-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EjTNMLcpc3cyMgqgn/VrMUgp97dCcU8skVvoiI7zVoHvIQSOmrSB8MzvEV/Slpih xdV2h9DdFyZhybIwsv3lbg== 0000049816-96-000007.txt : 19960501 0000049816-96-000007.hdr.sgml : 19960501 ACCESSION NUMBER: 0000049816-96-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS POWER CO CENTRAL INDEX KEY: 0000049816 STANDARD INDUSTRIAL CLASSIFICATION: 4931 IRS NUMBER: 370344645 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03004 FILM NUMBER: 96541212 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 10-K 1 10-K BASE DOCUMENT SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549-1004 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1995 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Registrants, State of Incorporation, Address Commission of Principal Executive I.R.S. Employer File Number Offices and Telephone Number Identification No. - - ---------- ____________________________ ------------------ 1-11327 ILLINOVA CORPORATION 37-1319890 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 62525-1805 (217) 424-6600 1-3004 ILLINOIS POWER COMPANY 37-0344645 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 62525-1805 (217) 424-6600 Securities registered pursuant to Section 12(b) of the Act: Each of the following securities registered pursuant to Section 12(b) of the Act are listed on the New York Stock Exchange. Title of each class Registrant - - ------------------- ---------- Common Stock (a) Illinova Corporation Preferred stock, cumulative, Illinois Power Company $50 par value 4.08% Series 4.26% Series 4.70% Series 4.20% Series 4.42% Series Preferred stock, cumulative, no par value Adjustable Rate Series A Adjustable Rate Series B Mandatorily redeemable preferred securities of subsidiary (Illinois Power Capital, L.P.) 9.45% Series First mortgage bonds 6 1/2% Series due 1999 8 3/4% Series due 2021 7.95% Series due 2004 New mortgage bonds 6 1/8% Series due 2000 6 3/4% Series due 2005 5 5/8% Series due 2000 8% Series due 2023 6 1/2% Series due 2003 7 1/2% Series due 2025 (a) Illinova Common Stock is also listed on the Chicago Stock Exchange. Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Illinova Corporation Yes [X] No Illinois Power Company Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Illinova Corporation [X] Illinois Power Company [X] The aggregate market value of the voting common stock held by non-affiliates of Illinova Corporation at February 29, 1996 was approximately $2.2 billion. Illinova Corporation is the sole holder of the common stock of Illinois Power Company. The aggregate market value of the voting preferred stock held by non-affiliates of Illinois Power Company at February 29, 1996, was approximately $99 million. The determination of stock ownership by non- affiliates was made solely for the purpose of responding to this requirement and the registrants are not bound by this determination for any other purpose. The number of shares of Illinova Corporation Common Stock, without par value, outstanding on February 29, 1996 was 75,674,837. Documents Incorporated by Reference 1. Portions of the 1995 Annual Report to Shareholders of Illinova Corporation in the appendix to the Illinova Corporation Proxy Statement. (Parts I, II, III and IV of Form 10-K) 2. Portions of the 1995 Annual Report to Shareholders of Illinois Power Company in the appendix to the Illinois Power Company Information Statement. (Parts I, II, III and IV of Form 10-K) 3. Portions of the Illinova 1995 Proxy Statement. (Part III of Form 10-K) 4. Portions of the Illinois Power 1995 Information Statement. (Part III of Form 10-K) ILLINOVA CORPORATION ILLINOIS POWER COMPANY FORM 10-K For the Fiscal Year Ended December 31, 1995 This combined Form 10-K is separately filed by Illinova Corporation and Illinois Power Company. Prior to the filing of the combined 10-Q for the quarter ended June 30, 1994, Illinova Corporation was not a reporting company for purposes of the Securities Exchange Act of 1934 and Illinois Power Company filed its own separate reports on Form 10-K. Information contained herein relating to Illinois Power Company is filed by Illinova Corporation and separately by Illinois Power Company on its own behalf. Illinois Power Company makes no representation as to information relating to Illinova Corporation or its subsidiaries, except as it may relate to Illinois Power Company. TABLE OF CONTENTS Part I Page Item 1. Business 6 General 6 Competition 7 Customer and Revenue Data 8 Electric Business 9 Overview 9 Power Coordination Agreement With Soyland 10 Fuel Supply 10 Construction Program 12 Clinton Power Station 13 General 13 Decommissioning Costs 13 Accounting Matters 13 Dividends 14 Gas Business 14 Gas Supply 14 Environmental Matters 15 Air Quality 15 Clean Air Act 16 Manufactured-Gas Plant(MGP) Sites 16 Water Quality 16 Other Issues 17 Electric and Magnetic Fields 17 Environmental Expenditures 17 Research and Development 17 Regulation 18 Executive Officers of Illinova Corporation 18 Executive Officers of Illinois Power Company 19 Operating Statistics 20 Item 2. Properties 20 Item 3. Legal Proceedings 20 Environmental 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Part II Item 5. Market for Registrants' Common Equity and Related Stockholder Matters 22 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 TABLE OF CONTENTS (Continued) Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 23 Part III Item 10. Directors and Executive Officers of the Registrants 24 Item 11. Executive Compensation 24 Item 12. Security Ownership of Certain Beneficial Owners and Management 24 Item 13. Certain Relationships and Related Transactions 24 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 25 Signatures 27-28 Exhibit Index 29 PART I - - ----------------------------------------------------------------- ITEM 1. Business - - ------- General ------- Illinois Power Company (IP) was incorporated under the laws of the State of Illinois on May 25, 1923. Illinova Corporation (Illinova) was incorporated under the laws of the State of Illinois on May 27, 1994 and currently serves as the parent holding company of three principal operating subsidiaries: IP, Illinova Generating Company (IGC) and Illinova Power Marketing, Inc. (IPMI). IP is the primary business and principal 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. Several developments have occurred recently at IP that are related to the increasingly competitive nature of the utility industry and IP's efforts to position itself to benefit from the opportunities emerging on the horizon. In 1995, IP was a participant in the development of Energy Choice 2000, a legislative proposal designed to reform utility regulation in Illinois. Furthermore, IP designed and proposed an open energy access experiment which would allow approximately 20 industrial customers to purchase electricity and related services from other sources. IP plans to use this experiment to evaluate the financial, operational and service impacts of transporting power from other suppliers to customers. For a more detailed discussion of these developments, refer to the "Competition" section of this item. In December 1994, IP announced plans for voluntary enhanced retirement