-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PPSIf4PJ2CUszrEbQIzaOU/ru/4NkF9I2LuQoybdXzV9NGrMy4w42eYZlgqrDHjP OYEv+8gksm73UrWwJyJ8dA== 0000049816-95-000007.txt : 19950615 0000049816-95-000007.hdr.sgml : 19950615 ACCESSION NUMBER: 0000049816-95-000007 CONFORMED SUBMISSION TYPE: DEF 14C PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950313 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS POWER CO CENTRAL INDEX KEY: 0000049816 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370344645 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14C SEC ACT: 1934 Act SEC FILE NUMBER: 001-03004 FILM NUMBER: 95520472 BUSINESS ADDRESS: STREET 1: 500 S 27TH ST STREET 2: C/O HARRIS TRUST & SAVINGS BANK CITY: DECATUR STATE: IL ZIP: 62525-1805 BUSINESS PHONE: 2174246600 FORMER COMPANY: FORMER CONFORMED NAME: ILLINOIS IOWA POWER CO DATE OF NAME CHANGE: 19660822 DEF 14C 1 ILLINOIS POWER COMPANY INFORMATION STATEMENT AND 1994 ANNUAL REPORT TO SHAREHOLDERS notice of annual meeting of shareholders - ---------------------------------------- Table of Contents Notice of Annual Meeting . . . . . . . . . . . . . . 2 Information Statement . . . . . . . . . . . . . . . 3 Appendix: 1994 Annual Report to Shareholders . . . . . . . . . A-1 TO THE SHAREHOLDERS OF ILLINOIS POWER COMPANY: Notice is Hereby Given that the Annual Meeting of Shareholders of Illinois Power Company (the "Company") will be held on April 12, 1995, at 10:00 A.M., at its Corporate Headquarters, 500 South 27th Street, Decatur, Illinois 62525- 1805, for the following purposes: (1) To elect the Board of Directors for the ensuing year. (2) To transact any other business which may properly come before the meeting or any adjournment. Shareholders of record at the close of business on February 13, 1995, will be entitled to notice of and to vote at the Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, Vice President, General Counsel and Corporate Secretary Decatur, Illinois March 15, 1995 IMPORTANT Only shareholders of the Company are entitled to attend the Annual Meeting. Shareholders will be admitted upon verification of record share ownership at the admission desk. Shareholders who own shares through banks, brokerage firms, nominees or other account custodians must present proof of beneficial share ownership (such as a brokerage account statement) at the admission desk. information statement (pursuant to Section 14(c) of the Securities Exchange Act of 1934) - -------------------------------------------------------- March 15, 1995 (Date first sent or given to security holders) WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. This Information Statement is furnished in connection with the Annual Meeting of Shareholders of Illinois Power. The Annual Meeting will be held on April 12, 1995, at 10:00 A.M., at the Company's corporate headquarters, 500 South 27th Street, Decatur, Illinois 62525-1805, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. On February 13, 1995 ("Record Date"), Illinova Corporation ("Illinova") beneficially owned all of the 75,643,937 shares of the Company's Common Stock then outstanding and there were 4,718,365 shares of the Company's Preferred Stock then outstanding, none of which was held by Illinova. VOTING RIGHTS Shareholders of record at the close of business on the Record Date will be entitled to receive notice of and to vote at the Annual Meeting. Shareholders who are present at the Annual Meeting will be entitled to one vote for each share of the Company's Stock which they held of record at the close of business on the Record Date. When voting for candidates nominated to serve as directors, all shareholders will be entitled to 12 votes (the number of directors to be elected) for each of their shares and may cast all of their votes for any one candidate whose name has been placed in nomination prior to the voting or distribute their votes among two or more such candidates in such proportions as they may determine. In voting upon other matters presented for consideration at the Annual Meeting, each shareholder will be entitled to one vote for each share of Stock held of record at the close of business on the Record Date. ANNUAL REPORT AND INFORMATION STATEMENT Accompanying this Information Statement, which includes Consolidated Financial Statements, is a Notice of Annual Meeting of Shareholders and the Summary Annual Report to Shareholders covering operations of Illinova for the year 1994. This Information Statement and accompanying documents are first being mailed to shareholders on or about March 15, 1995. BOARD OF DIRECTORS Information Regarding the Board of Directors The Board of Directors held six Board meetings in 1994. Other than Mr. Vannoy, all directors attended at least 75% of the aggregate meetings of the Board and Committees of which they were members during 1994. The Board has two standing committees: the Audit Committee and the Nuclear Operations Committee. The duties and members of the standing committees are: Audit Committee (1) Review with the Chairman, President and Chief Executive Officer and the independent accountants the scope and adequacy of the Company's system of internal controls; (2) review the scope and results of the annual examination performed by the independent accountants; (3) review the activities of the Company's internal auditors; (4) report its findings to the Board and provide a line of communication between the Board and both the internal auditors and the independent accountants; and (5) recommend to the Board the appointment of the independent accountants and approval of the services performed by the independent accountants, considering their independence with regard thereto. The Audit Committee met three times in 1994. This Committee consists of the following non-employee directors ("Outside Directors"): Vernon K. Zimmerman, Chairman, Richard R. Berry, Donald E. Lasater, Robert M. Powers, Walter M. Vannoy, and Marilou von Ferstel. Nuclear Operations Committee (1) Review the safety, reliability and quality of nuclear operations; (2) review the effectiveness of the management of nuclear operations; (3) review the strategic plan of nuclear operations; and (4) report its findings to the Board. The Nuclear Operations Committee met three times during 1994. This Committee consists of the following members of the Board: Walter M. Vannoy, Chairman, Richard R. Berry, Larry D. Haab, Donald E. Lasater, Charles W. Wells, and Vernon K. Zimmerman. Board Compensation The Outside Directors of the Company, who also serve on the Board of Illinova, receive a retainer fee of $18,000 per year. Outside Directors who also chair Board committees receive an additional $2,000 per year retainer. Outside Directors receive a grant of 600 shares of Illinova Common Stock on the date of each Annual Shareholders Meeting, representing payment in lieu of attendance-based fees for all Board and Committee meetings to be held during the subsequent one-year period. Outside Directors elected to the Board between Annual Shareholders Meetings are paid $850 for each Board and Committee meeting attended prior to the first Annual Shareholders Meeting after their election to the Board. Illinova has a Retirement Plan for Outside Directors. Under this plan, each Outside Director who has attained age 65 and has served on the Board for a period of 60 or more consecutive months is eligible for annual retirement benefits at the rate of the annual retainer fee in effect when the director retires. These benefits, at the discretion of the Board, may be extended to Outside Directors who have attained the age of 65 but not served on the Board for the specified period. The benefits are payable for a number of months equal to the number of months of Board service, subject to a maximum of 120 months, and cease upon the death of the retired Outside Director. Pursuant to a Deferred Compensation Plan for Certain Directors, Outside Directors of the Company may elect to defer all or any portion of their fees until termination of their services as a director. Such deferred dollar amounts are converted into stock units representing shares of Illinova Common Stock with the value of each stock unit based upon the closing price of such stock at the end of each calendar quarter. Additional credits are made to the participating director's account in dollar amounts equal to the dividends paid on the Common Stock which the director would have received if the director had been the record owner of the shares represented by stock units, and are converted into additional stock units. Upon termination of a participating director's services as a director, payment of the deferred fees is made in shares of Illinova Common Stock in an amount equal to the aggregate number of stock units credited to his or her account. Such payment is made in such number of annual installments as Illinova may determine beginning in the year following the year of termination. ELECTION OF DIRECTORS The Company's entire Board of Directors is elected at each Annual Meeting of Shareholders. Directors hold office until the next Annual Meeting of Shareholders and until their successors are elected and qualified. At the Annual Meeting a vote will be taken on a proposal to elect the 12 directors nominated by the Company's Board of Directors. The names and certain additional information concerning each of the director nominees is set forth below. Each of the director nominees is currently a director of the Company. If any nominee should become unable to serve as a director, another nominee may be selected by the current Board of Directors. Year in Which First Elected Name of Director Nominee, Age, a Director of Business Experience and Other Information the Company - ------------------------------------------------------------ Richard R. Berry, 63 1988 Prior to retirement in February 1990, Mr. Berry was Executive Vice President and director of Olin Corporation, Stamford, Connecticut, a diversified manufacturer concentrated in chemicals, metals and aerospace/defense products, since June 1983. Larry D. Haab, 57 1986 Chairman, President and Chief Executive Officer of Illinois Power since June 1991, and an employee of Illinois Power since 1965. He is a director of First Decatur Bancshares, Inc., The First National Bank of Decatur and Firstech, Incorporated. Donald E. Lasater, 69 1981 Prior to retirement in April 1989, Mr. Lasater was Chairman of the Board and Chief Executive Officer of Mercantile Bancorporation, Inc., St. Louis, Missouri, a bank holding company, since 1970. He is a director of Interco Incorporated, General American Life Insurance Company and A.P. Green Industries, Inc. Donald S. Perkins, 67 1988 Prior to retirement in June 1983, as Chairman of the Executive Committee, Mr. Perkins was Chairman of the Board and Chief Executive Officer of Jewel Companies, Inc., Chicago, Illinois, a diversified retailer, from 1970 to 1980. He is Chairman of the Board and a director of Kmart Corporation and a director of AT&T, Aon Corporation, Cummins Engine Company, Inc., Inland Steel Industries, Inc., LaSalle Street Fund, Inc., The Putnam Funds, and Time Warner, Inc. Robert M. Powers, 63 1984 Prior to retirement in December 1988, Mr. Powers was President and Chief Executive Officer of A. E. Staley Manufacturing Company, Decatur, Illinois, a processor of grain and oil seeds, since 1980. He is Chairman of the Board and a director of A. E. Staley Manufacturing Company, and a director of Tate & Lyle, PLC. Walter D. Scott, 63 1990 Professor of Management and Senior Austin Fellow, J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois, since 1988. Previously, Mr. Scott served as Chairman of GrandMet USA, from 1984 to 1986, and as President and Chief Executive Officer of IDS Financial Services, from 1980 to 1984. Mr. Scott is a director of Chicago Title and Trust Company, Chicago Title Insurance Company, Intermatic Incorporated, and Orval Kent Food Company, Inc. Ronald L. Thompson, 45 1991 Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing Co., Bowling Green, Ohio, a manufacturer of automotive parts, since 1993. He was President and Chief Executive Officer and a director of The GR Group, Inc., St. Louis, Missouri a diversified holding company with interests in manufacturing and service activities, from 1980 to 1993. He is Chairman of the Board of The GR Group and a director of McDonnell Douglas Corporation. Walter M. Vannoy, 67 1990 Chairman of the Board and a director of Figgie International, Inc., a diversified operating company serving consumer, industrial, technical, and service markets world-wide, Willoughby, Ohio, since 1994. He is a director of Chempower, Inc. Marilou von Ferstel, 57 1990 Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a public relations firm in Chicago, Illinois, since June 1990. She had previously been Managing Director and Senior Vice President of Hill and Knowlton, Chicago, Illinois, a public relations consulting firm, from May 1981 to June 1990. Ms. von Ferstel is a director of Walgreen Company. Charles W. Wells, 60 1976 Executive Vice President of Illinois Power Company since 1976. Mr. Wells has been an employee of Illinois Power since 1956. He was elected a Vice President in 1972. He is a director of First of America Decatur N.A. John D. Zeglis, 47 1993 Senior Vice President, General Counsel and Government Affairs of AT&T, Basking Ridge, New Jersey, a diversified communications company, since 1989. He had been Senior Vice President and General Counsel from 1986 to 1989. He is a director of the Helmerich & Payne Corporation. Vernon K. Zimmerman, 66 1973 Director of the Center for International Education Research and Accounting, and Distinguished Service Professor of Accountancy, University of Illinois, Urbana, Illinois, since August 1985. He is a director of First Busey Corporation and Southwestern Life Corporation. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table shows shares of Illinova Common Stock and Illinois Power Preferred Stock beneficially owned as of January 25, 1995, by each director nominee and the executive officers named in the Summary Executive Compensation Table. All owners of more than five percent of Illinois Power Preferred Stock are also listed.
