Net income (loss) before extraordinary item 55.0 51.4 71.9 (27.5)
Net income (loss) after extraordinary item 55.0 51.4 71.9 (222.5)
Net income (loss) applicable to common stock 49.5 46.0 67.5 (228.5)
Cash dividends declared on common stock 23.5 23.2 22.2 22.2
Cash dividends paid on common stock 23.5 23.5 23.2 22.2
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
</TABLE>
<PAGE>
Illinois Power Company
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
(Millions of dollars)
1997 1996 1995 1994 1993 1987
Operating revenues
Electric $ 1,244.4 $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 1,135.6 $ 910.8
Electric interchange 175.6 137.6 116.3 110.0 130.8 92.4
Gas 353.9 348.2 272.5 302.0 314.8 308.7
Total operating revenues $1,773.9 $1,688.7 $ 1,641.4 $ 1,589.5 $ 1,581.2 $ 1,311.9
Extraordinary item net of income tax benefit $ (195.0) $ - $ - $ - $ - $ -
Net income (loss) after extraordinary item $ (44.2) $ 228.6 $ 182.7 $ 180.3 $ (56.1) $ 289.6
Effective income tax rate 40.1% 37.6% 39.1% 38.4% (72.4)% 19.1%
Net income (loss) applicable to common stock $ (65.5) $ 205.6 $ 155.5 $ 161.8 $ (82.2) $ 251.9
Cash dividends declared on common stock $ 91.1 $ 87.1 $ 77.9 $ 49.1 $ 30.2 $ 178.5
Cash dividends paid on common stock 92.4 84.8 75.3 60.5 60.5 176.2
Total assets $ 5,291.5 $ 5,568.5 $ 5,567.2 $ 5,595.8 $ 5,445.1 $ 5,922.7
Capitalization
Common stock equity $ 1,299.1 $ 1,576.1 $ 1,478.1 $ 1,466.0 $ 1,342.8 $ 1,841.4
Preferred stock 57.1 96.2 125.6 224.7 303.7 315.2
Mandatorily redeemable
preferred stock 197.0 197.0 97.0 133.0 48.0 160.0
Long-term debt 1,617.5 1,636.4 1,739.3 1,946.1 1,926.3 2,279.2
Total capitalization $3,170.7 $3,505.7 $ 3,440.0 $ 3,769.8 $ 3,620.8 $ 4,595.8
Retained earnings (deficit) $ 89.5 $ 245.9 $ 129.6 $ 51.1 $ (71.0) $ 554.8
Capital expenditures $ 223.9 $ 187.3 $ 209.3 $ 193.7 $ 277.7 $ 263.5
Cash flows from operations $ 418.7 $ 443.3 $ 473.7 $ 280.2 $ 396.6 $ 232.3
AFUDC as a percent of earnings
applicable to common stock (7.6)% 3.2% 3.9% 5.7% N/A 80.2%
Ratio of earnings to fixed charges 1.24 3.40 2.77 2.73 .80 2.51
</TABLE>
<PAGE>
Illinois Power Company
SELECTED STATISTICS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993 1987
Electric Sales in KWH (Millions)
Residential 4,734 4,782 4,754 4,537 4,546 4,241
Commercial 3,943 3,894 3,804 3,517 3,246 2,862
Industrial 8,403 8,493 8,670 8,685 8,120 7,323
Other 426 367 367 536 337 910
Sales to ultimate consumers 17,506 17,536 17,595 17,275 16,249 15,336
Interchange 7,230 5,454 4,444 4,837 6,015 3,682
Wheeling 3,253 928 642 622 569 -
Total electric sales 27,989 23,918 22,681 22,734 22,833 19,018
Electric Revenues (Millions)
Residential 489 $ 483 $ 500 $ 471 $ 463 $ 352
Commercial 325 318 321 295 269 209
Industrial 376 360 392 378 360 325
Other 40 38 37 30 40 25
Revenues from ultimate consumers 1,230 1,199 1,250 1,174 1,132 911
Interchange 176 138 116 110 131 92
Wheeling 14 4 3 3 3 -
Total electric revenues $1,420 $ 1,341 $ 1,369 $ 1,287 $ 1,266 $ 1,003
Gas Sales in Therms (Millions)
Residential $ 343 427 356 359 371 332
Commercial 147 177 144 144 148 137
Industrial 47 99 88 81 78 96
Sales to ultimate consumers 537 703 588 584 597 565
Transportation of customer-owned gas 309 251 273 262 229 327
Total gas sold and transported 846 954 861 846 826 892
Interdepartmental sales 19 9 21 5 7 5
Total gas delivered 865 963 882 851 833 897