and severance programs. During the fourth quarter of 1995, 727 employees elected to accept either enhanced retirement or enhanced severance. These two programs resulted in a pre-tax charge of $38 million against fourth quarter 1995 earnings but are expected to generate savings of approximately $36 million annually beginning in 1996. IP provides funds to Illinova for operations and investments. Illinova accrues interest due to IP on these funds at a rate equal to the higher of the rate that Illinova would have to pay if it used a currently outstanding line of credit, or IP's actual cost of the funds provided. At the end of each quarter, IP effects a common stock repurchase from Illinova by accepting shares equal in market value to the amount of the funds provided to Illinova during the quarter plus the accrued interest for the quarter. During 1995, IP provided approximately $34 million in funds to Illinova. Since Illinova's inception in 1994, IP has provided approximately $54 million to Illinova. For further information on IP common stock repurchases, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operation" of this report. IP's financial position and results of operations are currently the principal factors affecting Illinova's consolidated financial position and results of operations. IGC is Illinova's wholly-owned independent power subsidiary that invests in energy-related projects throughout the world and competes in the independent power market. IGC is an equity partner with Tenaska, Inc. in four natural gas-fired generation plants. Tenaska, Inc. is a developer of independent power projects and is based in Omaha, Nebraska. IGC also owns 50 percent of the North American Energy Services Company (NAES), which supplies a broad range of operations, maintenance and support services to the world-wide independent power generation industry. NAES will operate the Tenaska generation plants in which IGC has an equity position. IGC is an equity partner in the Indeck North American Power Fund (Fund). The Fund has generation projects in Long Beach, California, and Pepperell, Massachusetts. In addition to these ventures, IGC is involved in generation projects in Teesside, England; Puerto Cortez, Honduras; Zhejiang Province, People's Republic of China; Aguaytia, Peru; and Old Harbour, Jamaica. IGC also has invested in a coal-drying facility in Gillette, Wyoming. IPMI is Illinova's wholly-owned subsidiary that is in the business of marketing energy and energy-related services. On May 16, 1995, IPMI obtained approval from the Federal Energy Regulatory Commission (FERC) to conduct business as a marketer of electric power and gas to various customers outside of IP's present service territory. In September 1995, IPMI began buying and selling wholesale electricity in the western United States. IPMI owns 50 percent of Tenaska Marketing Ventures (TMV). IPMI and TMV have formed Tenaska Marketing Canada to market natural gas in Canada. On December 13, 1995, the Illinova Board of Directors approved the formation of a captive insurance subsidiary of Illinova. The purpose of the insurance subsidiary will be to provide insurance coverage to IP that is not available in the commercial market, to provide greater financial flexibility for Illinova and to reduce IP's risk management costs. It is anticipated that the insurance subsidiary will be created in mid- 1996. Competition - - ----------- Competition has become a dominant issue for the electric utility industry. It has been promoted by federal legislation, starting with the Public Utility Regulatory Policies Act of 1978, which facilitated the development of co-generators and independent power producers. Federal promotion of competition continued with enactment of the Energy Policy Act of 1992, which authorized the 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, which is a practice that continues. Competition arises not only from co-generation or independent power production, but also from municipalities seeking to extend their service boundaries to include customers being served by IP. The right of municipalities to have power wheeled to them by utilities was established in 1973. IP has been obligated to wheel power for municipalities and cooperatives in its territory since 1976. 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 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. Legislative action would be required for retail wheeling to occur in Illinois. 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 which is designed to allow a reasonable return on prudent investment and recovery of operating costs. States' 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 existing generation investment. In March 1995, IP was instrumental in developing a legislative proposal, Energy Choice 2000, which is designed to reform Illinois' regulatory laws governing utilities. Energy Choice 2000 establishes the framework for a managed transition for utilities to operate in a competitive market. The proposal outlines a time frame for all classes of customers to benefit from competition, beginning in the year 2000. In May 1995, the Illinois General Assembly passed Senate Joint Resolution 21, which established the Joint Committee on Electric Utility Regulatory Reform and directed it to use Energy Choice 2000 "as a key element for developing legislative proposals for reducing regulation, increasing customer choice and promoting and facilitating competition in Illinois' electric utility industry." The Joint Committee on Electric Utility Regulatory Reform is directed to provide a final legislative proposal during the fourth quarter of 1996. On September 11, 1995, IP filed a proposal with the ICC seeking approval to conduct an open-energy access experiment beginning in 1996. The experiment would allow approximately 20 industrial customers to purchase electricity and related services from other sources. IP would transmit (wheel) the electricity over its lines. IP received approval for the experiment from the ICC on March 13, 1996. IP expects to receive approval from the FERC by April 15, 1996. The maximum total load involved in this experiment represents approximately 1 percent of IP's total load, or about $7.5 million in net annual revenue. IP expects the earnings impact to be immaterial. Any loss of sales would be partially offset by revenues obtained by selling the surplus energy and capacity on the open market and by transmission and ancillary service charges necessary for customers to obtain energy from an alternative supplier, as well as by corresponding reductions in fuel and other variable operating costs. The open-access experiment will allow IP to evaluate the financial, operational and service impacts of transporting power from other suppliers to customers. Additionally, regulators and legislators will benefit from the experiment by observing open- energy access in a "laboratory setting" while they look for ways to bring the benefits of competition to all customers. Finally, it will give customers opportunity to gain experience in arranging their power supplies and transmission requirements and managing their operations under an open-energy access scenario. At this time, the