Number of Shares Name of Class Beneficially Percent Beneficial Owner of Stock Owned (1) of Class - ---------------------------------------------------------------- Richard R. Berry Common 2,802 (2) Larry D. Haab Common 9,647 (2) Donald E. Lasater Common 3,313 (2) Donald S. Perkins Common 7,353 (2) Robert M. Powers Common 6,600 (2) Preferred 1,200 Walter D. Scott Common 3,200 (2) Ronald L. Thompson Common 2,391 (2) Walter M. Vannoy Common 2,700 (2) Marilou von Ferstel Common 3,353 (2) Charles W. Wells Common 8,157 (2) John D. Zeglis Common 1,659 (2) Vernon K. Zimmerman Common 7,432 (2) Paul L. Lang Common 2,587 (2) Larry F. Altenbaumer Common 3,642 (2) Larry S. Brodsky Common 1,534 (2) American Express Company (3)Preferred 233,245 16.7%
(1) The nature of beneficial ownership for shares shown is sole voting and/or investment power, except for Mr. Powers and Mr. Wells, who disclaim beneficial ownership of 1,200 shares of Illinois Power Preferred Stock and 1,000 shares of Illinova Common Stock, respectively, held in the names of their wives. (2) Except as indicated above, no director or any executive officer owns any other equity securities of the Company. No director or executive officer owns as much as 1% of Illinova Common Stock. All directors and executive officers of both Illinova and Illinois Power as a group own 75,791 shares of Illinova Common Stock (less than 1%). (3) According to its Form 4 filing, American Express Company, American Express Tower, World Financial Center, New York, NY 10285, and its subsidiaries owned 233,245 shares of Preferred Stock, without par value, as of October 25, 1994, as to which beneficial ownership is disclaimed, with sole power to vote and dispose of all shares. EXECUTIVE COMPENSATION The following table sets forth a summary of the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of the Company for the years indicated. The compensation shown includes all compensation paid for service to the Company, its parent and subsidiaries. Summary Compensation Table
Long Term Compensation ----------------------------------------- Annual Compensation Awards Payouts ----------------------------- ---------------------- -------- Restricted Other Stock Securities LTIP All Other Bonus Annual Awards Underlying Payouts Compensation Name and Principal Position Year Salary (1) Compensation (2) Options (3) (4) - ------------------------------------------------------------------------------------------------------------ Larry D. Haab 1994 $451,375 $42,881 $15,783 $42,881 20,900 shs. $22,869 $3,578 Chairman, President and 1993 437,500 22,531 13,199 20,000 shs. 3,555 Chief Executive Officer of1992 403,958 28,883 7,099 16,000 shs. 3,373 Illinova and Illinois Power Charles W. Wells 1994 $276,625 $25,242 $12,404 $25,242 8,500 shs. $15,152 $5,533 Executive Vice President 1993 265,875 12,629 9,697 6,500 shs 5,341 of Illinois Power 1992 252,500 16,160 7,034 6,000 shs. 5,129 Paul L. Lang 1994 $213,562 $20,289 $ 8,672 $20,289 6,800 shs. $11,036 $ 543 Senior Vice President 1993 205,625 9,767 7,508 6,000shs. 527 of Illinois Power 1992 188,667 13,490 4,472 5,000 shs. 536 Larry F. Altenbaumer 1994 $196,562 $18,674 $8,975 $18,674 6,800 shs. $ 9,519 $2,007 Chief Financial Officer, 1993 187,750 8,918 7,093 6,000 shs. 2,009 Treasurer and Controller 1992 166,500 10,656 3,588 5,000 shs. 1,867 of Illinova and Senior Vice President and Chief Financial Officer of Illinois Power Larry S. Brodsky 1994 $174,186 $16,548 $4,973 $16,548 4,400 shs. $ 8,766 $1,587 Senior Vice President 1993 157,875 8,131 4,220 4,500 shs. 1,527 of Illinois Power 1992 146,791 9,395 3,676 3,000 shs. 1,508
(1) The amounts shown in this column are the cash award portion of grants made to these individuals under the Executive Incentive Compensation Plan ("Compensation Plan"), including amounts deferred under the Executive Deferred Compensation Plan. See the Compensation Plan description in footnote (2) below. (2) This table sets forth stock unit awards under the Company's Compensation Plan. One-half of each year's award under this plan is converted into stock units representing shares of Illinova Common Stock based on its closing price on the last trading day of the award year. The other one-half of the award is paid to the recipient in cash in the following year and is included under Bonus in the Summary Compensation Table. Stock units awarded in a given year, together with cash representing the accumulated dividend equivalents on those stock units, become fully vested after a three-year holding period. Stock units are converted into cash and paid based on the closing price of Illinova Common Stock on the first trading day of the distribution year. Participants (or beneficiaries of deceased participants) whose employment is terminated by retirement on or after age 55, disability or death receive the present value of all unpaid awards on the date of such termination. Participants whose employment is terminated for reasons other than retirement, disability or death forfeit all unvested awards. In the event of a termination of employment within two years after a change in control of the Company, without good cause or by any participant with good reason, all awards of the participant become fully vested and payable. As of December 31, 1994, named executive officers were credited with the following total aggregate number of unvested stock units under the Compensation Plan, valued on the basis of the closing price of Illinova Common Stock on December 31, 1994: Mr. Haab, 4,427 units valued at $96,713; Mr. Wells, 2,535 units valued at $55,384; Mr. Lang, 2,044 units valued at $44,653; Mr. Altenbaumer, 1,792 units valued at $39,157; Mr. Brodsky, 1,596 units valued at $34,880. Although stock units have been rounded, valuation is based on total stock units, including partial shares. (3) The amounts shown in this column reflect the cash value of the stock units granted in 1992 for the year 1991, including amounts deferred, under the Compensation Plan. See the compensation Plan description in footnote (2) above. (4) The amounts shown in this column are the Company's contributions under the Incentive Savings Plan (including the market value of shares of Illinova Common Stock at the time of allocation). The following tables summarize grants during 1994 of stock options under Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC Plan") and awards outstanding at year end for the individuals named in the Summary Compensation Table. No options were exercisable or exercised during 1994. OPTION GRANTS IN 1994 Individual Grants -------------------------------------
Number % of of Securities Total Options Exercise Grant Underlying Granted to or Base Date Options Employees Price Expiration Present Granted(1) in 1994 Per Share(1) Date Value(2) --------------------------------------------------------- Larry D. Haab 20,900 25% $20.875 6/8/2003 $158,500 Charles W. Wells 8,500 10 20.875 6/8/2003 64,100 Paul L. Lang 6,800 8 20.875 6/8/2003 51,500 Larry F. Altenbaumer 6,800 8 20.875 6/8/2003 51,500 Larry S. Brodsky 4,400 5 20.875 6/8/2003 33,300
(1) Each option becomes exercisable on June 30, 1997. In addition to the specified expiration date, the grant expires on the first anniversary of the recipient's death and/or the 90th day following retirement, and is not exercisable in the event a recipient's employment terminates. In the event of certain change- in-control circumstances, the Compensation and Nominating Committee may declare the option immediately exercisable. The exercise price of each option is equal to the fair market value of Illinova Common Stock on the date of the grant. (2) The Grant Date Present Value has been calculated using the Black-Scholes option pricing model. Disclosure of the Grant Date Present Value, using the Black-Scholes model or potential realizable value assuming 5% and 10% annualized growth rates, is mandated by SEC rules; however, the Company and Illinova do not necessarily view the Black-Scholes pricing methodology, or any other present methodology, as a valid or accurate means of valuing stock option grants. Illinova elected to use the standard Black-Scholes model, which uses the following factors: fair market value of share at grant; option exercise price; term of the option; current yield of the stock; risk-free interest rate; volatility of the stock. The fair market value of the stock on June 8, 1994, was $20.875; the exercise price of the options is $20.875; and the term of the option is 10 years. The annual dividend yield on Illinova Common Stock was 3.623%. The risk-free interest rate used was 7.50%, based on the yield of a zero-coupon government bond maturing at the end of the option term. The volatility of the stock used was 0.1975. AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at Fiscal Year-End at Fiscal Year-End Name Exercisable/Unexercisable Exercisable/Unexercisable - ----------------------------------------------------------------- Larry D. Haab 0 shs./56,900 shs. 0/20,168 Charles W. Wells 0 shs./21,000 shs. 0/8,202 Paul L. Lang 0 shs./17,800 shs. 0/6,562 Larry F. Altenbaumer 0 shs./17,800 shs. 0/6,562 Larry S. Brodsky 0 shs./11,900 shs. 0/4,246
PENSION BENEFITS The Company maintains a Retirement Income Plan for Salaried Employees (the "Retirement Plan") providing pension benefits for all eligible salaried employees. In addition to the Retirement Plan, the Company also maintains a nonqualified Supplemental Retirement Income Plan for Salaried Employees of the Company (the "Supplemental Plan") that covers all elected officers eligible to participate in the Retirement Plan and provides for payments from the general funds of Illinois Power of any monthly retirement income not payable under the Retirement Plan because of benefit limits imposed by law or because of certain Retirement Plan rules limiting the amount of credited service accrued by a participant. The following table shows the estimated annual pension benefits on a straight life annuity basis payable upon retirement based on specified annual average earnings and years of credited service classifications, assuming continuation of the Retirement Plan and Supplemental Plan and employment until age 65. This table does not show, but any actual pension benefit payments would be subject to, the Social Security offset. ESTIMATED ANNUAL BENEFITS (ROUNDED)
Annual Average 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs. Earnings Service Service Service Service Service - ------------------------------------------------------------ $125,000 $37,500 $50,000 $62,500 $75,000 $87,500 150,000 45,000 60,000 75,000 90,000 105,000 175,000 52,500 70,000 87,500 105,000 122,500 200,000 60,000 80,000 100,000 120,000 140,000 250,000 75,000 100,000 125,000 150,000 175,000 300,000 90,000 120,000 150,000 180,000 210,000 350,000 105,000 140,000 175,000 210,000 245,000 400,000 120,000 160,000 200,000 240,000 280,000 450,000 135,000 180,000 225,000 270,000 315,000 500,000 150,000 200,000 250,000 300,000 350,000 550,000 165,000 220,000 275,000 330,000 385,000 600,000 180,000 240,000 300,000 360,000 420,000 650,000 195,000 260,000 325,000 390,000 455,000
The earnings used in determining pension benefits under the Retirement Plan are the participants' regular base compensation, as set forth under Salary in the Summary Compensation Table. At December 31, 1994, for purposes of both the Retirement Plan and the Supplemental Plan, Messrs. Haab, Wells, Lang, Altenbaumer, and Brodsky had completed 29, 31, 8, 22, and 20 years of credited service, respectively. EMPLOYEE RETENTION AGREEMENTS The Company has entered into Employee Retention Agreements with each of its executive officers. Under each of these agreements, the officer would be entitled to receive a lump sum cash payment if his or her employment were terminated by the Company without good cause or voluntarily by the officer for good reason within two years following a change in control of Illinova Corporation (as defined in the Agreement). The amount of the lump sum payment would be equal to (1) 36 months' salary at the greater of the officer's salary rate in effect on the date the change in control occurred or the salary rate in effect on the date the officer's employment with the Company terminated; plus (2) three times the largest bonus earned by the officer during the three calendar years preceding termination of employment. Under the agreement, the officer would continue, after any such termination of employment, to participate in and receive benefits under other benefit plans of the Company. Such coverage would continue for 36 months following termination of employment, or, if earlier, until the officer reached age 65 or was employed by another employer; provided that, if the officer was 50 years of age or older at the time of such termination, then coverage under health, life insurance and similar welfare plans would continue until the officer became 55 years of age, at which time he or she would be eligible to receive the type of coverage extended to the employees of the Company who elect early retirement. COMPENSATION AND NOMINATING COMMITTEE REPORT ON OFFICER COMPENSATION The six-member Compensation and Nominating Committee of the Illinova Board of Directors (the "Committee") is composed entirely of Outside Directors. The Committee's role includes a review of the performance of the elected officers and the establishment of specific officer salaries subject to Board approval. The Committee establishes performance goals for the officers under the Compensation Plan, approves payments made pursuant to the Compensation Plan and recommends grants under the Long-Term Incentive Compensation Plan approved by the shareholders in 1992. The Committee also reviews other forms of compensation and benefits making recommendations to the Board on changes whenever appropriate. The Committee carries out these responsibilities with assistance from an executive compensation consulting firm and with input from the Chief Executive Officer and management as it deems appropriate. Officer Compensation Philosophy The Company's compensation philosophy reflects a commitment to compensate officers competitively with other companies in the electric and gas utility industry while rewarding executives for achieving levels of operational excellence and financial returns consistent with continuous improvement in customer satisfaction and shareholder value. The Company's compensation policy is to provide a total compensation opportunity equal to a peer group of comparable electric utility companies. One-third of the companies in the compensation group are included in the S&P Utilities Index. The S&P index covers the utility industry, broadly including electric, gas, and telecommunications utilities. After careful consideration, the Committee has decided to maintain a separate peer group limited to electric or combination electric and gas companies for compensation purposes. The compensation program for officers consists of base salary, annual incentive and long-term incentive components. The combination of these three elements balances short- and long-term business performance goals and aligns officer financial rewards with those of the shareholders. The compensation program is structured so that, depending on the salary level, between 25 and 35 percent of an officer's total compensation opportunity is composed of incentive compensation. Base Salary Plan The Committee determines base salary ranges for executive officers based upon competitive pay practices. Officer salaries correspond to approximately the average of the companies in the compensation peer group. Individual increases were based on several factors including the officer's performance during the year and the relationship of the officer's salary to the market salary level for the position. Executive Incentive Compensation Plan The Board of Directors established this Compensation Plan for the Company's officers in 1989. Annual incentive awards are earned based on the achievement of specific annual financial and operational goals by the officer group as a whole and consideration of the officer's individual contribution. If payment is earned under this Compensation Plan, one-half of the bonus is payable in cash during the year following the award year and one-half is credited to the participant in the form of Illinova Common Stock units, the number of which is determined by dividing half of the earned bonus amount by the closing price of Illinova Common Stock on the last trading day of the award year. The officer's interest in the stock units vests at the end of the three-year period which begins the year after the award year. The officer receives this award in cash equal to (1) the closing stock price on the first trading day of the distribution year times the number of units held plus (2) dividend equivalents that would have been received if the stock had actually been issued. For 1994, awards under the Compensation Plan are based on achievement in the performance areas: earnings per share, customer satisfaction, employee teamwork, cost management, and operating effectiveness. Based on an assessment of performance relative to the standard set for each goal, each officer is eligible for the same percentage of base salary. However, 15 percent of the awarded amount is based on an assessment of the individual officer's performance during the year. Awards shown under Bonus in the Summary Compensation Table for performance during 1994 were based on the following results. Earnings per share and operating effectiveness (as measured by power plant availability) were better than the threshold level for the award. Customer satisfaction was at the threshold target level. Employee teamwork did not result in an award. Cost management was better than the maximum level for the award. Long-Term Incentive Compensation Plan In 1992, the Board of Directors adopted and the Company's shareholders approved the LTIC Plan. The initial grant of stock options was made in that year. Awards under the LTIC Plan are made to individual officers based on their contribution to corporate performance based on the review of this Committee. The Committee may grant awards in the form of stock options, stock appreciation rights, or restricted stock grants. The stock option grants for the officers named in the Summary Compensation Table were based on Illinova's philosophy of providing a total compensation opportunity consistent with the practices and levels of the compensation peer group. The shares granted to the officers for 1994 represent a long-term incentive award based on Illinova, the Company and individual performance as evaluated by the Chairman and reviewed by the Committee. CEO Compensation Larry Haab became Chairman, President and Chief Executive Officer ("CEO") of the Company on June 12, 1991, and Chairman, President and Chief Executive Officer of Illinova in December 1993. Mr. Haab's 1994 compensation was based on the policies and plans described above. The Committee invokes the active participation of all Outside Directors in reviewing Mr. Haab's performance before it makes recommendations regarding his compensation. The Committee is responsible for administering the processes for completing this review. The process starts early in the year when the Board of Directors works with Mr. Haab to establish his personal goals and short- and long-term strategic goals for Illinova and the Company. At the conclusion of the year Mr. Haab reviews his performance with the Outside Directors. The Committee oversees this review and recommends to the Board appropriate adjustments to compensation. For 1994 the Committee, with the participation of all Outside Directors, determined that almost all goals were achieved and that the results for Illinova and the Company for the year were excellent. They concluded that his performance continued to lead Illinova and the Company to the accomplishment of their strategic objectives. The 1994 Compensation Plan award for the CEO was calculated consistent with the determination of awards for all other officers. Under the terms of the plan, one-half of the award was paid in cash and one-half was converted to 1,963 stock units which vest over a three-year period as described above. The 20,900 option shares granted to the CEO reflect the Committee's recognition of his work in directing Illinova and the Company toward their long-term objectives of outstanding customer satisfaction and sustained growth in shareholder return. Compensation and Nominating Committee Donald S. Perkins, Chairman Robert M. Powers Walter D. Scott Ronald L. Thompson Marilou von Ferstel John D. Zeglis COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires executive officers and directors, and persons who