Gas Revenues (Millions)
Residential $ 238 $ 216 $ 173 $ 192 $ 200 $ 192
Commercial 77 79 60 66 68 66
Industrial 20 40 24 31 34 34
Revenues from ultimate consumers 335 335 257 289 302 292
Transportation of customer-owned gas 9 7 8 9 8 15
Miscellaneous 10 6 7 4 5 2
Total gas revenues $ 354 $ 348 $ 272 $ 302 $ 315 $ 309
System peak demand (native load) in kw (thousands) 3,532 3,492 3,667 3,395 3,415 3,083
Firm peak demand (native load) in kw (thousands) 3,469 3,381 3,576 3,232 3,254 2,923
Net generating capability in kw (thousands) 3,289 4,148 3,862 4,121 4,045 3,400
Electric customers (end of year) 580,257 549,957 529,966 553,869 554,270 542,848
Gas customers (end of year) 405,710 389,223 374,299 388,170 394,379 384,091
Employees (end of year) 3,655 3,635 3,559 4,350 4,540 4,616
</TABLE>
500 south 27th street, decatur, illinois 62521 n http://www.illinova.com
unlocking the power 1997
This entire report is printed on recycled paper
Exhibit 21(a)
Subsidiaries of Illinova Corporation and Illinois Power Company
State or Jurisdiction
Name of Incorporation
- ---- ---------------------
Illinova Corporation Illinois
Illinois Power Company Illinois
IP Gas Supply Company Illinois
Illinois Power Fuel Company (1) Illinois
Illinois Power Capital, L.P. (2) Delaware
Illinois Power Financing I Delaware
Illinova Generating Company Illinois
Electric Energy, Inc. (3) Illinois
Illinova Resource Recovery, Inc.
(formerly IPG Canfield Co.) Illinois
IGC Krishnapatnam Company
(formerly IPG Dominguez Co.) Illinois
IPG Eastern, Inc. Illinois
IPG Ferndale, Inc. Illinois
IPG Frederickson, Inc. Illinois
IGC Solutions, Inc.
(formerly IPG LAP Cogen, Inc.) Illinois
IGC Grimes Frontier, Inc.
(formerly IPG Panorama Co.) Illinois
IPG Paris, Inc. Illinois
IPG Western, Inc. Illinois
IGC Acquisition Co.
(formerly IPG Aztec Co.) Illinois
IGC Brazos, Inc. Illinois
IGC Development Company Illinois
IGC International, Inc. Cayman Islands
IGC Grimes County, Inc.
(formerly IGC Sub Co., Inc.) Illinois
White Oak Energy Investors, Inc. Illinois
ECI Energy, Ltd. (4) Delaware
North American Energy Services Co. (5) Washington
IGC ELCO Partnership, LLC (6) Cayman Islands
IGC Jamaica Partnership, LLC (7) Cayman Islands
IGC International II, Inc. Cayman Islands
IGC Flores Partnership, LLC (8) Cayman Islands
IGC Flores Partnership II, LLC (9) Cayman Islands
FIG Leasing International, Inc. (10) Cayman Islands
FIG Leasing International III, Inc. (11) Cayman Islands
FIG Equipment, LLC (12) Cayman Islands
IGC Aguaytia Partners, LLC (13) Cayman Islands
IGC Mauritius Holding Company
(formerly IGC-ABC Shanghai Co.)(14) Mauritius
Illinova ZJ XC Company (15) Mauritius
IGC Mauritius International Company (16) Mauritius
IGC Uch, LLC (17) Cayman Islands
Operaciones de Arequipa, LLC (18) Cayman Islands
Tenaska-Illinova Generating Inter-
national, LLC (19) Cayman Islands
Fuerza Electrica de Latinoamerica,LLC (20) Cayman Islands
IGC (Encoe), LLC Cayman Islands
IGC Vietnam Development, Inc. Cayman Islands
IGC STI Guna Company (21) Mauritius
COE (UK) Corp. (22) Connecticut
COE (Gencoe) Corp. (23) Connecticut
<PAGE>
Charter Oak (Paris), Inc. (24) Connecticut
Illinova Energy Partners, Inc. Delaware
Tenaska Marketing Ventures (25) Nebraska
Illinova Insurance Company Vermont
(1) Illinois Power Company owns 50% of the common stock of Illinois Power Fuel
Company.