ultimate effect of competition in the electric utility industry on Illinova's consolidated financial position and results of operations is uncertain. Customer and Revenue Data - - ------------------------- Approximately 83 percent and 17 percent of Illinova's and its subsidiaries' operating revenues are derived from the sale of electricity and the sale and transportation of natural gas, respectively. The territory served by IP comprises substantial areas in northern, central and southern Illinois, including ten cities with populations greater than 30,000 (1990 Federal Census data). IP supplies electric service at retail to an estimated aggregate population of 1,265,000 in 310 incorporated municipalities, adjacent suburban and rural areas, and numerous unincorporated communities and retail natural gas service to an estimated population of 920,000 in 257 incorporated municipalities and adjacent areas. IP holds franchises in all of the 310 incorporated municipalities in which it furnishes retail electric service and in all of the 257 incorporated municipalities in which it furnishes retail gas service. At February 29, 1996, IP served 629,351 active electric customers and 402,775 active gas customers. These numbers do not include non-metered customers such as street lights. Sales of electricity and gas sales and transportation are affected by seasonal weather patterns, and, therefore, operating revenues and associated operating expenses are not distributed evenly during the year. For more information, see "Note 13 - Segments of Business" on page A-30 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. To the extent that information incorporated by reference herein appears identically in both the 1995 Annual Report to Shareholders of Illinova Corporation and the 1995 Annual Report to Shareholders of Illinois Power Company, reference will be made herein only to the 1995 Annual Report to Shareholders of Illinova Corporation, and such reference will be deemed to include a reference to the 1995 Annual Report of Illinois Power Company. Electric Business ----------------- Overview - - -------- IP supplies electric service at retail to residential, commercial and industrial consumers in substantial portions of northern, central and southern Illinois. Electric service at wholesale is supplied for resale to one electric utility and to the Illinois Municipal Electric Agency (IMEA) as agent for 11 municipalities. IP also has a power coordination agreement with Soyland Power Cooperative, Inc. (Soyland). See the sub-caption "Power Coordination Agreement With Soyland" hereunder for additional information. In 1995, IP provided interchange power to 21 entities, including 7 power marketers. IP's highest system peak hourly demand (native load) in 1995 was 3,666,738 kilowatts on July 13, 1995. This 1995 peak load set a new company record, surpassing IP's previous high of 3,508,000 kilowatts set in 1988. IP owns and operates generating facilities with a total net summer capability of 4,443,000 kilowatts. The generating capability comes from six major steam generating plants and three peaking service combustion turbine plants. See Item 2 "Properties" for further information. IP owns 20% of the capital stock of Electric Energy, Inc. (EEI), an Illinois corporation. EEI was organized to own and operate a steam electric generating station and related transmission facilities near Joppa, Illinois to supply electric energy to the U.S. Department of Energy (DOE) for its project near Paducah, Kentucky. Under a power supply agreement with EEI, IP has the right to purchase 5.0% of the annual output of the Joppa facility. IP has the flexibility to schedule the capacity in varying amounts ranging from a nominal 51,000 kilowatts for 52 weeks up to a maximum of 203,000 kilowatts for approximately 13 weeks. IP must schedule its annual capacity entitlement by August 1 of the preceding year, and availability of the scheduled capacity is subject to certain other limitations related to scheduling considerations of the other co-owners of the Joppa facility and the DOE, and any planned unit outages. The power supply agreement is effective until December 31, 2005, unless amended, changed, or canceled by mutual agreement of all parties. IP is a participant, together with Union Electric Company (UE) and Central Illinois Public Service Company (CIPS), in the Illinois-Missouri Power Pool which was formed in 1952. The Pool operates under an interconnection agreement which provides for the interconnection of transmission lines. Additionally, the agreement contains provisions for the coordination of generating equipment maintenance schedules, inter-company sales of firm and non-firm power, and the maintenance of minimum capacity reserves by each participant. These capacity reserves are equal to the greater of 15% of its peak demand, one-half of its largest unit, or one-half of its largest non-firm purchase. This agreement has no expiration date, but any party may withdraw from the agreement by giving 36 months notice to the other parties. IP, CIPS and UE have a contract with the Tennessee Valley Authority (TVA) providing for the interconnection of the TVA system with those of the three companies to exchange economy and emergency power and for other working arrangements. This contract has no expiration date, but any party may withdraw from the agreement by giving 5 years written notice to the other parties. IP also has interconnections with Indiana-Michigan Power Company, Commonwealth Edison Company, Central Illinois Light Company, Mid-American Energy Corporation, Kentucky Utilities Company, Southern Illinois Power Cooperative, EEI, Soyland and the City of Springfield, Illinois. IP is also a member of the Mid-America Interconnected Network, which is one of nine regional reliability councils established to coordinate plans and operations of member companies regionally and nationally. Power Coordination Agreement With Soyland - - ----------------------------------------- Under the provisions of the 1984 Power Coordination Agreement (PCA) between IP and Soyland, IP is required to provide Soyland with 12.0% of the electrical capacity from its fossil- fueled generating plants until the agreement expires or is terminated. IP transmits energy for Soyland through IP's transmission and subtransmission systems and is compensated by Soyland with capacity charges and for energy and variable operating costs. For more information on the PCA, see "Note 6 - Facilities Agreements" on page A-23 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Fuel Supply - - ----------- Coal was used to generate 72.7% of the electricity produced by IP during 1995, with nuclear and oil and gas contributing 26.8% and 0.5%, respectively. Based on current forecasts, the percentages of generation attributable to coal, nuclear, oil and gas in 1995 should remain essentially the same in future years. The percentage attributable to nuclear is projected to increase to around 31.0%, while the percentage attributable to coal should decline to about 68.0%, during those years in which there is not a scheduled refueling outage for the Clinton Power Station (Clinton). IP's rate schedules contain provisions for passing