beneficially own more than ten percent (10%) of the Company's equity securities registered under the Exchange Act to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission ("SEC"). Executive officers, directors and greater than 10 percent beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company and written representations from the executive officers and directors, the Company believes that all Section 16(a) filing requirements applicable to its executive officers and directors were complied with during 1994. INDEPENDENT AUDITORS The Board of Directors of the Company has selected Price Waterhouse LLP as independent auditors for the Company for 1995. A representative of that firm will be present at the Annual Meeting and available to make a statement and to respond to appropriate questions. OTHER MATTERS Illinova's 1994 Summary Annual Report to Shareholders was mailed to the Company's shareholders commencing on March 15, 1995. Copies of the Company's Annual Report on Form 10-K will be provided to shareholders, after the filing thereof with the SEC on or before March 31, 1995. Requests should be addressed to Investor Relations, G-21, Illinois Power Company, 500 South 27th Street, Decatur, Illinois 62525-1805. Any proposal by a shareholder to be presented at the next Annual Meeting must be received at the Company's executive offices not later than October 31, 1995. OTHER BUSINESS Management does not know of any matter which will be presented for consideration at the Annual Meeting other than the matters described in the accompanying Notice of Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner Vice President, General Counsel and Corporate Secretary Decatur, Illinois March 15, 1995 Illinois Power Company appendix: 1994 annual report to shareholders - -------------------------------------------- TABLE OF CONTENTS Management's Discussion and Analysis . . . . . . . . . . . A-2 Responsibility for Information . . . . . . . . . . . . . A-10 Report of Independent Accountants . . . . . . . . . . . . A-10 Consolidated Statements of Income . . . . . . . . . . . . A-11 Consolidated Balance Sheets . . . . . . . . . . . . . . . A-12 Consolidated Statements of Cash Flows . . . . . . . . . . A-13 Consolidated Statements of Retained Earnings (Deficit) . . A-13 Notes to Consolidated Financial Statements . . . . . . . . A-14 Selected Consolidated Financial Data . . . . . . . . . . . A-32 Selected Statistics . . . . . . . . . . . . . . . . . . . A-33 management's discussion and analysis - ------------------------------------ In this report, we make reference to the Consolidated Financial Statements, related Notes to Consolidated Financial Statements, Selected Consolidated Financial Data and Selected Statistics for information concerning consolidated financial position and results of operations. The factors having significant impact upon consolidated financial position and consolidated results of operations since January 1, 1992, are discussed below. Illinois Power Company (IP) is a subsidiary of Illinova Corporation (Illinova), a holding company. Illinova was officially formed on May 27, 1994, with the filing of documents with the Illinois Secretary of State. Illinova became the parent of IP through a merger pursuant to a share-for-share conversion of IP common stock into Illinova common stock. On June 8, 1994, Illinova Generating Company (formerly IP Group, Inc.), originally a subsidiary of IP, was transferred to Illinova, establishing Illinova Generating Company as a wholly owned subsidiary of Illinova. IP is the primary business and subsidiary of Illinova, and is engaged in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the State of Illinois. COMPETITION Competition has become a dominant issue for the electric utility industry. Competition has been promoted by federal legislation, starting with the Public Utility Regulatory Policy Act of 1978, which facilitated the development of co-generators and independent power producers, and continuing with enactment of the Energy Policy Act of 1992 which authorized the Federal Energy Regulatory Commission (FERC) to mandate wholesale wheeling of electricity by utilities at the request of certain authorized generating entities and electric service providers. Wheeling is the transport of electricity generated by one entity over transmission and distribution lines belonging to another entity. For many years prior to enactment of the Energy Policy Act, the FERC imposed wholesale wheeling obligations as a condition of approving mergers and granting operating privileges, a practice that continues. Competition arises not only from co-generation or independent power production, but from municipalities seeking to extend their service boundaries to include customers being served by IP. This is not a new risk in the industry, as the right of municipalities to have power wheeled to them by utilities was established in 1973. The Illinois Commerce Commission (ICC) has been supportive of IP's attempts to maintain its customer base through approval of special contracts and flexible pricing that help IP to compete with existing municipal providers. Further competition may be introduced by state action or by further federal regulatory action. While the Energy Policy Act precludes the FERC from mandating retail wheeling, state regulators and legislators could open utility franchise territories to full competition at the retail level. Retail wheeling involves the transport of electricity to end-use residential, commercial or industrial customers. Such a change would be a significant departure from existing regulation in which public utilities have a universal obligation to serve the public in return for relatively protected service territories and regulated pricing designed to allow a reasonable return on prudent investment and recovery of operating costs. State attempts to lay the groundwork for retail wheeling have been hampered by opposition from various interest groups, as well as the complexity of related issues, including recovery of costs associated with pre-existing generation investment. While IP is confident of its present ability to compete with all current alternate sources of energy supply, the issue of competition is one that raises both risks and opportunities. At this time, the ultimate effect of competition on consolidated financial position and results of operations is uncertain. See "Note 1 - Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" for additional discussion of the effects of regulation. OPEN ACCESS AND WHEELING Under the Energy Policy Act, an investor-owned utility must respond to any bona fide transmission service request within 60 days. Although the Energy Policy Act created, for the first time, a FERC-administered mechanism for imposing wholesale wheeling obligations on utilities, IP has had the obligation to wheel power for interconnected electricity suppliers since 1976. That condition was included in IP's Clinton Power Station (Clinton) construction permit and operating license issued by the Nuclear Regulatory Commission. IP currently wheels power at rates originally approved by the FERC in 1984. Illinova Power Marketing, Inc. (IPM) is a wholly owned subsidiary of Illinova formed in July 1994. IPM plans to become active in the business of brokering and marketing electric power to various customers. In accordance with FERC standards, IPM's affiliated utility must file an open access transmission tariff offering transmission services and prices comparable to those which the utility provides to its customers. IP plans to submit the comparable open access transmission tariff, designed to satisfy the FERC's "comparability" requirements, to the FERC during the first quarter of 1995. It is too soon to predict the long-term financial impact of increasing transmission access and other issues arising from such access. EARLY RETIREMENT In December 1994, IP announced plans for a voluntary early retirement program. Approximately 200 salaried employees would qualify for early retirement under this program. The offer will be made to employees during the fourth quarter of 1995. A similar program for union employees is the subject of contract negotiations currently underway between IP and the International Brotherhood of Electrical Workers. Approximately 450 union employees would qualify for the program if current negotiations result in the same package as offered to salaried employees. At December 31, 1994, IP employed 4,350 people, as compared to 4,540 at December 31, 1993. The early retirement program for salaried employees is expected to generate a pre-tax charge of approximately $22 million against fourth quarter 1995 earnings and to generate savings of approximately $15 million annually beginning in 1996. A combined early retirement program for both salaried and union employees, based on the same package as announced for salaried employees, would generate a pre-tax charge of approximately $42 million against fourth quarter 1995 earnings and would generate savings of approximately $35 million annually beginning in 1996. CONSOLIDATED RESULTS OF OPERATIONS Overview Net income (loss) applicable to common stock was $162 million for 1994, $(82) million for 1993 and $93 million for 1992. The 1994 results include $6.4 million for the excess of carrying amount over consideration paid for preferred stock redeemed in December 1994. The 1994 results also reflect an increase in gas rates as a result of IP's 1994 gas rate order, increased electric sales, lower operating and maintenance expenses due to on-going cost management efforts, no Clinton refueling and maintenance outage and lower financing costs. In 1993, net income applicable to common stock was $118 million, excluding the September 1993 write-off of disallowed Clinton post- construction costs of $200 million, net of income taxes. The 1993 net income before the write-off reflects increased electric and gas sales due to closer-to-normal temperatures, increased interchange sales, lower operating and maintenance expenses and lower interest expense as a result of a continued refinancing program. The 1992 net income was primarily due to the February 1992 increase in electric rates of 9.2%, which was modified in August 1992, resulting in a net increase of 7.2%. Additionally, in 1992 IP reduced its interest expense by retiring and refinancing certain long-term debt and lowered its electric depreciation expense as a result of new depreciation rates approved in the 1992 electric rate case order. IP operating revenues are based on rates authorized by the ICC and the FERC. These rates are designed to recover the cost of service and to allow shareholders a fair rate of return as determined by the ICC and the FERC. Future electric and natural gas sales, including interchange sales, will continue to be affected by an increasingly competitive marketplace, changes in the regulatory environment, increased transmission access, weather conditions, competing fuel sources, interchange market conditions, plant availability, fuel cost recoveries, customer and IP conservation efforts and the overall economy. [GRAPH APPEARS HERE] OPERATING REVENUES (in millions of dollars)
Year Revenue Amount - ---- -------------- 1994 1589.5 1993 1581.2 1992 1479.5 1991 1474.9 1990 1469.5
ELECTRIC OPERATIONS - For the years 1992 through 1994, electric revenues including interchange increased 8.1% and the gross electric margin increased 5.5% as follows: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Electric revenues $1,177.5 $1,135.6 $1,117.9 Interchange revenues 110.0 130.8 73.0 Fuel cost & power purchased (319.2) (313.6) (272.8) - ----------------------------------------------------------------- Electric margin $ 968.3 $ 952.8 $ 918.1 ================================================================= The components of annual changes in electric revenues are summarized as follows: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Price $(23.2) $(30.0) $ 71.2 Volume and other 44.1 72.1 (45.8) Fuel cost recoveries 21.0 (24.4) (8.7) - ----------------------------------------------------------------- Revenue increase $ 41.9 $ 17.7 $ 16.7 ================================================================= From 1995 through 1999 electric sales excluding interchange are expected to increase approximately 2% per year. 1994 - The 3.7% increase in electric revenues was primarily due to a 6.3% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher commercial sales (8.3%) and higher industrial sales (7.0%) due to an improving economy. Residential sales remained essentially unchanged from 1993 primarily due to milder temperatures in 1994 as compared to 1993. Interchange sales decreased 19.6% primarily due to unusually large sales opportunities during 1993. 1993 - The 1.6% increase in electric revenues was primarily due to a 3.2% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling) reflecting closer-to- normal temperatures during the summer season. Volume increases resulted from higher residential sales (9.9%), commercial sales (6.3%), and industrial sales (.5%). The increase in electric revenues was partially offset by the reduction in rates resulting from the August 1992 ICC Rehearing Order. Interchange revenues increased $57.8 million (79.2%) primarily as a result of increased sales opportunities. 1992 - The 1.5% increase in electric revenues was primarily due to the 9.2% rate increase in February 1992, which was modified in August 1992, resulting in a net increase of 7.2%, partially offset by decreased usage due to unusually mild weather. Total kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling) decreased 2.1%. The decreases in residential sales (10.4%) and commercial sales (1.8%) were due to unusually cool summer and mild winter temperatures as compared to a warmer summer and colder winter during 1991. Industrial sales increased 5.8% due to higher usage by several of IP's larger customers. The 14.7% decrease in interchange revenues in 1992 as compared to 1991 was attributable to milder weather. [GRAPH APPEARS HERE] MAJOR SOURCES OF ELECTRIC ENERGY (in millions of MWH)
Year Fossil Nuclear Purchases - ----------------------------------------------------------------- 1994 13.2 6.4 3.1 1993 13.1 5.1 5.1 1992 13.5 4.3 1.6 - -----------------------------------------------------------------
The cost of meeting IP's system requirements was reflected in fuel costs for electric plants and power purchased. Changes in these costs are summarized as follows: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Fuel for electric plants Volume and other $ 13.8 $ 3.5 $(17.4) Price (14.3) 7.4 (7.9) Fuel cost recoveries 32.0 (24.6) 7.5 - ----------------------------------------------------------------- 31.5 (13.7) (17.8) Power purchased (25.9) 54.5 (.7) - ----------------------------------------------------------------- Total increase (decrease) $ 5.6 $40.8 $(18.5) ================================================================= Weighted average system generating fuel cost ($/MWH) $12.72 $13.88 $13.77 ================================================================= Changes in these costs were caused by system load requirements, generating unit availability, fuel prices, purchased power prices, resale of energy to other utilities and fuel cost recovery through the Uniform Fuel Adjustment Clause. [GRAPH APPEARS HERE] Equivalent Availability -- Clinton and Fossil
Year Clinton Fossil - ----------------------------------------------------------------- 1994 92% 78% 1993 73% 85% 1992 62% 82% 1991 76% 81% 1990 47% 76% - -----------------------------------------------------------------
Changes in factors affecting the cost of fuel for electric generation are summarized as follows: - ----------------------------------------------------------------- 1994 1993 1992 - ----------------------------------------------------------------- Increase (decrease) in generation 8.2% 2.5% (7.0%) Generation mix Coal and other 67% 72% 75% Nuclear 33% 28% 25% ================================================================= 1994 - The cost of fuel increased 13.4% and electric generation increased 8.2%. The increase in fuel cost was attributable to the effects of the Uniform Fuel Adjustment Clause, partially offset by a decrease in fossil generation and an increase in lower-cost nuclear generation. Clinton's equivalent availability and generation were higher in 1994 as compared to 1993 due to no refueling and maintenance outage. Clinton's next refueling and maintenance outage is scheduled to begin in March 1995. Power purchased for the period decreased $25.9 million. Unusually large interchange sales opportunities during 1993, not recurring in 1994, were the primary cause of the decrease in purchased power. [GRAPH APPEARS HERE] FUEL COST PER MILLION BTU (percent of generation)
Fuel Type Cost Percent - ---------------------------------------------------------------- Coal $1.42 66.2% Nuclear .85 33.3 Gas 3.06 .2 Oil 3.89 .3 - ----------------------------------------------------------------
1993 - The cost of fuel decreased 5.5%, while electric generation increased 2.5%. The decrease in fuel cost was attributable to the effects of the Uniform Fuel Adjustment Clause and lower generation at IP's largest fossil plant. This decrease was partially offset by an increase in transportation costs due to flooding in the Midwest and the United Mine Workers' Strike. Power purchased for the period increased $54.5 million. Coal delivery concerns and coal conservation measures stemming from the United Mine Workers' Strike, combined with favorable interchange prices and increased sales opportunities, contributed to IP's increase in purchased power. Clinton returned to service December 10, 1993, after completing its fourth refueling and maintenance outage which began September 26, 1993. 1992 - The cost of fuel decreased 6.7% and electric generation decreased at fossil plants as a result of mild weather and a credit refund from one coal supplier, partially offset by the effects of the Uniform Fuel Adjustment Clause. The credit refund resulted from a price reduction arrived at through arbitration under the applicable coal supply contract. Clinton returned to service June 1, 1992, after completing a refueling and maintenance outage that began February 27, 1992. GAS OPERATIONS - For the years 1992 through 1994, gas revenues, including transportation, increased 4.6% and the gross margin on gas revenues increased 11.1% as follows: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Gas revenues $ 293.2 $ 306.8 $ 281.8 Gas cost (172.4) (187.3) (171.9) Transportation revenues 8.8 8.0 6.8 - ----------------------------------------------------------------- Gas margin $ 129.6 $ 127.5 $ 116.7 ================================================================= (Millions of therms) Therms sold 584 597 613 Therms transported 262 229 204 - ----------------------------------------------------------------- Total consumption 846 826 817 ================================================================= Changes in the cost of gas purchased for resale are summarized as follows: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Gas purchased for resale Cost (excluding take-or-pay) $ (6.4) $13.3 $ 1.0 Take-or-pay costs 2.8 5.3 (16.0) Volume (13.6) (3.4) 16.5 Gas cost recoveries 2.3 .2 2.6 - ----------------------------------------------------------------- Total increase (decrease) $(14.9) $15.4 $ 4.1 ================================================================= Average cost per therm delivered .261 .275 .260 ================================================================= The 1994 decrease in the cost of gas purchased was primarily due to lower natural gas prices, the expanded use of additional gas storage and a decrease in therms purchased. Also contributing to the higher gas margin in 1994 was the 6.1% increase in gas base rates approved by the ICC in April 1994. The 1993 increase in the cost of gas purchased was primarily due to an increase in the price of purchased gas and take-or-pay costs. From 1995 through 1999, gas sales including therms transported are expected to remain close to 1994 levels. Other Expenses and Taxes. A comparison of significant increases (decreases) in other expenses and deferred Clinton costs for the last three years is presented in the following table: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Other operating expenses $(9.2) $(2.1) $17.9 Maintenance (11.2) (1.3) 14.9 Depreciation and amortization 12.2 7.9 (15.5) Deferred Clinton costs (5.8) (1.9) - ================================================================= The decrease in operating and maintenance expenses for 1994 is due to ongoing re-engineering efforts, improved operating efficiencies at IP's fossil plants and at Clinton and no refueling and maintenance outage at Clinton. The decrease in operating and maintenance expenses for 1993 is primarily due to decreased costs at Clinton, partially offset by increased fossil plant maintenance. The Clinton refueling and maintenance outage and higher administration and general expenses contributed to the increase in other operating and maintenance expenses in 1992. The 1994 increase in depreciation expense is due primarily to a higher utility plant balance in 1994 as compared to 1993. The 1993 increase in depreciation expense is due principally to the effects of the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." See "Note 1 - Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" for additional information. The 1992 decrease in depreciation expense reflects the reduction of the non-Clinton electric plant composite rate approved in the 1992 rate order. Deferred Clinton costs decreased in 1994 and 1993 as a result of the September 1993 write-off of disallowed Clinton post-construction costs. [GRAPH APPEARS HERE] OPERATING AND MAINTENANCE EXPENSES (in millions of dollars)