(2) Illinois Power Company is the general partner in Illinois Power Capital,
L.P., with a 3% equity ownership share. Illinois Power Capital is
consolidated in the accounts of Illinois Power Company.
(3) Illinova Generating Company owns 20% of the common stock of EEI.
(4) Illinova Generating Company owns 47.5% of the voting common stock of ECI
Energy, Ltd.
(5) Illinova Generating Company owns 50% of the common stock of North American
Energy Services Company.
(6) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of IGC ELCO
Partnership, LLC.
(7) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of IGC Jamaica
Partnership, LLC.
(8) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of IGC Flores
Partnership, LLC.
(9) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of IGC Flores
Partnership II, LLC.
(10) IGC Flores Partnership, LLC (a subsidiary of IGC International, Inc. and
IGC International II, Inc.) owns 51% of the common stock of FIG Leasing
International, LLC.
(11) IGC Flores Partnership, LLC (a subsidiary of IGC International, Inc. and
IGC International II, Inc.) owns 51% of the common stock of FIG Leasing
International III, Inc.
(12) IGC Flores Partnership, LLC (a subsidiary of IGC International, Inc. and
IGC International II, Inc.) owns 50% of the common stock of FIG Equipment,
LLC.
(13) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of IGC Aguaytia
Partners, LLC.
(14) IGC International II, Inc. (a wholly-owned subsidiary of Illinova
Generating Company) owns 100% of the equity of IGC Mauritius Holding
Company Ltd.
<PAGE>
(15) IGC International II, Inc. (a wholly-owned subsidiary of Illinova
Generating Company) owns 100% of the equity of Illinova ZJ XC Company.
(16) IGC International II, Inc. (a wholly-owned subsidiary of Illinova
Generating Company) owns 100% of the equity of IGC Mauritius International
Company.
(17) IGC International II, Inc. (a wholly-owned subsidiary of Illinova
Generating Company) owns 99% and IGC International, Inc. (a wholly-owned
subsidiary of Illinova Generating Company) owns 1% of the common stock of
IGC Uch, LLC.
(18) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of Operaciones
de Arequipa, LLC.
(19) IGC Uch, LLC (a subsidiary of IGC International, Inc. and IGC International
II, Inc.)owns 50% of the voting common stock of Tenaska-Illinova Generating
International, LLC.
(20) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of Illinova Generating Company) owns 1% of the common stock of Fuerza
Electrica de Latinoamerica, LLC.
(21) IGC International II, Inc. (a wholly-owned subsidiary of Illinova
Generating Company) owns 100% the equity IGC STI Guna Company.
(22) IGC (Encoe), LLC (a wholly-owned subsidiary of Illinova Generating Company)
owns 79.9% and COE (Gencoe) Corp. (owned 49% by IGC (Encoe), LLC) owns
20.1% of the common stock of COE (UK) Corp.
(23) IGC (Encoe), LLC (a wholly-owned subsidiary of Illinova Generating Company)
owns 49% of the common stock of COE (Gencoe) Corp.
(24) IPG Paris, Inc. (a wholly-owned subsidiary of Illinova Generating Company)
owns 100% of the common stock of Charter Oak (Paris), Inc.
(25) Illinova Energy Partners, Inc. owns 50% of the equity of Tenaska Marketing
Ventures.
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-22068), the Registration Statement on Form S-8
(No. 33-60278), the Registration Statement on Form S-8 (No. 33-66124), the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-25699), the Prospectus constituting part of the Registration Statement on
Form S-3 (No. 333-03011), and the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-17847) of our report dated February
12, 1998, appearing on page A-10 of the Annual Report to Shareholders in the
Appendix to the Illinova Corporation Proxy Statement which is incorporated in
this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
March 10, 1998
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
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ILLINOIS POWER COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE BALANCE SHEET,INCOME STATEMENT AND CASH FLOW STATEMENT OF
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