along to its electric customers increases or decreases in the cost of fuels used in its generating stations. For additional information see the information under the sub-captions "Revenue and Energy Cost" of "Note 1 - Summary of Significant Accounting Policies" on page A-15 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. COAL - Coal is expected to be a major source of fuel for future generation. Through both long-term and short-term contracts, IP has obtained commitments for the major portion of future coal requirements. IP has short-term contracts with four suppliers which last through 1997 and long-term contracts with two suppliers which last through 1999 and 2010. Contracts renegotiated in 1993 and 1994 have provided for the continued economic use of high sulfur Illinois coal while IP complies with Phase I of the Clean Air Act Amendments that became effective January 1, 1995. Spot purchases of coal in 1995 represented less than 1% of IP's total coal purchases. IP believes that it will be able to obtain sufficient coal to meet its future generating requirements. However, IP is unable to predict the extent to which coal availability and price may fluctuate in the future. Coal inventories on hand at December 31, 1995 represented a 27- day supply based on IP's average daily burn projections for 1996. IP continues to evaluate and obtain alternate fuel delivery and unloading facilities for greater flexibility of fuel supplies. New rail unloading facilities at the Havana Station (Havana) are expected to be operational in 1996. NUCLEAR - IP leases nuclear fuel from Illinois Power Fuel Company (Fuel Company). The Fuel Company, which is 50% owned by IP, was formed in 1981 for the purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to the Fuel Company's cost of fuel as consumed (including related financing and administrative costs). As of December 31, 1995, the Fuel Company had an invest ment in nuclear fuel of approximately $95 million. IP is obligated to make subordinated loans to the Fuel Company at any time the obligations of the Fuel Company which are due and payable exceed the funds available to the Fuel Company. At December 31, 1995, IP had no outstanding loans to the Fuel Company. At December 31, 1995, IP's net investment in nuclear fuel consisted of $10 million of Uranium 308. This inventory represents fuel to be used in connection with the sixth reload of Clinton which is scheduled to begin in October 1996 and expected to last approximately six weeks. At December 31, 1995, the unamortized investment of the nuclear fuel assemblies in the reactor was $85 million. IP has two long-term contracts for the supply of uranium concentrates. One contract is with Cameco, a Canadian corporation. The Cameco contract was renegotiated in 1994 to lower the price and provide 55% to 65% of Clinton's estimated fuel requirements through 2000. The decision to utilize Cameco for the additional 10% of Clinton's fuel requirements is made the year before each delivery and depends on the estimated price and availability from the spot market versus the estimated contract prices. The contract with Cameco is stated in terms of U. S. Dollars. The second uranium contract is with U.S. Energy/Crested Corporation. Originally, it was for 1,179,240 pounds of uranium concentrates with deliveries through 1998. IP purchased approximately one half of the uranium concentrates supply under this contract before it was terminated in September 1993. In October 1993, IP filed suit in U.S. District Court, Central District of Illinois, Danville, seeking a declaration that IP's termination of the U.S. Energy contract was permitted by the terms of the contract as they relate to rights of termination in the event of certain receivership proceedings. On September 1, 1994, the Court granted defendants' motions for summary judgment and ruled that the termination constituted a breach of contract. On June 15, 1995, IP concluded a negotiated settlement with U.S. Energy/Crested Corporation. That settlement reduced the quantity to be purchased and shortened the contract term by one year, while increasing the price per pound. Conversion services for the period 1991-2001 are contracted with Sequoyah Fuels. Sequoyah Fuels closed its Oklahoma conversion plant in 1992 and joined with Allied Chemical Company to form a marketing company named CoverDyn. All conversion services will be performed at Allied's Metropolis, Illinois facility, but Sequoyah Fuels retains the contract with IP. IP has a Utility Services contract for uranium enrichment require ments with the DOE which provides 70% of the enrichment require ments of Clinton through September 1999. The remaining 30% has been contracted with the DOE through an amendment to its incentive pricing plan through 1999. This amendment allows IP to either purchase the enrichment services at the DOE's incentive price or provide electricity at DOE's Paducah, Kentucky enrichment plant at an agreed exchange rate. In addition, legislation was passed to create a new private government corporation, the United States Enrichment Corporation (USEC), for enrichment services. All of the DOE's assets including all contracts, were transferred to the USEC as of July 1993. A contract with General Electric Company provides fuel fabrication requirements for the initial core and approximately 11 reloads, or through 2004. In 1993, an amendment was signed with the General Electric Company to add 67% more fuel bundles to the contract and to change the existing price and other terms and conditions. The additional fuel bundles are expected to cover fuel fabrication requirements through 2017. Beyond the stated commitments, IP may enter into additional contracts for uranium concentrates, conversion to uranium hexafluoride, enrichment and fabrication. Currently, no plants for commercial reprocessing of spent nuclear fuel are in operation in the U.S., and reprocessing cannot begin until appropriate licenses are issued by the Nuclear Regulatory Commission (NRC). Various governmental agencies are currently reviewing the environmental impact of nuclear fuel reprocessing and waste management. The Nuclear Waste Policy Act of 1982 was enacted to establish a government policy with respect to disposal of spent nuclear fuel and high-level radioactive waste. On July 6, 1984, IP signed a contract with the DOE for disposal of spent nuclear fuel and/or high-level radioactive waste. Under the contract, IP is required to pay the DOE one mill (one-tenth of a cent) per net kilowatt-hour (one dollar per MWH) of electricity generated and sold. IP is recovering this amount through rates charged to customers. On June 20, 1994, IP and 13 other utilities filed an action in the D.C. Circuit Court of Appeals asking the Court to rule that the DOE is obligated to take responsibility for spent nuclear fuel by January 31, 1998 under the Nuclear Waste Policy Act of 1982. IP based its decision to build Clinton, in part, on the assurance that a federal repository would be built and operated by the DOE, and, under the Act, the DOE has been collecting money from IP to pay for such a repository. The utilities are asking the Court to confirm the DOE's commitment and to order the DOE to develop