Year Dollars - ----------------------------------------------------------------- 1994 349.6 1993 370.0 1992 373.4 1991 340.6 1990 365.6 - -----------------------------------------------------------------
OTHER INCOME AND DEDUCTIONS - Total allowance for funds used during construction (AFUDC), a non-cash item of income, increased in 1994 compared to 1993 and 1992. The 1994 increase was due to higher construction work-in-progress balances eligible for AFUDC, partially offset by a lower AFUDC rate. The AFUDC effective rate was 7.0%, 7.5% and 7.5% in 1994, 1993 and 1992, respectively. The 1994 increase in Miscellaneous-net deductions was primarily due to a decrease in allocated income taxes. INTEREST CHARGES - Total interest charges decreased $21.0 million in 1994, $3.7 million in 1993 and $12.3 million in 1992. These decreases were primarily due to the refinancing with lower cost debt or the retirement of debt from 1992 through 1994. From 1992 to 1994, IP retired or refinanced approximately $1.5 billion of long-term debt, excluding revolving loan agreements, with a weighted average interest rate of 9.27%. During this time, approximately $1.4 billion of new debt was issued at a weighted- average interest rate of 6.97%. INFLATION - Inflation, as measured by the Consumer Price Index, was 2.5%, 3.1% and 3.0% in 1994, 1993 and 1992, respectively. The primary effect of inflation on IP is that historical rather than current plant costs are recovered in IP's rates. LIQUIDITY AND CAPITAL RESOURCES Regulatory Matters 1994 GAS RATE ORDER - On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's natural gas base rates. The increase will be partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Concurrent with the gas rate increase, IP's gas utility plant composite depreciation rate decreased to 3.4%. FERC ORDER 636 - Pursuant to Orders 636 and 636-A, issued in April and August 1992, respectively, the FERC approved amendments to its rules that are intended to increase competition among natural gas suppliers by "unbundling" the interstate pipelines' merchant sales service into separate sales and transportation services and by mandating that the pipelines' firm transportation service be comparable to the transportation service included in their traditional bundled sales service. As a result of Orders 636 and 636-A, the pipelines are charging their customers "transition" costs, which arise from unbundling services. IP estimates that approximately $10.5 million in transition costs will be incurred. In 1993, IP began to pay transition costs billed by gas pipelines and to recover these payments through a tariff rider. On September 23, 1994, the ICC issued a final order approving recovery of Order 636 transition costs. Dividends On October 12, 1994, the Board of Directors of Illinois Power increased the common stock dividend 25 percent, declaring the common stock dividend for the first quarter of 1995 at 25 cents per share, payable February 1, 1995, to shareholders of record as of January 10, 1995. On December 14, 1994, IP declared preferred stock dividends for the first quarter of 1995, payable February 1, 1995, to shareholders of record as of January 10, 1995. Capital Resources and Requirements IP needs cash for operating expenses, interest and dividend payments, debt and IP preferred stock retirements and construction programs. To meet these needs, IP has used internally generated funds and external financings including the issuance of preferred stock, debt and revolving lines of credit. The timing and amount of external financings depend primarily upon economic and financial market conditions, cash needs and capitalization ratio objectives. To a significant degree, the availability and cost of external financing depend upon the financial health of the company seeking those funds. Short-term debt is used to meet temporary cash needs for operations or to meet capital requirements until the timing is considered appropriate to issue long-term securities. Cash flow from operations during 1994 provided sufficient working capital to meet ongoing operating requirements, to service existing common and preferred stock dividends and debt requirements and a substantial portion of construction requirements. Additionally, IP expects current revenues will enable it to meet future operating requirements and continue to service its existing debt, preferred and common stock dividends, sinking fund requirements and all of its anticipated construction requirements. The current ratings of securities by two principal securities rating agencies are as follows: - ----------------------------------------------------------------- Standard Moody's & Poor's - ----------------------------------------------------------------- IP first/new mortgage bonds Baa2 BBB IP preferred stock baa3 BBB- IP commercial paper P-2 A-2 ================================================================= These ratings are an indication of IP's financial position and may affect the cost of securities, as well as the willingness of investors to invest in securities. Under current market conditions, these ratings are unlikely to impair IP's ability to issue or significantly increase the cost of issuing additional securities through external financing. IP has adequate short-term and intermediate-term bank borrowing capacity. In 1993, Standard and Poor's (S&P) published revised standards for review of utility business and financial risks, based in part on a subjective evaluation of such factors as anticipated growth in service territory, industrial sales as a proportion of total revenues, regulatory environment and nuclear plant ownership. S&P's preliminary assessment placed IP, along with approximately one-third of the industry, in the "below average" category. On April 13, 1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. This action came after S&P reviewed IP's specific business position in light of the revised standards. In February 1994, IP redeemed $12 million of mandatorily redeemable serial preferred stock and issued $35.6 million of First Mortgage Bonds, 5.7% Series due 2024 (Pollution Control Series K). In May, the proceeds of the debt issuance were used to retire $35.6 million of First Mortgage Bonds, 11 5/8% Series due 2014 (Pollution Control Series D). In August 1994, $100 million of 8 1/2% debt securities were retired. Illinois Power Capital, L.P., (IP Capital), is a limited partnership in which IP serves as a general partner. IP Capital issued $97 million of tax-advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-tax rate) in October 1994. The proceeds were loaned to IP and were used to redeem $79.1 million (principal value) of higher-cost outstanding preferred stock of IP. The excess of carrying amount of redeemed preferred stock over consideration paid amounted to $6.4 million which was recorded in equity and included in net income applicable to common stock. See "Note 9 - Preferred Stock" of the "Notes to Consolidated Financial Statements" for additional information. In December 1994, IP issued $84.1 million of First Mortgage Bonds, 7.4% Series due 2024 (Pollution Control Series L). In March 1995, the proceeds of the debt issuance will be used to retire $84.1 million First Mortgage Bonds, 10 3/4% Series due 2015 (Pollution Control Series E). See "Note 8 - Long-Term Debt" of the "Notes to Consolidated Financial Statements" for additional information. For the years 1994, 1993 and 1992, changes in long-term debt and preferred stock outstanding, including normal maturities and elective redemptions, were as follows: - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Bonds $ (10) $ 35 $(21) Other long-term debt (100) - (66) Preferred stock 6 (51) (10) - ----------------------------------------------------------------- Total decrease $(104) $(16) $(97) ================================================================= In February 1995, 1994, 1993 and 1992, IP redeemed $12 million of mandatorily redeemable 8% serial preferred stock. The amounts shown in the preceding table for debt retirements do not include all mortgage sinking fund requirements. IP has generally met these requirements by pledging property additions as permitted under the 1943 mortgage. For additional information, see "Note 8 - Long-Term Debt" and "Note 9 - Preferred Stock" of the "Notes to Consolidated Financial Statements." See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for information related to coal and gas purchases, nuclear fuel commitments and emission allowance purchases. In 1992, the IP Board authorized a new general obligation mortgage (New Mortgage), which is intended to replace IP's 1943 Mortgage and Deed of Trust (First Mortgage). Bonds issued under the New Mortgage are secured by a corresponding issue of First Mortgage bonds under the First Mortgage. At December 31, 1994, based upon the most restrictive earnings test contained in the First Mortgage, IP could issue approximately $691 million of additional first mortgage bonds for other than refunding purposes. The amount of available unsecured borrowing capacity totaled $160 million at December 31, 1994. Also at December 31, 1994, the unused portion of IP bank lines of credit was $250 million. As of December 31, 1994, IP has $120 million of unissued debt securities and $56.5 million of unissued preferred stock authorized by the Securities and Exchange Commission in September 1993 and August 1993, respectively. IP has filed a petition with the ICC seeking approval of a program whereby IP will reacquire shares of its common stock from Illinova, from time to time, at prices determined to be equivalent to current market value. The reacquired stock will be retained as treasury stock or cancelled. IP expects to receive ICC approval, and to implement the program, in the first quarter of 1995. Construction expenditures for the years 1992 through 1994 were approximately $715.8 million, including $21.7 million of AFUDC. IP estimates that $1.13 billion will be required for construction and capital requirements during the 1995-99 period as follows: - ----------------------------------------------------------------- Five-Year Period - ----------------------------------------------------------------- (Millions of dollars) 1995 1995-1999 - ----------------------------------------------------------------- Construction requirements Electric generating facilities $82 $246 Electric transmission and distribution facilities 70 296 General plant 28 112 Gas facilities 24 121 - ----------------------------------------------------------------- Total construction requirements 204 775 Nuclear fuel 11 107 Debt retirements - 214 Preferred stock retirements 12 36 - ----------------------------------------------------------------- Total $227 $1,132 ================================================================= Construction and capital requirements are expected to be met primarily through internal cash generation. The expenditures in the preceding table do not include any capital expenditures for compliance with the Clean Air Act. See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information. Environmental Matters See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of the Clean Air Act and manufactured-gas plant sites. Tax and Accounting Matters IP is subject to the Alternative Minimum Tax (AMT) provisions of the Internal Revenue Code. As a result, in 1994, 1993 and 1992, federal income tax liabilities were approximately $51 million, $27 million and $23 million, respectively, greater than they would have been had IP not been subject to AMT. As of December 31, 1994, IP had approximately $187 million of AMT credit carryforwards that can be carried forward indefinitely. This credit is available to offset regular tax liabilities in excess of the tentative minimum tax. In 1994, IP continued to utilize a portion of its tax net operating loss carryforward. As of December 31, 1994, the balance of the tax net operating loss carryforward was approximately $25 million. In October 1994, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 119, "Disclosures About Derivative Financial Instruments and Fair Value of Financial Instruments" (FAS 119). FAS 119 requires expanded disclosure in the consolidated financial statements beginning with the year ended December 31, 1994. responsibility for information - ------------------- The consolidated financial statements and all information in this annual report are the responsibility of management. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. In the opinion of management, the consolidated financial statements fairly reflect IPOs financial position, results of operations and cash flows. IP believes that the accounting and internal accounting control systems are maintained so that these systems provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing the consolidated financial statements. The consolidated financial statements have been audited by IP's independent accountants, Price Waterhouse LLP, in accordance with generally accepted auditing standards. Such standards include the evaluation of internal accounting controls to establish a basis for developing the scope of the examination of the consolidated financial statements. In addition to the use of independent accountants, IP maintains a professional staff of internal auditors who conduct financial, procedural and special audits. To assure their independence, both Price Waterhouse LLP and the internal auditors have direct access to the Audit Committee of the Board of Directors. The Audit Committee is composed of members of the Board of Directors who are not active or retired employees of IP. The Audit Committee meets with Price Waterhouse LLP and the internal auditors and makes recommendations to the Board of Directors concerning the appointment of the independent accountants and services to be performed. Additionally, the Audit Committee meets with Price Waterhouse LLP to discuss the results of their annual audit, IPOs internal accounting controls and financial reporting matters. The Audit Committee meets with the internal auditors to assess the internal audit work performed, including tests of internal accounting controls. /S/Larry D. Haab /s/Larry F. Altenbaumer - ------------------- ------------------------ Larry D. Haab Larry F. Altenbaumer Chairman, President Senior Vice President and Chief Executive Officer and Chief Financial Officer report of independent accountants - --------------------------------- PRICE WATERHOUSE LLP To the Board of Directors of Illinois Power Company In our opinion, the consolidated financial statements of Illinois Power Company and its subsidiaries appearing on pages A- 11 through A-31 of this report present fairly, in all material respects, the financial position of Illinois Power Company and its subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/Price Waterhouse LLP - ----------------------------- Price Waterhouse LLP St. Louis, Missouri February 1, 1995 consolidated statements of income - ---------------------------------
(Millions of dollars - ----------------------------------------------------------------- For the Years Ended December 31, 1994 1993 1992 OPERATING REVENUES Electric $1,177.5 $1,135.6 $1,117.9 Electric interchange 110.0 130.8 73.0 Gas 302.0 314.8 288.6 - ----------------------------------------------------------------- Total 1,589.5 1,581.2 1,479.5 - ----------------------------------------------------------------- OPERATING EXPENSES AND TAXES Fuel for electric plants 266.6 235.1 248.8 Power purchased 52.6 78.5 24.0 Gas purchased for resale 172.4 187.3 171.9 Other operating expenses 260.0 269.2 271.3 Maintenance 89.6 100.8 102.1 Depreciation and amortization 175.8 163.6 155.7 General taxes 130.3 125.6 122.2 Deferred Clinton costs 3.5 9.3 11.2 Income taxes 118.3 106.5 86.2 - ----------------------------------------------------------------- Total 1,269.1 1,275.9 1,193.4 - ----------------------------------------------------------------- Operating income 320.4 305.3 286.1 - ----------------------------------------------------------------- OTHER INCOME AND DEDUCTIONS Allowance for equity funds used during construction 3.8 2.7 1.5 Disallowed Clinton costs - (271.0) - Income tax effects of disallowed costs - 70.6 - Miscellaneous-net (5.5) (3.3) (.6) - ----------------------------------------------------------------- Total (1.7) (201.0) .9 - ----------------------------------------------------------------- Income before interest charges 318.7 104.3 287.0 - ----------------------------------------------------------------- INTEREST CHARGES Interest on long-term debt 135.1 154.1 160.8 Other interest charges 8.8 10.8 7.8 Allowance for borrowed funds used during construction (5.5) (4.5) (3.7) - ----------------------------------------------------------------- Total 138.4 160.4 164.9 - ----------------------------------------------------------------- Net income (loss) 180.3 (56.1) 122.1 Less-Preferred dividend requirements 24.9 26.1 28.9 Plus-Excess of carrying amount over consideration paid for redeemed preferred stock 6.4 - - - ----------------------------------------------------------------- Net income (loss) applicable to common stock $161.8 ($82.2) $93.2 =================================================================
See notes to consolidated financial statements which are an integral part of these statements. consolidated balance sheets - ---------------------------
(Millions of dollars) - ----------------------------------------------------------------- December 31, 1994 1993 ASSETS Utility Plant, at original cost Electric (includes construction work in progress of $202.8 million and $218.7 million, respectively) $6,023.1 $5,889.4 Gas (includes construction work in progress of $16.8 million and $18.8 million, respectively) 606.1 589.9 - ----------------------------------------------------------------- 6,629.2 6,479.3 Less -- accumulated depreciation 2,102.7 1,974.6 - ----------------------------------------------------------------- 4,526.5 4,504.7 Nuclear fuel in process 6.2 6.6 Nuclear fuel under capital lease 111.5 128.5 - ----------------------------------------------------------------- 4,644.2 4,639.8 - ----------------------------------------------------------------- INVESTMENTS AND OTHER ASSETS 15.4 15.4 - ----------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents 47.9 9.3 Accounts receivable (less allowance for doubtful accounts of $3 million and $4 million, respectively) Service 110.4 85.2 Other 52.6 37.5 Accrued unbilled revenue 78.9 49.0 Materials and supplies, at average cost Fossil fuel 18.7 17.0 Gas in underground storage 23.1 23.2 Operating materials 92.1 91.4 Prepaid and refundable income taxes 11.5 14.7 Prepayments and other 23.4 17.0 - ----------------------------------------------------------------- 458.6 344.3 - ----------------------------------------------------------------- DEFERRED CHARGES Deferred Clinton costs 110.8 114.3 Recoverable income taxes 147.3 108.0 Other 219.5 223.3 - ----------------------------------------------------------------- 477.6 445.6 - ----------------------------------------------------------------- $5,595.8 $5,445.1 ================================================================= CAPITAL AND LIABILITIES CAPITALIZATION Common stock -- No par value, 100,000,000 shares authorized; 75,643,937 shares outstanding, stated at $1,424.6 $1,424.6 Retained earnings (deficit) 51.1 (71.0) Less -- Capital stock expense 9.7 10.8 - ----------------------------------------------------------------- Total common stock equity 1,466.0 1,342.8 - ----------------------------------------------------------------- Preferred stock 321.7 303.7 Mandatorily redeemable preferred stock 36.0 48.0 Long-term debt 1,946.1 1,926.3 - ----------------------------------------------------------------- Total capitalization 3,769.8 3,620.8 - ----------------------------------------------------------------- CURRENT LIABILITIES Accounts payable 108.2 128.4 Notes payable 238.8 92.3 Long-term debt and lease obligations maturing within one year 33.5 187.7 Dividends declared 23.4 49.9 Taxes accrued 32.3 32.0 Interest accrued 38.4 64.6 Other 55.8 51.4 - ----------------------------------------------------------------- 530.9 606.3 - ----------------------------------------------------------------- DEFERRED CREDITS Accumulated deferred income taxes 981.4 906.6 Accumulated deferred investment tax credits 230.9 230.5 Other 82.8 80.9 - ----------------------------------------------------------------- (Commitments and Contingencies Note 3) 1,295.1 1,218.0 - ----------------------------------------------------------------- $5,595.8 $5,445.1 =================================================================