a compliance program with appropriate deadlines. The utilities also have asked for relief from the ongoing funding requirements or to have an escrow account established for future funds paid to DOE. Oral arguments in this case were held in January 1996. A decision from the Court is expected sometime in 1996. IP has on-site storage capacity that will accommodate its spent fuel storage needs until the year 2004, based on current operating levels. If by that date the U.S. Government has not complied with to its statutory obligation to dispose of spent fuel, and IP has continued to operate the plant at current levels, IP will have to use alternative means of disposal, such as dry storage in casks on site or transportation of the fuel rods to private or collectively-owned utility repositories. IP currently is an equity partner in an effort to develop a private storage facility in conjunction with the Mescalaro Apaches on their reservation in New Mexico. Continued participation in the partnership will depend on the technological and economic viability of the project. Current technology allows safe, dry, on-site storage, subject to licensing and local permitting requirements. Under the Energy Policy Act of 1992, IP is responsible for a portion of the cost to decontaminate and decommission the DOE's uranium enrichment facilities. Each utility will be assessed an annual fee for a period of fifteen years based on quantities purchased from the DOE facilities prior to passage of the Act. At December 31, 1995, IP has a remaining liability of $5.1 million representing future assessments. IP is recovering these costs, as amortized, through its fuel adjustment clause. OIL and GAS - IP used natural gas and oil to generate 0.5% of the electricity produced in 1995. IP has not experienced difficulty in obtaining adequate supplies of these resources. However, IP is unable to predict the extent to which oil and gas availability and price may fluctuate in the future. Reference is made to the sub-caption "Environmental Matters" hereunder for information regarding pollution control matters relating to IP's fuel supply. Construction Program - - -------------------- Illinova and IP need cash for construction programs. To meet anticipated needs, Illinova and IP have used internally generated funds and external financings. The timing and amount of external financings depend primarily on economic and financial market conditions, cash needs and capitalization ratio objectives. For more information on Illinova's construction program and liquidity, see "Note 4 - Commitments and Contingencies" on page A- 18 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference; "Note 5 - Lines of Credit and Short-Term Loans" on page A-22 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference; and "Capital Resources and Requirements" in "Management's Discussion and Analysis" on page A-7 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. For more information on IP's construction program and liquidity, see "Note 3 - Commitments and Contingencies" on page A- 18 of the 1995 Annual Report to Shareholders in the appendix to the Illinois Power Information Statement which is incorporated herein by reference; "Note 4 - Lines of Credit and Short-Term Loans" on page A-22 of the 1995 Annual Report to Shareholders in the appendix to the Illinois Power Information Statement which is incorporated herein by reference; and "Capital Resources and Requirements" in "Management's Discussion and Analysis" on page A- 7 of the 1995 Annual Report to Shareholders in the appendix to the Illinois Power Information Statement which is incorporated herein by reference. Clinton Power Station - - --------------------- General ------- IP and Soyland share ownership of Clinton, with IP owning 86.8% and Soyland owning 13.2%. Clinton was placed in service in 1987 and represents approximately 18% of IP's installed generation capacity. For more information on the Clinton Power Station, see "Note 3 - Clinton Power Station" on page A-17 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Decommissioning 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 electric rates based on an ICC-approved formula that allows IP to adjust rates annually for changes in decommissioning cost estimates. For more information on the decommissioning costs related to the Clinton Power Station, see "Note 4 - Commitments and Contingencies" on page A-18 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Accounting Matters - - ------------------ The Illinova consolidated financial statements include the accounts of Illinova Corporation, a holding company; IP, a combination electric and gas utility; IGC, a wholly-owned subsidiary that invests in energy-related projects and competes in the independent power market; and IPMI, a wholly-owned subsidiary that markets energy and energy-related services. IP's consolidated financial position and results of operations are currently the principal factors affecting Illinova's consolidated financial position and results of operations. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. All non-utility operating transactions are included in the section titled Other Income and Deductions, "Miscellaneous- net" in the Consolidated Statements of Income. Prior year amounts have been restated on a basis consistent with the December 31, 1995, presentation. The IP consolidated financial statements include the accounts of Illinois Power Capital, L.P., a limited partnership in which IP serves as the general partner. IP currently prepares its financial statements in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). 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 non-cash charge to income would be recorded in order to remove the effects of the actions of regulators from the consolidated financial statements. The discontinuation of application of FAS 71 would likely have a material adverse effect on Illinova's and IP's consolidated financial position and results of operations. Dividends - - --------- On December 13, 1995, Illinova increased the quarterly common stock dividend 12%, to $.28 per share from $.25 per share, effective with the common stock dividend for the first quarter of 1996. Gas Business ------------ IP supplies retail natural gas service to an estimated aggregate population of 920,000 in 257 incorporated municipalities, adjacent suburban areas and numerous unincorporated communities. IP does not sell gas for resale. IP's rate schedules contain provisions for passing through to its gas customers increases or decreases in the cost of purchased gas. For information on revenue and energy costs, see the sub-caption "Revenue and Energy Cost" of "Note 1 - Summary of Significant Accounting Policies" on page A-15 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement that is incorporated herein by reference. IP has eight underground gas storage fields having a total capacity of approximately 15.2 million MMBtu and a total deliverability on a peak day of about 347,000 MMBtu. In addition to the capacity of the eight underground storage fields, IP has contracts with various natural gas suppliers and producers for 11.0 million MMBtu of underground storage capacity and