See notes to consolidated financial statements which are an integral part of these statements. consolidated statements of cash flows - -------------------------------------
(Millions of dollars) - ----------------------------------------------------------------- For the Years Ended December 31, 1994 1993 1992 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $180.3 ($56.1) $122.1 Items not requiring (providing) cash -- Disallowed Clinton costs, net of income tax - 200.4 - Depreciation and amortization 178.8 167.3 157.7 Allowance for funds used during construction (9.3) (7.2) (5.2) Deferred income taxes 38.9 67.9 56.6 Deferred Clinton costs 3.5 9.3 11.2 Changes in assets and liabilities -- Accounts and notes receivable (40.2) (21.3) 25.1 Accrued unbilled revenue (29.9) 42.9 (4.7) Materials and supplies (2.3) 6.2 (2.2) Accounts payable (19.7) 13.8 6.7 Interest accrued and other, net (19.9) (26.6) 7.2 - ----------------------------------------------------------------- Net cash provided by operating activities 280.2 396.6 374.5 - ----------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (193.7) (277.7) (244.4) Allowance for funds used during construction 9.3 7.2 5.2 Other investing activities (2.4) (2.1) 9.7 - ----------------------------------------------------------------- Net cash used in investing activities (186.8) (272.6) (229.5) - ----------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Dividends on common stock (86.6) (88.0) (90.2) and preferred stock Redemptions -- Short-term debt (258.2) (254.5) (221.6) Long-term debt (230.0) (832.0) (480.6) Preferred stock (91.0) (94.4) (10.0) Issuances -- Short-term debt 404.7 279.7 412.7 Long-term debt 119.8 866.8 269.0 Preferred stock 97.0 43.5 - Premium paid on redemption of long-term debt (2.8) (25.8) (14.6) Other financing activities (7.7) (18.7) (12.0) - ----------------------------------------------------------------- Net cash used in financing activities (54.8) (123.4) (147.3) - ----------------------------------------------------------------- Net change in cash and cash equivalents 38.6 .6 (2.3) Cash and cash equivalents at beginning of year 9.3 8.7 11.0 - ----------------------------------------------------------------- Cash and cash equivalents at end of year $47.9 $9.3 $8.7 =================================================================
consolidated statements of retained earnings (deficit) - ------------------------------------------------------
(Millions of dollars) - ----------------------------------------------------------------- For the Years Ended December 31, 1994 1993 1992 Balance (deficit) at Beginning of Year ($71.0) $41.0 $75.8 Net Income (loss) before dividends 180.3 (56.1) 122.1 - ----------------------------------------------------------------- 109.3 (15.1) 197.9 - ----------------------------------------------------------------- Less- Dividends- Preferred stock 11.1 20.1 51.6 Common Stock 53.5 35.8 105.3 Plus- Excess of carrying amount over consideration paid for redeemed preferred stock 6.4 - - - ----------------------------------------------------------------- (58.2) (55.9) (156.9) - ----------------------------------------------------------------- Balance (deficit) at End of Year $51.1 ($71.0) $41.0 =================================================================
See notes to consolidated financial statements which are an integral part of these statements. notes to consolidated financial statements - ------------------------------------------ Note 1 Summary of Significant Accounting Policies - ------------------------------------------------- Principles of Consolidation Illinois Power Company (IP) is a subsidiary of Illinova Corporation (Illinova), a holding company. Illinova was officially formed on May 27, 1994, with the filing of documents with the Illinois Secretary of State. Illinova became the parent of IP through a merger pursuant to a share-for- share conversion of IP common stock into Illinova common stock. On June 8, 1994, Illinova Generating Company (formerly IP Group, Inc.), originally a subsidiary of IP, was transferred to Illinova, establishing Illinova Generating Company as a wholly owned subsidiary of Illinova. The transfer of Illinova Generating Company and other equity to Illinova is reflected in the 1993 and 1994 Consolidated Statements of Retained Earnings (Deficit) as a component of common stock dividends. IP is the primary business and subsidiary of Illinova, and is engaged in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the State of Illinois. The consolidated financial statements include the accounts of IP, a combination electric and gas utility, and Illinois Power Capital, L.P. See "Note 9 - Preferred Stock" for additional information. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. Prior year amounts have been restated on a basis consistent with the December 31, 1994, presentation. REGULATION - IP is subject to regulation by the Illinois Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC) and, accordingly, prepares its consolidated financial statements based on the concepts of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71), which require that the effects of the ratemaking process be recorded. Such effects primarily concern the time at which various items enter the determination of net income in order to follow the principle of matching costs and revenues. Accordingly, IP records various regulatory assets and liabilities to reflect the actions of regulators. Management believes that IP currently meets the criteria for continued application of FAS 71, but will continue to evaluate significant changes in the regulatory and competitive environment to assess IP's overall compliance with such criteria. These criteria include: (1) whether rates set by regulators are designed to recover the specific costs of providing regulated services and products to customers; and (2) whether regulators continue to establish rates based on cost. In the event that management determines that IP no longer meets the criteria for application of FAS 71, an extraordinary noncash charge to income would be recorded in order to remove the effects of the actions of regulators from the consolidated financial statements. The discontinuation of application of FAS 71 would likely have a material adverse effect on IP's consolidated financial position and results of operations. IP's principal accounting policies are: UTILITY PLANT - The cost of additions to utility plant and replacements for retired property units is capitalized. Cost includes labor, materials and an allocation of general and administrative costs, plus an allowance for funds used during construction (AFUDC) as described below. Maintenance and repairs, including replacement of minor items of property, are charged to maintenance expense as incurred. When depreciable property units are retired, the original cost and dismantling charges, less salvage value, are charged to accumulated depreciation. REGULATORY ASSETS - Regulatory assets include deferred Clinton Power Station (Clinton) post-construction costs, unamortized debt discount, premium and expense, recoverable income taxes, deferred electric fuel and purchased gas costs and manufactured-gas plant site cleanup costs. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION - The FERC Uniform System of Accounts defines AFUDC as the net costs for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. AFUDC is capitalized at a rate that is related to the approximate weighted average cost of capital. In 1994, 1993 and 1992, the pre-tax rate used for all construction projects was 7.0%, 7.5% and 7.5%, respectively. Although cash is not currently realized from the allowance, it is realized under the ratemaking process over the service life of the related property through increased revenues resulting from a higher rate base and higher depreciation expense. DEPRECIATION - For financial statement purposes, IP depreciates the various classes of depreciable property over their estimated useful lives by applying composite rates on a straight-line basis. In 1994, 1993 and 1992, provisions for depreciation were 2.8% of the average depreciable cost for Clinton. Provisions for depreciation for all other electric plant were 2.5% in 1994, 1993 and 1992. Provisions for depreciation of gas utility plant, as a percentage of the average depreciable cost, were equivalent to 4% in 1993 and 1992. Effective with the April 6, 1994, ICC order in IP's gas rate case, the gas depreciation rate was lowered to 3.4%. AMORTIZATION OF NUCLEAR FUEL - IP leases nuclear fuel from Illinois Power Fuel Company under a capital lease. Amortization of nuclear fuel (including related financing costs) is determined on a unit of production basis. See "Note 3 - Commitments and Contingencies" for discussion of decommissioning and nuclear fuel disposal costs. A provision for spent fuel disposal costs is charged to fuel expense based on kilowatt-hours generated. Deferred Clinton Costs In accordance with an ICC order in April 1987, IP began deferring certain Clinton post-construction operating and financing costs until rates to reflect such costs became effective (April 1989). After issuance of the March 1989 ICC rate order, deferral of Clinton post-construction costs ceased and amortization of the previously deferred post- construction costs over a 37.5-year period commenced. Although cash is not currently realized from these deferrals, it is realized under the ratemaking process over the service life of Clinton through increased revenues resulting from a higher rate base and higher amortization expense. See "Note 2 - Clinton Power Station" for additional information. UNAMORTIZED DEBT DISCOUNT, PREMIUM AND EXPENSE - Discount, premium and expense associated with long-term debt are amortized over the lives of the related issues. Costs related to refunded debt are amortized over the lives of the related new debt issues or the remaining life of the old debt if no new debt is issued. REVENUE AND ENERGY COST - IP records revenue for services provided but not yet billed to more closely match revenues with expenses. Unbilled revenues represent the estimated amount customers will be billed for service delivered from the time meters were last read to the end of the accounting period. Operating revenues include related taxes that have been billed to customers in the years 1994, 1993 and 1992 in the amount of $66 million, $65 million and $61 million, respectively. The cost of fuel for the generation of electricity, purchased power and gas purchased for resale is recovered from customers pursuant to the electric fuel and purchased gas adjustment clauses. Accordingly, allowable energy costs that are to be passed on to customers in a subsequent accounting period are deferred. The recovery of costs deferred under these clauses is subject to review and approval by the ICC. On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's natural gas base rates. The increase will be partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. INCOME TAXES - Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), deferred tax assets and liabilities are recognized for the tax consequences of transactions that have been treated differently for financial reporting and tax return purposes, measured on the basis of the statutory tax rates. In accordance with FAS 71, a regulatory asset (Recoverable income taxes) has been recorded representing the probable recovery from customers of additional deferred income taxes established under FAS 109. Investment tax credits used to reduce federal income taxes have been deferred and are being amortized to income over the "service life" of the property that gave rise to the credits. IP is included in Illinova's consolidated federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss. See "Note 6 - Income Taxes" for additional discussion. PREFERRED DIVIDEND REQUIREMENTS - Preferred dividend requirements reflected in the consolidated income statements are recorded on the accrual basis and relate to the period for which the dividends are applicable. CONSOLIDATED STATEMENTS OF CASH FLOWS - Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less. Capital lease obligations not affecting cash flow increased by $28 million, $27 million and $14 million during 1994, 1993 and 1992, respectively. Income taxes and interest paid are as follows: Years ended December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Income taxes $ 72.1 $ 26.0 $ 27.5 Interest $165.9 $166.4 $177.3 ================================================================= The increase in income taxes paid from 1993 to 1994 was due to an increase in taxable income and the settlement of an IRS audit. The results of the settlement did not have a material effect on IP's consolidated financial position or results of operations. See "Note 6 - Income Taxes" for additional information. SALE OF ACCOUNTS RECEIVABLE AND ACCRUED UNBILLED REVENUE - In June 1993, IP entered an agreement for the sale of an undivided interest in a designated pool of IP's accounts receivable and accrued unbilled revenue up to a maximum of $50 million. At December 31, 1993, $15 million of accounts receivable and $35 million of accrued unbilled revenue had been sold. In December 1994, IP bought back all of the accounts receivable and accrued unbilled revenue that were sold under the agreement. All costs associated with the agreement have been reflected in Other Income and Deductions, "Miscellaneous-net," on IP's Consolidated Statements of Income. FORWARD CONTRACTS - Realized and unrealized gains and losses on forward contracts held as hedges of interest rate exposure are deferred and recognized as interest expense over the lives of the hedged liabilities. INTEREST RATE CAP - Premiums paid for the purchased interest rate cap agreement are being amortized to interest expense over the terms of the cap. Unamortized premiums are included in Deferred Charges, "Other" in the Consolidated Balance Sheets. Amounts received under the cap agreement are recognized as a reduction in interest expense. TRANSACTIONS WITH ILLINOVA - In addition to transfers of capital reflected in the Consolidated Statements of Retained Earnings (Deficit), IP provided approximately $20 million in funds to Illinova for operations and investments during 1994. Illinova is paying IP interest on these funds at a rate equal to that which Illinova would have paid had it used a currently outstanding line of credit. In addition, Illinova and IP have recorded an intercompany payable and receivable, respectively, for approximately $23.5 million in order to recognize the effect on the Employees Stock Ownership Plan of the conversion of IP common stock to Illinova common stock concurrent with the formation of Illinova. This was a noncash transaction. See "Note 10 - Common Stock and Retained Earnings" for additional information. Note 2 Clinton Power Station - ---------------------------- IP and Soyland Power Cooperative, Inc. (Soyland) share ownership of Clinton, with IP owning 86.8% and Soyland owning 13.2%. IP's ownership percentage is reflected in utility plant (at original cost) and in accumulated depreciation in the Consolidated Balance Sheets. Clinton was placed in service in 1987 and represents approximately 18% of IP's installed generation capacity. The investment in Clinton and its related deferred costs represented approximately 52% of IP's total assets at December 31, 1994. IP's 86.8% share of Clinton-related costs represented 32% of IP's total 1994 other operating, maintenance and depreciation expenses. Clinton's equivalent availability was 92%, 73% and 62% for 1994, 1993 and 1992, respectively. Clinton's equivalent availability was higher in 1994 due to no refueling outage. Ownership of an operating nuclear generating unit exposes IP to significant risks, including increased and changing regulatory, safety and environmental requirements and the uncertain future cost of closing and dismantling the unit. IP expects to be allowed to continue to operate Clinton; however, if any unforeseen or unexpected developments would prevent IP from doing so, IP could be materially adversely affected. See "Note 3 - - Commitments and Contingencies" for additional information. RATE AND REGULATORY MATTERS 1992 RATE ORDER - A September 1993 decision by the Illinois Appellate Court, Third District (Appellate Court Decision), upheld key components of the August 1992 Rehearing Order (Rehearing Order) issued by the ICC. The Rehearing Order denied IP recovery of certain deferred Clinton post-construction costs, which were composed of all deferred depreciation and real estate taxes and 72.8% of the deferred common equity return. IP originally recorded these deferred Clinton post- construction costs as a regulatory asset when such costs were believed probable of recovery through future rates, based on prior ICC orders. The deferred costs were recorded from the time Clinton began operations (April 1987) to the time the ICC allowed IP to begin recovering these deferred costs in rates (March 1989), otherwise known as the regulatory lag period. Based upon IP's assessment of the Appellate Court Decision and in accordance with FAS 71, IP recorded a loss of $271 million ($200 million, net of income taxes) in September 1993. This write- off included revenues and related interest of approximately $8.9 million to be refunded for deferred costs included in electric rates between April 1992 and August 1992, which were disallowed by the Rehearing Order. The Appellate Court Decision remanded the case to the ICC for further proceedings to determine the amount of actual financial harm incurred by IP during the regulatory lag period. The decision also remanded the case for verification of the calculation of the amortization of deferred Clinton post- construction costs from March 1989 to June 1992. On February 25, 1994, IP and the remaining parties to this case presented a joint motion to the Appellate Court requesting entry of an order remanding the case to the Commission for further pro-ceedings in accordance with a stipulated agreement of the parties. The Appellate Court granted the joint motion on March 2, 1994. On March 16, 1994, the ICC issued an order on remand that did not result in any change in IP's rates from those adopted in the Rehearing Order. The order on remand required IP to refund $8.9 million of revenue that had been collected between April and August 1992 subject to refund. The refunds began in March 1994 and were completed in October 1994. 