a total deliverability on a peak day of 160,000 MMBtu. Operation of un derground storage permits IP to increase deliverability to its customers during peak load periods by taking gas into storage during the off-peak months. IP owns two active liquefied petroleum gas plants having an aggregate peak-day deliverability of about 40,000 MMBtu for peak- shaving purposes. Gas properties include approximately 7,800 miles of mains. IP experienced its 1995 peak-day send out of 666,200 MMBtu of natural gas on December 9, 1995. This compares with IP's record peak-day send out of 857,324 MMBtu of natural gas on January 10, 1982. Gas Supply - - ---------- Pursuant to Orders 636 and 636-A, issued in April and August 1992, respectively, the FERC approved amendments to rules 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. Under this rule, pipelines are required to unbundle services that they provided so that natural gas purchasers can select services as needed to meet their energy requirements. As of December 31, 1993, all of IP's pipeline suppliers had restructured their service offerings to conform with the requirements of Orders 636 and 636-A. These rules have increased the complexity of providing firm gas service. This additional complexity results from the greater number of options available to IP, as well as the added responsibility to arrange for the acquisition, transportation and storage of natural gas, which was previously bundled into the pipelines' 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 it will incur approximately $10.5 million in transition costs through 1998. 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. Under Order 636, IP has entered into firm transportation agreements with the pipelines that feed its system. IP has contracts with five suppliers through 1996. IP's present estimated supplies of gas from pipelines and its own storage are sufficient to serve all of its existing firm loads. When gas service to interruptible customers is interrupted, storage service is made available in lieu of curtailment. Gas service continues to be available to all applicants on a current basis. Environmental Matters --------------------- IP is subject to regulation by certain federal and Illinois authorities with respect to environmental matters and may in the future become subject to additional regulation by such authorities or by other federal, state and local governmental bodies. Existing regulations affecting IP are principally related to air and water quality, hazardous wastes and toxic substances. Air Quality - - ----------- Pursuant to the Federal Clean Air Act (Act), the United States Environmental Protection Agency (USEPA) has established ambient air quality standards for air pollutants which, in its judgment, have an adverse effect on public health or welfare. The Act requires each state to adopt laws and regulations, subject to USEPA approval, designed to achieve such standards. Pursuant to the Illinois Environmental Protection Act, the Illinois Pollution Control Board (Board) adopted and, along with the Illinois Environmental Protection Agency (IEPA), is enforcing a comprehensive set of air pollution control regulations which include emission limitations and permitting and monitoring and reporting requirements. The air pollution regulations of the Board impose limitations on emissions of particulate, sulfur dioxide, carbon monoxide, nitrogen oxides and various other pollutants. Enforcement of emission limitations is accomplished in part through the regulatory permitting process. IP's practice is to obtain an operating permit for each source of regulated emissions. Presently, it has a total of approximately 100 permits for emission sources at its power stations and other facilities, expiring at various times. In addition to having the requisite operating permits, each source of regulated emissions must be operated within the regulatory limitations on emissions. Verification of such compliance is usually accomplished by reports to regulatory authorities and inspections by such authorities. In accordance with the requirements of the Illinois Clean Air Act Permit Program (CAAPP), IP submitted new air permit applications for each of its generating facilities in 1995. The IEPA will review these applications and is expected to issue CAAPP permits in 1996 or 1997. In addition to the sulfur dioxide emission limitations for existing facilities, both the USEPA and the State of Illinois adopted New Source Performance Standards (NSPS) applicable to coal-fired generating units limiting emissions to 1.2 pounds of sulfur dioxide per million Btu of heat input. This standard is applicable to IP's Unit 6 at the Havana power station. The federal NSPS also limit nitrogen oxides, opacity and particulate emissions and imposes certain monitoring requirements. In 1977 and 1990 the Act was amended and, as a result, USEPA has adopted more stringent emission standards for new sources. These standards would apply to any new plant constructed by IP. Clean Air Act - - ------------- For information on the impacts of the Clean Air Act Amendments of 1990, see "Note 4 - Commitments and Contingencies" on page A-18 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Manufactured-Gas Plant (MGP) Sites - - ---------------------------------- For information on MGP sites, see "Note 4 - Commitments and Contingencies" on page A-18 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Water Quality - - ------------- The Federal Water Pollution Control Act Amendments of 1972 require that National Pollutant Discharge Elimination System (NPDES) permits be obtained from USEPA (or, when delegated, from individual state pollution control agencies) for any discharge into navigable waters. Such discharges are required to conform with the standards, including thermal, established by USEPA and also with applicable state standards. Enforcement of discharge limitations is accomplished in part through the regulatory permitting process similar to that described previously under "Air Quality". Presently, IP has approximately two dozen permits for discharges at its power stations and other facilities, which must be periodically renewed. In addition to obtaining such permits, each source of regulated discharges must be operated within the limitations prescribed by applicable regulations. Verification of such compliance is usually accomplished by monitoring results reported to regulatory authorities and inspections by such authorities. The Baldwin power station (Baldwin) NPDES permit was reissued during the fourth quarter of 1993 and is due for renewal in the fourth quarter of 1997. The Hennepin power station (Hennepin) permit was reissued in 1992 and is due for renewal in the third quarter of 1997. The application to renew the Clinton permit has been submitted and IP is allowed to continue to operate the plant at currently authorized levels. IP expects the permit to be reissued in the second quarter of 1996. The Vermilion power station (Vermilion), Wood River power station (Wood River) and Havana permits were reissued in 1991 and were due for renewal in the fourth quarter of 1995. IP submitted all three applications for reissuance. The Havana permit was reissued effective March 1, 1996, and the Wood River permit is expected during the second quarter of 1996. The IEPA has not begun reviewing the Vermilion application; therefore, no realistic estimation can be made regarding its reissuance date. Because the applications have been filed, all three plants can continue operations without reissued permits. The Baldwin NPDES permit has been modified to extend the compliance schedule for achieving compliance with the boron effluent limit for its ash pond discharge. The initial date for achieving compliance was October 1996; however, because of delays caused by the flooded Kaskaskia River, necessary mixing zones studies could not be completed as anticipated. IEPA modified the permit to extend the compliance schedule until December 1, 1997, which allowed IP sufficient time to complete all necessary studies. Other Issues - - ------------ Hazardous and non-hazardous wastes generated by IP must be managed in accordance with federal regulations under the Toxic Substances Control Act (TSCA), the Comprehensive Environmental Response, Compensation and Liability Act and the Resource Conservation and Recovery Act (RCRA) and additional state regulations promulgated under both RCRA and state law. Regulations promulgated in 1988 under RCRA govern IP's use of underground storage tanks. The use, storage, and disposal of certain toxic substances, such as polychlorinated biphenyls (PCBs) in electrical equipment, are regulated under the TSCA. Hazardous substances used by IP are subject to reporting requirements under the Emergency Planning and Community-Right-To- Know Act. The State of Illinois has been delegated authority for enforcement of these regulations under the Illinois Environmental Protection Act and state statutes. These requirements impose certain monitoring, recordkeeping, reporting and operational requirements which IP has implemented or is implementing to assure compliance. IP does not anticipate that compliance will have a material adverse effect on its financial position or results of operations. Between June 1983 and January 1985, IP shipped various materials containing PCBs to the Martha C. Rose Chemicals, Inc. (Rose) facility in Holden, Missouri for proper treatment and disposal. Rose, pursuant to permits issued by USEPA, had undertaken to dispose of PCB materials for IP and others, but failed in part to do so. As a result of such failure, PCB materials were being stored at the facility. In 1986, IP joined with a number of other generators to efficiently and economically cleanup the facility. The Steering Committee, consisting of IP and 15 other entities, has successfully implemented the Remedial Design Work Plan. The Steering Committee is required to monitor ground water at the site from a minimum of five years to a maximum of ten years after completion of the plan. Based upon data collected during the first year of ground water monitoring, the Steering Committee has petitioned the USEPA to amend the record of decision to negate additional ground water monitoring. This will allow the USEPA to end the Committee's liability at the Rose site. At the present time, management does not believe its ratable share of potential liability related to the cost of future activities at the Rose site will have a material adverse effect on Illinova's or IP's consolidated financial position or results of operations. Electric and Magnetic Fields - - ---------------------------- For information on Electric and Magnetic Fields, see "Note 4 - - - Commitments and Contingencies" on page A-18 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Environmental Expenditures - - -------------------------- Operating expenses for environmentally-related activities in 1995 were approximately $22 million (including the incremental costs of alternative fuels to meet environmental requirements). IP's accumulated capital expenditures (including AFUDC) for environmental protection programs since 1969 have reached approximately $814 million. Research and Development ------------------------ Illinova's research and development expenditures, consisting entirely of IP's research and development expenditures, during 1995, 1994 and 1993 were approximately $5.5 million, $5.5 million and $6.4 million, respectively. The higher research and development costs in 1993 were due primarily to increased dues to the Electric Power Research Institute and increased alternate fuel testing at the Baldwin power station. The lower research and development costs during 1994 and 1995 were because of decreased alternate fuel testing at the Baldwin power station and an overall reduction in discretionary spending at IP. Regulation ---------- Under the Illinois Public Utilities Act, the ICC has broad powers of supervision and regulation with respect to the rates and charges of IP, its services and facilities, extensions or abandonment of service, classification of accounts, valuation and depreciation of property, issuance of securities and various other matters. Before a new electric generating plant or a significant addition to an existing facility may be included in IP's rate base, the ICC must determine that the plant or addition is reasonable in cost, prudent and used and useful in providing utility service to customers. Illinova and IP are exempt from all the provisions of the Public Utility Holding Company Act of 1935 except Section 9(a)(2) thereof. That section requires approval of the Securities and Ex change Commission prior to certain acquisitions of any securities of other public utility companies or public utility holding companies. IP is subject to regulation under the Federal Power Act by the FERC as to rates and charges in connection with the transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce, the issuance of debt securities maturing in not more than 12 months, accounting and depreciation policies, and certain other matters. The FERC has declared IP exempt from the Natural Gas Act and the orders, rules and regulations of the Commission thereunder. IP is subject to the jurisdiction of the NRC with respect to Clinton. NRC regulations control the granting of permits and licenses for the construction and operation of nuclear power stations and subject such stations to continuing review and regulation. Additionally, the NRC review and regulatory process covers decommissioning, radioactive waste, environmental and radiological aspects of such stations. In general, the NRC continues to propose new and revised rules relating to the operations and maintenance aspects of nuclear facilities. It is unclear whether such proposed rules will be adopted and what effect, if any, such adoption will have on IP. IP is subject to the jurisdiction of the Illinois Department of Nuclear Safety (IDNS) with respect to Clinton. IDNS and the NRC entered a memorandum of understanding which allows IDNS to review and regulate nuclear safety matters at state nuclear facilities. The IDNS review and regulatory process covers radiation safety, environmental safety, non-nuclear pressure vessels, emergency preparedness and emergency response. IDNS continues to propose new and revised state administrative code. It is unclear if such proposed rules