1987 UNIFORM FUEL ADJUSTMENT CLAUSE RECONCILIATION - In January 1994, the ICC issued an order on remand consistent with an Illinois Appellate Court, Third District, decision which held that evidence did not support the findings in a February 1992 ICC order that IP incurred $29.3 million in imprudent nuclear fuel procurement and management costs. As a result of the Appellate Court decision and subsequent related ICC orders, IP is in the process of recovering approximately $12.7 million of nuclear fuel costs, which will not have an impact on consolidated results of operations. Note 3 Commitments and Contingencies - ------------------------------------ COMMITMENTS - Estimated construction requirements in 1995 are $204 million, which includes $152 million for electric facilities, $24 million for gas facilities and $28 million for general plant. The five-year construction program for 1995 through 1999 is estimated to be $775 million. These expenditures do not include capital expenditures for compliance with the Clean Air Act, as discussed below. In addition, IP has substantial commitments for the purchase of coal under long-term contracts. Coal contract commitments for 1995 through 1999 are estimated to be $779 million (excluding price escalation provisions). Total coal purchases for 1994, 1993 and 1992 were $191 million, $184 million and $186 million, respectively. IP has existing contracts with various natural gas suppliers and interstate pipelines to provide natural gas supply, transportation and leased storage. Committed natural gas, transportation and leased storage costs (including pipeline transition costs) for 1995 through 1999 are estimated to total $75 million. Total natural gas purchased for 1994, 1993 and 1992 was $168 million, $188 million and $184 million, respectively. IP's share of nuclear fuel commitments for Clinton is approximately $22 million for uranium concentrates through 1998, $8.4 million for conversion through 2002, $51 million for enrichment through 1999 and $164 million for fabrication through 2017. IP has commitments for emission allowances through 1999 estimated at $101 million. It is anticipated that all of these costs will be recoverable under IP's electric fuel and purchased gas adjustment clauses, if found by the ICC to be prudently incurred. INSURANCE - IP maintains insurance on behalf of IP and Soyland for certain losses involving the operation of Clinton. One insurance program provides coverage for physical damage to the plant. Based upon a review of this insurance, IP has reduced its limits from $2.7 billion to $1.6 billion effective December 15, 1994. IP's insurance program has two layers: 1) a primary layer of $500 million provided by nuclear insurance pools; and 2) an excess coverage layer of $1.1 billion provided by an industry- owned mutual insurance company. In the event of an accident with an estimated cost of reactor stabilization and site decontamination exceeding $100 million, Nuclear Regulatory Commission (NRC) regulations require that insurance proceeds be dedicated and used first to return the reactor to, and maintain it in, a safe and stable condition. After providing for stabilization and decontamination, the insurers would then cover property damage up to a total payout of $1.38 billion. Second, the NRC requires decontamination of the reactor and reactor station site in accordance with a plan approved by the NRC. The insurers would provide up to $220 million to cover decommissioning costs in excess of funds already collected for decommissioning, as discussed later. In the event insurance limits are not exhausted, the excess coverage may also be applied to a portion of the value of the undamaged property. In addition, while IP has no reason to anticipate a serious nuclear accident at Clinton, if such an incident should occur, the claims for property damage and other costs could materially exceed the limits of current or available insurance coverage. IP also carries approximately $.9 million per week of business interruption insurance coverage for its ownership share of Clinton through the industry-owned mutual insurance company in the event of an extended shutdown of Clinton due to accidental property damage. This insurance does not provide coverage until Clinton has been out of service for 21 weeks. Thereafter, the insurance provides up to 156 weeks of coverage. Multiple major losses covered under the current property damage and business interruption insurance coverages involving Clinton or other stations insured by the industry-owned mutual insurance company could result in retrospective premium assessments of up to approximately $13 million. About $12 million of this assessment would be allocated between IP and Soyland based on their respective ownership interests in Clinton. All United States nuclear power station operators are subject to the Price-Anderson Act. Under that Act, public liability for a nuclear incident is currently limited to $8.9 billion. Coverage of the first $200 million is provided by private insurance. Excess coverage is provided by retrospective premium assessments against each licensed nuclear reactor in the United States. Currently, the liability to these reactor operators/owners for such an assessment would be up to $79.3 million per incident, not including premium taxes which may be applicable, payable in annual installments of not more than $10 million. A Master Worker Policy covers worker tort claims alleging bodily injury, sickness or disease as a result of initial radiation exposure occurring on or after January 1, 1988. The policy has an aggregate limit of $200 million applying to the commercial nuclear industry as a whole. As claims are paid under the policy, there is a provision for automatic reinstatement of policy limits up to an additional $200 million. There is also a provision for retrospective assessment of additional premiums if claims exceed funds available in the insurance company's reserve accounts. The maximum retrospective premium assessment for this contingency is approximately $3 million and may be subject to state premium taxes. Any retrospective premium assessments pertaining to the Master Worker Policy or the Price-Anderson Act would be allocated between IP and Soyland based on their respective ownership interests in Clinton. IP may be subject to other risks which may not be insurable, or the amount of insurance carried to offset the various risks may not be sufficient to meet potential liabilities and losses. There is also no assurance that IP will be able to maintain insurance coverages at their present levels. Under those circumstances, such losses or liabilities would have a substantial adverse effect on IP's consolidated financial position. DECOMMISSIONING AND NUCLEAR FUEL DISPOSAL COSTS - IP is responsible for its ownership share of the costs of decommissioning Clinton and for spent nuclear fuel disposal costs. IP is collecting future decommissioning costs through its rates based on an ICC-approved formula that allows IP to adjust rates annually for changes in decommissioning cost estimates. Based on NRC regulations that establish a minimum funding level, IP's 86.8% share of Clinton decommissioning costs is estimated to be approximately $357 million (1994 dollars). The NRC minimum is based only on the cost of removing radioactive plant structures. A site-specific study to estimate the costs of dismantlement, removal and disposal of Clinton has not been made; however, IP plans to undertake this study in 1995. This study may result in projected decommissioning costs higher than the NRC- specified funding level. At December 31, 1994 and 1993, IP had recorded a liability of $22.4 million and $17.2 million, respectively, for the future decommissioning of Clinton. External decommissioning trusts, as prescribed under Illinois law and authorized by the ICC, have been established to accumulate funds based on the expected service life of the plant for the future decommissioning of Clinton. For the years 1994, 1993 and 1992, IP has contributed $5.5 million, $3.9 million and $3.7 million, respectively, to its external nuclear decommissioning trust funds. The balances in these nuclear decommissioning funds at December 31, 1994 and 1993, were $22.4 million and $17.2 million, respectively. IP recognizes earnings and expenses from the trust funds as changes in its assets and liabilities relating to these funds. In November 1994, the ICC granted IP permission to invest up to 60% of the nuclear decommissioning trust assets in selected equity securities. As a result, funding in this manner commenced with an initial investment in December 1994. Future contributions will be directed to this asset class until the approved equity allocation is reached. The Securities and Exchange Commission staff has questioned certain current accounting practices of the electric utility industry, including those practices used by IP, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements. In response to these questions, the Financial Accounting Standards Board has agreed to review the accounting for removal costs of nuclear generating stations, including decommissioning. If current electric utility industry accounting practices for such decommissioning are changed: 1) annual provisions for decommissioning could increase; 2) the estimated total cost for decommissioning could be recorded as a liability; and 3) trust fund income from the external decommissioning trusts could be reported as investment income rather than as a reduction to decommissioning expense. Although it is too early to determine whether any changes to current electric utility industry accounting practices for decommissioning will be adopted, IP believes that based on current information, any required changes would not have an adverse effect on consolidated results of operations due to existing and anticipated future ability to recover decommissioning costs through rates. In 1992, the ICC entered an order in which it expressed concern that IP take all reasonable action to ensure that Soyland contributes its ownership share of the current or any revised estimate of decommissioning costs. The order also states that if IP becomes liable for decommissioning expenses attributable to Soyland, the ICC will then decide whether that expense should be the responsibility of IP stockholders or its customers. Under the Energy Policy Act of 1992, IP is responsible for a portion of the cost to decontaminate and decommission the U.S. Department of Energy's (DOE) uranium enrichment facilities. Based on quantities purchased from the DOE facilities prior to passage of the Act, each utility is being assessed an annual fee for a period of 15 years. At December 31, 1994, IP has a remaining liability of $5.7 million representing future assessments. IP is recovering these costs, as amortized, through its fuel adjustment clause. Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the permanent storage and disposal of spent nuclear fuel. The DOE currently charges one mill ($0.001) per net kilowatt-hour (one dollar per MWH) generated and sold for future disposal of spent fuel. IP is recovering these charges through rates. ENVIRONMENTAL MATTERS CLEAN AIR ACT - In August 1992, IP announced that it had suspended construction of two scrubbers at the Baldwin Power Station, on which IP had expended approximately $34.6 million. IP has recovered approximately $3.1 million as a result of the sale of excess materials that were not used on the project. After suspending scrubber construction, IP reconsidered its alternatives for complying with Phase I of the 1990 Clean Air Act Amendments. In March 1993, IP announced its compliance plan for Phase I (1995-1999) of the Clean Air Act, which is to continue using high-sulfur Illinois coal and acquire emission allowances to comply with the Clean Air Act requirements. An emission allowance is the authorization by the United States Environmental Protection Agency (U.S.EPA) to emit one ton of sulfur dioxide. The ICC approved IP's Phase I Clean Air Act compliance plan in September 1993, and IP is continuing to implement that plan. Sufficient emission allowances have been acquired to meet anticipated needs for 1995. IP will be active in the emissions allowance market in order to meet requirements for allowances in 1996 and beyond. In 1993, the Illinois General Assembly passed and the governor signed legislation authorizing but not requiring the ICC to permit expenditures and revenues from emission allowance purchases and sales to be reflected in rates charged to customers as a cost of fuel. In December 1994, the ICC approved the recovery of emission allowance costs through the Uniform Fuel Adjustment Clause. IP's compliance plan will defer, until at least 2000, any need for scrubbers or other capital projects associated with sulfur dioxide emission reductions. Additional actions and capital expenditures will be required by IP to achieve compliance with the Phase II (2000 and beyond) sulfur dioxide emission requirements of the Clean Air Act. IP planned to comply with the Phase I nitrogen-oxide emission reduction requirements of the acid rain provisions of the Clean Air Act by installing low-nitrogen-oxide (NOx) burners at Baldwin Unit 3. On November 29, 1994, the U.S. Appellate Court remanded the Phase I NOx rules back to the U.S.EPA. IP is positioned to comply with the previously established rules and does not expect the new rules to be any more stringent. Therefore, the Court's decision is not expected to have a material impact on IP's compliance activity. Additional capital expenditures are anticipated prior to 2000 to comply with the Phase II nitrogen-oxide requirements, as well as potential requirements to further reduce nitrogen-oxide emissions from IP plants to help achieve compliance with air quality standards in the St. Louis and/or Chicago metropolitan areas. IP has installed continuous emission monitoring systems at its major generating stations, as required by the acid rain provisions of the Clean Air Act. In July 1993, the Alliance for Clean Coal (Alliance), a coalition of Western coal producers and railroads, filed suit against the ICC in the U.S. District Court in Chicago. The Alliance sought a declaration that an Illinois statute regarding the filing with and approval by the ICC of utility Clean Air Act compliance plans, including provisions on the construction of scrubbers or other devices to facilitate continued use of high-sulfur Illinois coal as a fuel, is unconstitutional. In December 1993, the U.S. District Court issued an opinion and an order in Alliance for Clean Coal vs. Ellen Craig, et al. declaring the statute unconstitutional. The order prohibits the ICC from enforcing the statute, and declares void compliance plans prepared and approved in reliance on the statute. Subsequent to that decision, IP filed its plan with the ICC, not for approval as it believes no approval of the plan is required, but as a supplement to informational filings made in a pending least-cost plan proceeding. The ICC concluded in its final order that IP's compliance plan represented the least-cost option for compliance. On January 9, 1995, the Seventh Circuit Court of Appeals affirmed the U.S. District Court decision. MANUFACTURED-GAS PLANT (MGP) SITES - IP, through its predecessor companies, was identified on a State of Illinois list as the responsible party for potential environmental impairment at 24 former manufactured-gas plant sites. IP is investigating each of the sites to determine: 1) the type and amount of residues present; 2) whether the residues constitute environmental or health hazards and, if present, their extent; and 3) whether IP has any responsibility for remedial action. Because of the unknown and unique characteristics of each site (such as amount and type of residues present, physical characteristics of the site and the environmental risk) and uncertain regulatory requirements, IP is not able to determine its ultimate liability for the investigation and remediation of the 24 sites. However, at December 31, 1994, IP had estimated and recorded a minimum liability of $35 million. In 1994, IP spent approximately $1.3 million for investigation and remediation activities. IP is unable to determine at this time what portion of these costs, if any, will be eligible for recovery from insurance carriers or other potentially responsible parties. In addition, IP is unable to determine the time frame over which these costs may be paid out. IP has recorded a regulatory asset in the amount of $35 million, reflecting management's expectation that investigation and remediation costs for the manufactured-gas plant sites will be recovered from customers or insurers. In September 1992, the ICC issued a generic order concluding that utilities will be allowed to collect from customers MGP remediation costs paid to third parties, subject to prudency evaluation. The order allowed recovery of such prudently incurred costs over a five-year period but with no recovery from customers of carrying costs on the unrecovered balance. IP is currently recovering MGP site cleanup costs from its customers through a tariff rider approved by the ICC in April 1993. In February 1994, an intervening consumer group appealed the September 1992 ICC order and an affirming December 1993 Appellate Court decision to the Illinois Supreme Court, arguing that utilities should not be permitted to recover MGP cleanup costs from customers or should not be permitted to recover such costs through riders. IP and other utilities have also appealed to the Illinois Supreme Court seeking to include carrying costs on the unrecovered balance of cleanup costs through the tariff rider. The Illinois Supreme Court agreed to hear both appeals, and briefing and oral arguments were held in September 1994. Management believes that the final disposition of these appeals will not have a material adverse effect on IPOs consolidated financial position or results of operations. ELECTRIC AND MAGNETIC FIELDS - The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects continues to be the subject of litigation and governmental, medical and media attention. Litigants have also claimed that EMF concerns justify recovery from utilities for the loss in value of real property exposed to power lines, substations and other such sources of EMF. Scientific research worldwide has produced conflicting results and no conclusive evidence that electric and/or magnetic field exposure causes adverse health effects. Research is continuing to resolve scientific uncertainties. It is too soon to tell what, if any, impact these actions may have on IP's consolidated financial position. LEGAL PROCEEDINGS IP is involved in legal or administrative proceedings before various courts and agencies with respect to matters occurring in the ordinary course of business, some of which involve substantial amounts of money. Management believes that the final disposition of these proceedings will not have a material adverse effect on consolidated financial position or results of operations. OTHER IP sells electric energy and natural gas to residential, commercial and industrial customers throughout Illinois. At December 31, 1994, 60%, 21% and 19% of accounts receivable were from residential, commercial and industrial customers, respectively. IP maintains reserves for potential credit losses and such losses have been within management's expectations. Note 4 Lines of Credit and Short-Term Loans - ---------------------- IP has total lines of credit represented by bank commitments amounting to $250 million, all of which were unused at December 31, 1994. The weighted average borrowings for 1994 were $1.1 million at a weighted average interest rate of 3.7%. These lines of credit are renewable in July 1995 and September 1996. These bank commitments support the amount of commercial paper outstanding at any time, limited only by the amount of unused bank commitments, and are available to support other IP activities. IP pays facility fees up to 0.25% per annum, on $250 million of the total line of credit, regardless of usage. The interest rate on borrowings under these agreements is, at IP's option, based upon the lending banks' reference rate, their Certificate of Deposit rate, the borrowing rate of key banks in the London interbank market or competitive bid. IP has letters of credit totaling $204.8 million and pays fees up to 0.55% per annum on the unused amount of credit. In addition, IP has short-term financing options to obtain funds not to exceed $80 million. IP pays no fees for these uncommitted facilities and funding is subject to availability upon request. For the years 1994, 1993 and 1992, IP had short-term borrowings consisting of bank loans, commercial paper, extendible floating rate notes and other short-term debt outstanding at various times as follows: - ----------------------------------------------------------------- (Millions of dollars, except rates) 1994 1993 1992 - ----------------------------------------------------------------- Balance at December 31 Short-term borrowings $238.8 $ 92.3 $ 67.1 Weighted average interest rate at December 31 6.2% 3.5% 3.8% Maximum amount outstanding at any month end $238.8 $123.7 $181.9 Average daily borrowings outstanding during the year $165.4 $ 85.0 $115.1 Weighted average interest rate during the year 4.6% 3.5% 4.0% - ----------------------------------------------------------------- IP has only limited involvement with derivative financial instruments and does not use them for trading purposes. They are used to manage well-defined interest rate risks arising out of core activities without the use of leverage and without risk to principal. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate commercial paper. In 1994, IP entered a five-year variable rate interest rate cap agreement covering up to $140 million of commercial paper. The agreement entitles IP to receive from a counterparty on a monthly basis the amount, if any, by which IP's interest payments on a nominal amount of commercial paper exceed the interest rate set by the cap. At December 31, 1994, the cap rate was set at 5.0% while the current market rate available to IP was 6.125%. Note 5 Facilities Agreements - ---------------------------- IP and Soyland share ownership of Clinton, with IP owning 86.8% and Soyland owning 13.2%. Agreements between IP and Soyland provide that IP has control over construction and operation of the generating station, that the parties share electricity generated in proportion to their ownership interests and that IP will have certain obligations to provide replacement power to Soyland if IP ceases to operate or reduces output from Clinton. Under the provisions of a Power Coordination Agreement (PCA) between Soyland and IP dated October 5, 1984, as amended, IP was required to provide Soyland with 8.0% (288 megawatts) of electrical capacity from its fossil-fueled generating plants through 1994. This requirement will increase to 12% in 1995 and each year thereafter until the agreement expires or is terminated. This is in addition to the capacity Soyland receives as an owner of Clinton. IP is compensated with capacity charges and for energy costs and variable operating expenses. IP transmits energy for Soyland through IP's transmission and subtransmission systems. Under provisions of the PCA, Soyland has the option of participating financially in major capital expenditures at the fossil-fueled plants, such as those needed for Phase II Clean Air Act compliance, to the extent of its capacity entitlement with each party bearing its own direct capital costs, or by having the costs treated as plant additions and billed to Soyland in accordance with other billing provisions of the PCA. See "Note 3 - Commitments and Contingencies" for discussion of the Clean Air Act. At any time after December 31, 2004, either IP or Soyland can terminate the PCA by giving not less than seven years' prior written notice to the other party. The party to whom termination notice has been given may designate an earlier effective date of termination which shall be not less than twelve months after receiving notice. Note 6 Income Taxes - -------------------- Deferred tax assets and liabilities were composed of the following: Balance as of December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 - ----------------------------------------------------------------- Deferred Tax Assets: - ----------------------------------------------------------------- Current: Misc. book/tax recognition differences $ 19.7 $ 25.6 - ----------------------------------------------------------------- Noncurrent: Depreciation and other property related 52.6 56.3 Alternative minimum tax 187.0 131.0 Tax credit and net operating loss carryforward 27.6 111.9 Unamortized investment tax credit 122.0 129.1 Misc. book/tax recognition differences 53.2 17.3 - ----------------------------------------------------------------- 442.4 445.6 - ----------------------------------------------------------------- Total deferred tax assets $462.1 $471.2 ================================================================= Deferred Tax Liabilities: - ----------------------------------------------------------------- Current: Misc. book/tax recognition differences $ 8.2 $ 10.9 - ----------------------------------------------------------------- Noncurrent: Depreciation and other property related 1,252.0 1,187.3 Deferred Clinton costs 62.1 64.0 Misc. book/tax recognition differences 109.7 100.9 - ----------------------------------------------------------------- 1,423.8 1,352.2 - ----------------------------------------------------------------- Total deferred tax liabilities $1,432.0 $1,363.1 ================================================================= Income taxes included in the Consolidated Statements of Income consist of the following components: Years Ended December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Current taxes - Included in operating expenses and taxes $ 58.3 $ 25.3 $ 22.9 - ----------------------------------------------------------------- Total current taxes 58.3 25.3 22.9 - ----------------------------------------------------------------- Deferred taxes - Included in operating expenses and taxes Property related differences 60.0 72.3 73.2 Alternative minimum tax (50.4) (31.8) (31.4) Gain/loss on reacquired debt - 16.5 4.8 Take-or-pay charges - .3 2.3 Net operating loss carryforward 62.0 22.8 18.3 Internal Revenue Service interest on tax issues 7.5 (1.9) .7 Misc. book/tax recognition differences (7.8) 3.8 (4.1) Included in other income and deductions Property related differences 10.0 6.0 9.2 Net operating loss carryforward (17.4) (15.4) (15.5) Misc. book/tax recognition differences 1.9 (2.3) .4 Disallowed Clinton costs - (62.2) - - ----------------------------------------------------------------- Total deferred taxes 65.8 8.1 57.9 - ----------------------------------------------------------------- Deferred investment tax credit - net Included in operating expenses and taxes (11.3) (.8) (.5) Included in other income and deductions (.3) (.7) (.8) Disallowed investment tax credit - (8.4) - - ----------------------------------------------------------------- Total investment tax credit (11.6) (9.9) (1.3) - ----------------------------------------------------------------- Total income taxes $112.5 $23.5 $79.5 ================================================================= The reconciliations of income tax expense to amounts computed by applying the statutory tax rate to reported pretax results for the period are set forth below: Years Ended December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Income tax expense at the federal statutory tax rate $102.5 $(11.4) $68.5 Increases/(decreases) in taxes resulting from - State taxes, net of federal effect 13.8 5.8 11.3 Investment tax credit - amortization (7.8) (8.8) (8.4) Depreciation not normalized 4.3 7.1 9.4 Disallowed Clinton costs (including ITC) - 27.4 - Other-net (.3) 3.4 (1.3) - ----------------------------------------------------------------- Total income taxes $112.5 $ 23.5 $ 79.5 ================================================================= Combined federal and state effective income tax rates were 38.4%, (72.4%) and 39.4% for the years 1994, 1993 and 1992, respectively. The negative effective tax rate for 1993 is a result of the loss recorded by IP due to the Rehearing Order which denied IP recovery of certain deferred Clinton costs. The 1993 effective tax rate excluding the effect of this loss was 39.5%. At December 31, 1994, IP had approximately $25 million of federal income tax net operating loss carryforwards to offset future taxable income. Approximately $15 million of these carryforwards expire in 2006 and $10 million expire in 2007. IP is subject to the provisions of the Alternative Minimum Tax System (AMT). As a result, IP has an alternative minimum tax credit carryforward at December 31, 1994, of approximately $187 million. This credit can be carried forward indefinitely to offset future regular income tax liabilities in excess of the tentative minimum tax. The Internal Revenue Service (IRS) has completed its audit of IP's federal income tax returns for the years 1986 through 1988. IP and the IRS have reached an agreement on all audit issues. The results of the agreement did not have a material effect on IP's consolidated financial position or results of operations. Note 7 Capital Leases - --------------------- Illinois Power Fuel Company (Fuel Company), which is 50% owned by IP, was formed in 1981 for the purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to the Fuel Company's cost of fuel as consumed (including related financing and administrative costs). Billings under the lease agreement during 1994, 1993 and 1992 were $52 million, $45 million and $43 million, respectively, including financing costs of $7 million, $6 million and $8 million, respectively. IP is obligated to make subordinated loans to the Fuel Company at any time the obligations of the Fuel Company that are due and payable exceed the funds available to the Fuel Company. IP has an obligation for nuclear fuel disposal costs of leased nuclear fuel. See "Note 3 - Commitments and Contingencies" for discussion of decommissioning and nuclear fuel disposal costs. Nuclear fuel lease payments are included with fuel for electric plants on IP's Consolidated Statements of Income. At December 31, 1994 and 1993, current obligations under capital lease for nuclear fuel are $33.3 million and $41.6 million, respectively. Over the next five years estimated payments under capital leases are as follows: - ----------------------------------------------------------------- (Millions of dollars) - ----------------------------------------------------------------- 1995 $39.2 1996 34.6 1997 26.7 1998 13.0 1999 8.5 Thereafter 2.9 - ----------------------------------------------------------------- 124.9 Less: Interest 13.4 - ----------------------------------------------------------------- Total $111.5 ================================================================= Note 8 Long-Term Debt - ---------------------
(Millions of dollars) - -------------------------------------------------------------------------------- December 31, 1994 1993 First mortgage bonds-- 5.85% series due 1996 $ 40.0 $ 40.0 6 1/2% series due 1999 72.0 72.0 6.60% series due 2004 (Pollution Control 7.0 7.2 Series A) 9 7/8% series due 2004 - 10.0 7.95% series due 2004 72.0 72.0 6% series due 2007 (Pollution Control Series B) 18.7 18.7 11 5/8% series due 2014 (Pollution Control - 35.6 Series D) 10 3/4% series due 2015 (Pollution Control - 84.1 Series E) 7 5/8% series due 2016 (Pollution Control 150.0 150.0 Series F, G and H) 8.30% series due 2017 (Pollution Control 33.8 33.8 Series I) 7 3/8% series due 2021 (Pollution Control 84.7 84.7 Series J) 8 3/4% series due 2021 125.0 125.0 5.7% series due 2024 (Pollution Control Series K) 35.6 - 7.4% series due 2024 (Pollution Control Series L] 84.1 - - -------------------------------------------------------------------------------- Total first mortgage bonds 722.9 733.1 - -------------------------------------------------------------------------------- New mortgage bonds-- 6 1/8% series due 2000 40.0 40.0 5 5/8% series due 2000 110.0 110.0 6 1/2% series due 2003 100.0 100.0 6 3/4% series due 2005 70.0 70.0 8.0% series due 2023 235.0 235.0 7 1/2% series due 2025 200.0 200.0 Adjustable rate series due 2028 (Pollution Control Series M, N and O) 111.8 111.8 - -------------------------------------------------------------------------------- Total new mortgage bonds 866.8 866.8 - -------------------------------------------------------------------------------- Total mortgage bonds 1,589.7 1,599.9 - -------------------------------------------------------------------------------- Short-term debt to be refinanced as long-term debt 125.0 125.0 8 1/2% debt securities due 1994 - 100.0 Medium-term notes, series A 100.0 100.0 Variable rate long-term debt due 2017 75.0 75.0 - -------------------------------------------------------------------------------- Total other long-term debt 300.0 400.0 - -------------------------------------------------------------------------------- 1,889.7 1,999.9 Unamortized discount on debt (21.6) (15.4) - -------------------------------------------------------------------------------- Total long-term debt excluding capital lease obligations 1,868.1 1,984.5 Obligation under capital leases 111.5 129.5 - -------------------------------------------------------------------------------- 1,979.6 2,114.0 Long-term debt and lease obligations maturing within one year (33.5) (187.7) - -------------------------------------------------------------------------------- Total long-term debt $ 1,946.1 $1,926.3 =================================================================================
In May 1994, $35.6 million of 11 5/8% Pollution Control Bonds Series D due 2014 were retired with the same principal amount of 5.7% Pollution Control Bonds Series K due 2024. In December 1994, $84.1 million of 7.4% Pollution Control Bonds Series L due 2024 were issued. The proceeds and additional funds were placed in an irrevocable trust and invested in U. S. Treasury securities, and will be used to extinguish the outstanding $84.1 million 10 3/4% Pollution Control Bonds Series E due 2015 on March 1, 1995. This resulted in an in-substance defeasance in accordance with Statement of Financial Accounting Standards No. 76, " Extinguishment of Debt." The $84.1 million of 10 3/4% Pollution Control Bonds Series E due 2015 have been removed from the consolidated financial statements. Short-term debt to be refinanced as long-term debt consists of commercial paper that will be renewed regularly on a long-term basis. Ongoing credit support is provided by IP's revolving credit agreements of $250 million. In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At December 31, 1994, the maturity dates on these notes ranged from 1996 to 1998 with interest rates ranging from 9% to 9.31%. Interest rates on variable rate long-term debt due 2017 are adjusted weekly and ranged from 5.25% to 5.6% at December 31, 1994. For the years 1995, 1996, 1997, 1998 and 1999, IP has long-term debt maturities and cash sinking fund requirements in the aggregate of (in millions) $.2, $61.7, $10.8, $68.8 and $72.8, respectively. These amounts exclude capital lease requirements. See "Note 7 - Capital Leases." Certain supplemental indentures to the First Mortgage require that IP make annual deposits, as a sinking and property fund, in amounts not to exceed $.4 million in 1995, $1.8 million in 1997, $1.8 million in 1998 and $1.8 million in 1999. These amounts are subject to reduction and historically have been met by pledging property additions, as permitted by the First Mortgage. At December 31, 1994, the aggregate total of unamortized debt expense and unamortized loss on reacquired debt was approximately $107.4 million. IP's first mortgage bonds are secured by a first mortgage lien on substantially all of the fixed property, franchises and rights of IP with certain minor exceptions expressly provided in the First Mortgage. In 1992, the Board authorized a new general obligation mortgage, which is intended to replace the First Mortgage. Bonds issued under the New Mortgage were secured by a corresponding issue of first mortgage bonds under the First Mortgage. The remaining balance of net bondable additions at December 31, 1994, was approximately $1.0 billion. Note 9 Preferred Stock - ---------------------- (millions of dollars) - ----------------------------------------------------------------- December 31, 1994 1993 SERIAL PREFERRED STOCK OF SUBSIDIARY, cumulative, $50 par value -- Authorized 5,000,000 shares; 3,325,815 and 4,150,000 shares outstanding, respectively Series Share Redemption prices 4.08% 300,000 $51.50 $15.0 $15.0 4.26% 150,000 51.50 7.5 7.5 4.70% 200,000 51.50 10.0 10.0 4.42% 150,000 51.50 7.5 7.5 4.20% 180,000 52.00 9.0 9.0 8.24% 600,000 51.90 30.0 30.0 7.56% 675,040 51.685 33.8 35.0 8.00% 693,975 52.29 34.7 50.0 7.75% 376,800 50.00 after July 1, 2003 18.8 43.5 Net premium on preferred stock 0.8 0.7 - ----------------------------------------------------------------- Total Preferred Stock, $50 par value 167.1 208.2 - ----------------------------------------------------------------- SERIAL PREFERRED STOCK, cumulative, without par value-- Authorized 5,000,000 shares; 1,512,550 and 2,390,300 shares outstanding, respectively (including 360,000 and 480,000 shares, respectively, of redeemable preferred stock) Series Share Redemption prices A 742,300 $ 50.00 37.1 50.0 B 410,250 ($51.50 prior to May 1, 1995, 20.5 45.5 $50 thereafter) - ----------------------------------------------------------------- Total Preferred Stock of Subsidiary, without par value 57.6 95.5 - ----------------------------------------------------------------- PREFERENCE STOCK, cumulative, without par value -- Authorized 5,000,000 shares; none outstanding --- --- PREFERRED SECURITIES OF SUBSIDIARY (Illinois Power Capital, L.P.) Monthly Income Preferred Securities 97.0 --- - ----------------------------------------------------------------- Total Serial Preferred Stock, Preference Stock and Preferred Securities of Subsidiary $321.7 $303.7 - ----------------------------------------------------------------- MANDATORILY REDEEMABLE SERIAL PREFERRED STOCK, cumulative -- Series Share Par Value 8.00% 360,000 none $36.0 $48.0 ================================================================= Serial Preferred Stock ($50 par value) is redeemable at the option of IP in whole or in part at any time not less than 30 days and not more than 60 days notice by publication. Quarterly dividend rates for Serial Preferred Stock, Series A, are determined based on market interest rates of certain U. S. Treasury securities. Dividends paid in 1994 and 1993 were $.75 per quarter. The dividend rate for any dividend period will not be less than 6% per annum or greater than 12% per annum applied to the liquidation preference value of $50 per share. Quarterly dividend rates for Serial Preferred Stock, Series B, are determined based on market interest rates of certain U. S. Treasury securities. Dividends paid in 1994 and 1993 were $.875 per quarter. The dividend rate for any dividend period will not be less than 7% per annum or greater than 14% per annum applied to the liquidation preference value of $50 per share. Illinois Power Capital, L.P., is a limited partnership in which IP serves as a general partner. Illinois Power Capital issued $97 million of tax-advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-tax rate) in October 1994. The proceeds were loaned to IP and were used to redeem $79.1 million (principal value) of higher-cost outstanding preferred stock of IP. The excess of carrying amount of redeemed preferred stock over consideration paid amounted to $6.4 million, which was recorded in equity and included in net income applicable to common stock. IP consolidates the accounts of Illinois Power Capital. In February 1993, IP redeemed $10 million of 8.52% and $12 million of 8.00% mandatorily redeemable preferred stock. In July 1993, IP redeemed the remaining $30 million of 8.52% mandatorily redeemable serial preferred stock. In February 1994 and 1993, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock. For each year, 1995 through 1997, IP is required to redeem $12 million of mandatorily redeemable preferred stock outstanding at stated value. Note 10 Common Stock and Retained Earnings - ---------------------- On May 31, 1994, common shares of IP began trading as common shares of Illinova. Illinova is the sole shareholder of IP common stock. IP has an Incentive Savings Plan (Plan) for salaried employees. IP's matching contribution is used to purchase Illinova common stock. Under this Plan, 27,545 shares of common stock were designated for issuance at December 31, 1994. IP has an Incentive Savings Plan for Employees Covered Under a Collective Bargaining Agreement. IP's matching contribution is used to purchase Illinova common stock. Under this plan, 69,167 shares of stock were designated for issuance at December 31, 1994. IP employees participate in an Employees Stock Ownership Plan (ESOP) that includes an incentive compensation feature which is tied to achievement of specified corporate performance goals. This arrangement began in 1991 when IP loaned $35 million to the Trustee of the Plans, who used the loan proceeds to purchase 2,031,445 shares of IP's common stock on the open market. The loan and common shares were converted to Illinova instruments pursuant to formation of the Holding Company in May 1994. These shares are held in a suspense account under the Plans and are being distributed to the accounts of participating employees as the loan is repaid by the Trustee with funds contributed by IP, together with dividends on the shares acquired with the loan proceeds. IP financed the loan with funds borrowed under its bank credit agreements. For the year ended December 31, 1994, 42,008 shares were allocated to salaried employees and 47,530 shares to employees covered under the Collective Bargaining Agreement through the matching contribution feature of the ESOP arrangement. Under the incentive compensation feature, 184,079 shares were allocated to employees for the year ended December 31, 1994. During 1994, IP contributed $5.5 million to the ESOP and using the shares allocated method, recognized $5.6 million of expense. Interest paid on the ESOP debt was approximately $2.5 million in 1994 and dividends used for debt services were approximately $1.6 million. In 1992, the Board of Directors adopted and the shareholders approved a Long-Term Incentive Compensation Plan (the Plan) for officers or employee members of the Board, but excluding directors who are not officers or employees. The types of awards that may be granted under the Plan are restricted stock, incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalents and other stock-based awards. The Plan provides that any one or more types of awards may be granted for up to 1,500,000 shares of Illinova's common stock. The following table outlines the activity thus far under this plan: - ----------------------------------------------------------------- Year Options Grant Year Granted Granted Price Exercisable - ----------------------------------------------------------------- 1992 62,000 $23 3/8 1996 1993 73,500 $24 1/4 1997 1994 82,650 $20 7/8 1997 - ----------------------------------------------------------------- The provisions of Supplemental Indentures to IP's General Mortgage Indenture and Deed of Trust contain certain restrictions with respect to the declaration and payment of dividends. IP was not limited by any of these restrictions at December 31, 1994. Under the Restated Articles of Incorporation, common stock dividends are subject to the preferential rights of the holders of preferred and preference stock. Note 11 Pension and Other Benefit Costs - --------------------------------------- IP has defined-benefit pension plans covering all officers and employees. Benefits are based on years of service and compensation. IP's funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than can be deducted for federal income tax purposes. Pension costs, a portion of which have been capitalized, for 1994, 1993 and 1992 include the following components: Years Ended December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 1992 - ----------------------------------------------------------------- Service cost on benefits earned during the year $11.9 $11.3 $ 9.4 Interest cost on projected benefit obligation 21.8 20.8 18.3 Return on plan assets (7.9) (28.1) (20.9) Net amortization and deferral (19.2) 1.9 (5.0) - ----------------------------------------------------------------- Total pension cost $ 6.6 $ 5.9 $ 1.8 ================================================================= The estimated funded status of the plans at December 31, 1994 and 1993, using discount rates of 8.75% and 7.75%, respectively, and future compensation increases of 4.5% was as follows: Balances as of December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 - ----------------------------------------------------------------- Actuarial present value of: Vested benefit obligation $(209.6) $(231.9) - ----------------------------------------------------------------- Accumulated benefit obligation $(220.8) $(233.6) - ----------------------------------------------------------------- Projected benefit obligation $(267.3) $(285.8) Plan assets at fair value 284.0 281.4 - ----------------------------------------------------------------- Excess (deficit) of assets over projected benefit obligation 16.7 (4.4) Unamortized net (gain) loss (38.8) 9.1 Unrecognized net asset at transition (15.0) (43.1) Prior service costs 24.5 23.9 - ----------------------------------------------------------------- Accrued pension cost included in accounts payable $ (12.6) $ (14.5) ================================================================= The plan assets consist primarily of common stocks, fixed income securities, cash equivalents and real estate. The actuarial present value of accumulated plan benefits at January 1, 1994 and 1993, were $230 million and $205 million, respectively, including vested benefits of $213 million and $203 million, respectively. The pension cost for 1994, 1993 and 1992 was calculated using: a discount rate of 7.75%, 8.25% and 8.5%, respectively; future compensation increases of 4.5% for 1994 and 5.5% for 1993 and 1992; and a return on assets of 9% for 1994, 1993 and 1992. The unrecognized net asset at transition and prior service costs are amortized on a straight-line basis over the average remaining service period of employees who are expected to receive benefits under the plan. IP did not make any cash contributions during 1993 for the pension plan due to its overfunded status. IP made cash contributions of $10 million in 1994 and $3 million in 1992. IP provides health care and life insurance benefits to certain retired employees, including their eligible dependents, who attain specified ages and years of service under the terms of the defined-benefit plans. Postretirement benefits, a portion of which have been capitalized, for 1994 and 1993 included the following components: Years Ended December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 - ----------------------------------------------------------------- Service cost on benefits earned during the year $ 3.3 $ 2.9 Interest cost on projected benefit obligation 6.2 5.9 Return on plan assets .2 (.5) Amortization of unrecognized transition obligation 2.1 3.3 - ----------------------------------------------------------------- Total postretirement cost $11.8 $11.6 - ----------------------------------------------------------------- The net periodic postretirement benefit cost in the table above includes amortization of the previously unrecognized accumulated postretirement benefit obligation, which was $55.2 million and $63.9 million as of January 1, 1994 and 1993, respectively, over 20 years on a straight-line basis. IP has established two separate trusts for those retirees who were subject to a collectively bargained agreement and all other retirees to fund retiree health care and life insurance benefits. IP's funding policy is to contribute annually an amount at least equal to the revenues collected for the amount of postretirement benefit costs allowed in rates. IP made cash contributions of $8.4 million in 1994 and $9.5 million in 1993. The plan assets consist of common stocks and fixed income securities at December 31, 1994 and 1993. The estimated funded status of the plans at December 31, 1994 and 1993, using weighted average discount rates of 8.75% and 7.75%, respectively, and a return on assets of 9% was as follows: Balances as of December 31, - ----------------------------------------------------------------- (Millions of dollars) 1994 1993 - ----------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees $(26.7) $(29.2) Other fully eligible participants (11.6) (14.0) Other active plan participants (27.3) (38.0) - ----------------------------------------------------------------- Total benefit obligation (65.6) (81.2) Plan assets at fair value 15.2 10.1 - ----------------------------------------------------------------- Funded status (50.4) (71.1) Unrecognized transition obligation 52.3 60.6 Unrecognized net (gain) loss (7.8) 7.4 - ----------------------------------------------------------------- Accrued postretirement benefit cost included in accounts payable $ (5.9) $ (3.1) - ----------------------------------------------------------------- The assumed 1995 weighted average health-care-cost trend rate used to measure the expected cost of benefits covered by the plans is 11%. This trend rate decreases through 2005 to an ultimate weighted average rate of 5% for 2005 and subsequent years. The effect of a 1% increase in each future year's assumed health-care-cost trend rates increases the service and interest cost from $9.4 million to $11.4 million and the accumulated postretirement benefit obligation from $65.6 million to $75.4 million. EARLY RETIREMENT In December 1994, IP announced plans for a voluntary early retirement program. Approximately 200 salaried employees would qualify for early retirement under this program. The offer will be made to employees during the fourth quarter of 1995. A similar program for union employees is the subject of contract negotiations currently underway between IP and the International Brotherhood of Electrical Workers. Approximately 450 union employees would qualify for the program if current negotiations result in the same package as offered to salaried employees. At December 31, 1994, IP employed 4,350 people, as compared to 4,540 at December 31, 1993. The early retirement program for salaried employees is expected to generate a pre-tax charge of approximately $22 million against fourth quarter 1995 earnings and to generate savings of approximately $15 million annually beginning in 1996. A combined early retirement program for both salaried and union employees, based on the same package as announced for salaried employees, would generate a pre-tax charge of approximately $42 million against fourth quarter 1995 earnings and would generate savings of approximately $35 million annually beginning in 1996. Note 12 Segments of Business - ---------------------------- Illinois Power Company is a public utility engaged in the generation, transmission, distribution, and sale of electric energy, and the distribution, transportation and sale of natural gas. The following is a summary of operations:
(millions of dollars) - ------------------------------------------------------------------------------------------------------------ 1994 1993 1992 Total TotalTotal Electric Gas Company Electric GasCompany Electric Gas Company - ------------------------------------------------------------------------------------------------------------ Operation information - Operating revenues $1287.5 $302.0 $1,589.5 $1,266.4 $314.8 $1,581.2 $1,190.9 $288.6 $1,479.5 Operating expenses, excluding provision for income taxes and deferred Clinton 872.6 274.7 1,147.3 873.9 286.2 1,160.1 831.3 264.7 1,096.0 Deferred Clinton costs 3.5 - 3.5 9.3 - 9.3 11.2 - 11.2 - ------------------------------------------------------------------------------------------------------------ Pre-tax operating income 411.4 27.3 438.7 383.2 28.6 411.8 348.4 23.9 372.3 Allowance for funds used during construction 8.9 0.4 9.3 6.2 1.0 7.2 4.5 0.7 5.2 Disallowed Clinton costs - - - (200.4) - (200.4) - - - - ------------------------------------------------------------------------------------------------------------ Pre-tax operating income, including AFUDC and disallowed Clinton costs $420.3 $ 27.7 $ 448.0 $ 189.0 $ 29.6 $218.6 $ 352.9 $ 24.6 $ 377.5 - ------------------------------------------------- --------------- ---------------- Other deductions, net 11.3 15.6 7.2 Interest charges 143.9 164.9 168.6 Provision for income taxes 112.5 94.2 79.6 - ------------------------------------------------------------------------------------------------------------ Net income (loss) 180.3 (56.1) (122.1) Preferred dividend requirements (24.9) (26.1) (28.9) Excess of carrying amount over consideration paid for redeemed preferred stock 6.4 - - - ------------------------------------------------------------------------------------------------------------ Net income (loss) applicable to common stock $ 161.8 $(82.2) $ 93.2 ============================================================================================================ Other information - Depreciation $ 156.1 $ 21.1 $ 177.2 $ 148.2 $ 21.0 $169.2 $ 141.3 $ 20.0 $ 161.3 - ------------------------------------------------------------------------------------------------------------ Capital expenditures $ 173.1 $ 20.6 $ 193.7 $ 221.3 $ 56.4 $277.7 $ 203.1 $ 41.3 $ 244.4 - ------------------------------------------------------------------------------------------------------------ Investment information - Identifiable assets* $4,589.0 $442.6 $5,031.6 $4,526.8 $406.4 $4,933.2 $4,602.9 $355.4 $4,958.3 - ------------------------------------------------- --------------- ---------------- Nonutility plant and other investments 15.2 15.2 9.3 Assets utilized for overall Company operations 549.0 496.7 364.1 - ------------------------------------------------------------------------------------------------------------ Total assets $5,595.8 $5,445.1 $5,331.7 ============================================================================================================
*Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs and prepaid and deferred energy costs. NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS - ------------------------------------------- 1994 1993 - ----------------------------------------------------------------- (Millions of dollars) Carrying Fair Carrying Fair Value Value Value Value - ----------------------------------------------------------------- Nuclear decommissioning trust funds $ 22.4 $22.9 $17.2 $18.3 Cash and cash equivalents 47.9 47.9 9.3 9.3 Mandatorily redeemable preferred stock 36.0 36.0 48.0 48.5 Long-term debt 1,868.1 1,750.7 1,984.5 2,048.6 Notes payable 238.8 238.8 92.3 92.3 - ----------------------------------------------------------------- The following methods and assumptions were used to estimate the fair value of each class of financial instruments listed in the table above: NUCLEAR DECOMMISSIONING TRUST FUNDS - The fair values of available-for-sale marketable debt securities and equity investments held by the Nuclear Decommissioning Trust are based on quoted market prices at the reporting date for those or similar investments. CASH AND CASH EQUIVALENTS - The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of these instruments. MANDATORILY REDEEMABLE SERIAL PREFERRED STOCK AND LONG-TERM DEBT - - The fair value of mandatorily redeemable preferred stock and long-term debt is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered for debt of the same remaining maturities. NOTES PAYABLE - The carrying amount of notes payable approximates fair value due to the short maturity of these instruments. Note 14 Quarterly Consolidated Financial Information and Common Stock Data (Unaudited) - --------------------------------------------------------- (Millions of dollars) - ----------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter 1994 1994 1994 1994 - ----------------------------------------------------------------- Operating revenues $442.9 $349.6 $428.9 $368.1 Operating income 71.3 72.2 112.2 64.7 Net income 34.4 36.5 78.4 31.0 Net income applicable to common stock 28.5 30.5 72.5 30.3 Cash dividends declared on common stock - 15.1 15.1 18.9 Cash dividends paid on common stock 15.1 30.2 - 15.2 First Second Third Fourth Quarter Quarter Quarter Quarter 1993 1993 1993 1993 - ----------------------------------------------------------------- Operating revenues $395.1 $350.5 $452.4 $383.2 Operating income 68.3 67.9 114.3 54.8 Net income (loss) 27.9 29.3 (123.9) 10.6 Net income (loss) applicable to common stock 21.0 22.5 (130.2) 4.5 Cash dividends declared on common stock 15.1 15.1 - - Cash dividends paid on common stock 15.1 15.1 15.1 15.2 The 1994 fourth quarter net income applicable to common stock includes $6.4 million for the excess of carrying amount over consideration paid for redeemed preferred stock. The 1993 third quarter loss reflects the write-off of disallowed Clinton costs of $200 million, net of income taxes. See "Note 2 - Clinton Power Station." On May 31, 1994, common shares of Illinois Power began trading as common shares of Illinova. Illinova is the sole shareholder of Illinois Power Company common stock. selected consolidated financial data - ------------------------------------ 1994 1993 1992 1991 1990 1984 - ----------------------------------------------------------------- Operating revenues Electric $1,177.5 $1,135.6 $1,117.9 $1,101.2 $1084.6 $810.3 Electric interchange 110.0 130.8 73.0 85.5 73.8 21.1 Gas 302.0 314.8 288.6 288.2 311.1 470.2 - ----------------------------------------------------------------- Total operating revenues $1,589.5 $1,581.2 $1,479.5 $1,474.9 $1,469.5 $1,301.6 - ----------------------------------------------------------------- Net income (loss) $180.3 $(56.1) $122.1 $109.3 $(78.5) $235.5 Effective income tax rate 38.4% (72.4)% 39.4% 40.4% (37.9)% 34.4% - ----------------------------------------------------------------- Net income (loss) applicable to common stock $161.8 $(82.2) $93.2 $78.4 $(115.3) $210.2 Cash dividends declared on common stock $ 49.1 $30.2 $105.9 $30.2 $ - $140.0 Cash dividends paid on common stock $ 60.5 $60.5 $60.5 $15.1 $ - $137.0 - ----------------------------------------------------------------- Total assets* $5,595.8 $5,445.1 $5,331.7 $5,271.8 $5,345.5 $4,083.5 - ----------------------------------------------------------------- Capitalization Common stock equity $1,466.0 $1,342.8 $1,454.0 $1,488.8 $1,414.9 $1,337.1 Preferred stock 321.7 303.7 303.1 303.1 308.9 265.2 Mandatorily redeemable preferred stock36.0 48.0 100.0 110.0 140.0 86.0 Long-term debt* 1,946.1 1,926.3 2,017.4 2,153.1 2,198.9 1,621.0 - ----------------------------------------------------------------- Total capitalization* $3,769.8 $3,620.8 $3,874.5 $4,055.0 $4,062.7 $3,309.3 - ----------------------------------------------------------------- Embedded cost of long-term debt 7.6% 7.5% 8.3% 8.7% 9.3% 10.1% - ----------------------------------------------------------------- Retained earnings (deficit) $51.1 $(71.0) $41.0 $75.8 $1.2 $350.6 - ----------------------------------------------------------------- Capital expenditures $193.7 $277.7 $244.4 $141.2 $130.6 $553.4 Cash flows from operations $280.2 $396.6 $374.5 $313.1 $252.6 $235.5 AFUDC as a percent of earnings applicable to common stock 5.7% N/A 5.6% 3.7% N/A 56.6% Ratio of earnings to fixed charges 2.73 .80 2.02 1.85 .70 3.15 ================================================================= * Restated for the effect of capitalized nuclear fuel lease. illinois power company selected statistics - ------------------------------------------ 1994 1993 1992 1991 1990 1984 - ----------------------------------------------------------------- ELECTRIC SALES IN KWH (MILLIONS) Residential 4,537 4,546 4,138 4,620 4,223 3,977 Commercial 3,517 3,246 3,055 3,111 2,981 2,698 Industrial 8,685 8,120 8,083 7,642 7,751 6,968 Other 536 337 466 699 987 1,822 - ----------------------------------------------------------------- Sales to ultimate consumers 17,275 16,249 15,742 16,072 15,942 15,465 Interchange 4,837 6,015 2,807 3,360 2,715 762 Wheeling 622 569 402 292 19 - - ----------------------------------------------------------------- Total electric sales 22,734 22,833 18,951 19,724 18,676 16,227 - ----------------------------------------------------------------- ELECTRIC REVENUES (MILLIONS) Residential $471 $463 $435 $447 $411 $279 Commercial 295 269 263 251 246 179 Industrial 378 360 381 355 373 277 Other 30 40 38 47 55 76 - ----------------------------------------------------------------- Revenues from ultimate consumers 1,174 1,132 1,117 1,100 1,085 811 Interchange 110 131 73 86 74 21 Wheeling 3 3 1 1 - - - ----------------------------------------------------------------- Total electric revenues $1,287 $1,266 $1,191 $1,187 $1,159 $832 - ----------------------------------------------------------------- GAS SALES IN THERMS (MILLIONS) Residential 359 371 339 339 322 399 Commercial 144 148 138 133 134 183 Industrial 81 78 136 98 99 230 - ----------------------------------------------------------------- Sales to ultimate consumers 584 597 613 570 555 812 Transportation of customer- owned gas 262 229 204 253 269 - - ----------------------------------------------------------------- Total gas sold and transported 846 826 817 823 824 812 Interdepart- mental sales 5 7 12 8 18 1 - ----------------------------------------------------------------- Total gas delivered 851 833 829 831 842 813 - ----------------------------------------------------------------- GAS REVENUES (MILLIONS) Residential $192 $200 $181 $184 $180 $248 Commercial 66 68 61 61 62 99 Industrial 31 34 37 31 42 110 - ----------------------------------------------------------------- Revenues from ultimate consumers 289 302 279 276 284 457 Transportation of customer- owned gas 9 8 7 9 10 - Miscellaneous 4 5 3 3 17 13 - ----------------------------------------------------------------- Total gas revenues $302 $315 $289 $288 $311 $470 - ----------------------------------------------------------------- System peak demand (native load) in kw (thousands) 3,395 3,415 3,109 3,272 3,394 3,371 Firm peak demand (native load) in kw (thousands) 3,232 3,254 2,925 3,108 3,180 3,217 Net generating capability in kw (thousands) 4,121 4,045 4,052 3,909 3,891 3,774 - ----------------------------------------------------------------- Electric customers (end of year) 553,869 554,270 549,391 565,421 560,045 533,364 Gas customers (end of year) 388,170 394,379 386,261 401,763 398,891 381,710 Employees (end of year) 4,350 4,540 4,624 4,514 4,402 4,236 ================================================================= -----END PRIVACY-ENHANCED MESSAGE-----