will be adopted and what effect, if any, such adoption will have on IP. Executive Officers of Illinova Corporation ------------------------------------------ Name of Officer Age Position - - --------------- --- -------- Larry D. Haab 58 Chairman, President and Chief Executive Officer Larry F. Altenbaumer 48 Chief Financial Officer, Treasurer and Controller Leah Manning Stetzner 47 General Counsel and Corporate Secretary Mr. Haab was elected Chairman, President and Chief Executive Officer in December 1993. Mr. Altenbaumer was elected Chief Financial Officer, Treasurer and Controller in June 1994. Ms. Stetzner was elected General Counsel and Corporate Secretary in June 1994. Executive Officers of Illinois Power Company -------------------------------------------- Name of Officer Age Position - - --------------- --- -------- Larry D. Haab 58 Chairman, President and Chief Executive Officer Larry F. Altenbaumer 48 Senior Vice President, Chief Financial Officer and Treasurer David W. Butts 41 Senior Vice President John G. Cook 48 Senior Vice President Paul L. Lang 55 Senior Vice President Wilfred Connell 58 Vice President Richard W. Eimer, Jr. 47 Vice President Leah Manning Stetzner 47 Vice President, General Counsel and Corporate Secretary Ralph F. Tschantz 43 Vice President Cynthia G. Steward 38 Controller Each of the IP executive officers, except for Mr. Tschantz, has been employed by IP or another subsidiary of Illinova for more than five years in executive or management positions. Prior to election to the positions shown above, the following executive officers held the following positions since January 1, 1991. Mr. Haab was elected Chairman in June 1991. Prior to being elected Chief Executive Officer in April 1991, Mr. Haab was President. Mr. Altenbaumer was elected Senior Vice President, Chief Financial Officer and Treasurer in September 1995. Prior to being elected Senior Vice President and Chief Financial Officer in June 1992, Mr. Altenbaumer was Vice President, Chief Financial Officer and Controller. Mr. Butts was elected Senior Vice President in September 1995. Prior to being elected President of IGC in 1993, Mr. Butts was a Division Vice President of IP. Mr. Cook was elected Senior Vice President in December 1995. Prior to being elected Vice President in 1992, Mr. Cook was Manager of Clinton Power Station. Mr. Lang was elected Senior Vice President in June 1992. He joined IP as Vice President in July 1986. Mr. Eimer was elected Vice President in December 1995. He previously held the positions of Assistant to the Vice President and Manager of Marketing. Ms. Stetzner was elected Vice President, General Counsel and Corporate Secretary in February 1993. She joined IP as General Counsel and Corporate Secretary in October 1989. Mr. Tschantz joined IP as Vice President in March 1995. He previously was a Regional Account Management Director with Keebler Company since 1993 and Group Director, Sales, Systems and Planning since 1990. Ms. Steward was elected Controller in September 1995. She previously held the positions of Manager of Employee Services and Director of Accounting. The present term of office of each of the above executive officers extends to the first meeting of Illinova's and IP's Board of Directors after the Annual Election of Directors. There are no family relationships among any of the executive officers and directors of Illinova and IP. Operating Statistics --------------------- For Illinova the information under the caption "Selected Illinois Power Company Statistics" on page A-33 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement is incorporated herein by reference. For IP the information under the caption "Selected Statistics" on page A-33 of the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement is incorporated herein by reference. Item 2. Properties - - ------- IP owns and operates six steam generating stations with composite net summer capacity of 4,296,000 kilowatts. In addition, IP owns nine quick start combustion turbine peaking units at three locations with a combined net summer capacity of 147,000 kilowatts. The total IP owned system net summer capability is 4,443,000 kilowatts. All of the generating stations are in the State of Illinois and are wholly-owned by IP, except for 13.2% of the Clinton power station owned by Soyland. Clinton is IP's only nuclear generating station. IP owns 807,000 kilowatts (86.8%) of the 930,000 kilowatt station. The major coal fired units at Baldwin, Havana, Hennepin and Wood River make up 2,936,000 kilowatts of capacity. Units comprising 377,000 kilowatts of capacity at the Wood River and Havana stations currently are not staffed but are available to meet reserve requirements with a maximum of four months notice. During 1995, natural gas firing capability was added to the Vermilion station. Vermilion now has the capability for either coal or natural gas firing to achieve its capacity of 176,000 kilowatts. Vermilion now is operated as a peaking plant, mainly during the summer season. IP owns an interconnected electric transmission system of approximately 2,800 circuit miles, operating from 69,000 to 345,000 volts and a distribution system which includes about 37,200 circuit miles of overhead and underground lines. All outstanding first mortgage bonds issued under the Mortgage and Deed of Trust dated November 1, 1943 are secured by a first mortgage lien on substantially all of the fixed property, franchises and rights of IP with certain exceptions expressly provided in the mortgage securing the bonds. All outstanding New Mortgage Bonds issued under the General Mortgage and Deed of Trust dated November 1, 1992, are secured by a lien on IP's properties used in the generation, purchase, transmission, distribution and sale of electricity and gas, which lien is junior to the lien of the Mortgage and Deed of Trust dated November 1, 1943. Item 3. Legal Proceedings - - ------- See discussion of legal proceedings under Item 1 "Competition" of this report and in "Manufactured-Gas Plant (MGP)" in "Note 4 - Commitments and Contingencies" on page A-21 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Environmental ------------- See "Environmental Matters" reported under Item 1 of this report for information regarding legal proceedings concerning environmental matters. Item 4. Submission of Matters to a Vote of Security Holders - - ------- Neither Illinova nor IP submitted any matter to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1995. PART II - - ----------------------------------------------------------------- Item 5. Market for Registrants' Common Equity and Related - - ------- Stockholder Matters For Illinova the information under the caption "Quarterly Consolidated Financial Information and Common Stock Data (Unaudit ed)" on page A-31 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement is incorporated herein by reference. For IP the information under the caption "Quarterly Consolidated Financial Information and Common Stock Data (Unaudited)" on page A-31 of the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement is incorporated herein by reference. Item 6. Selected Financial Data - - ------- For Illinova the information under the caption "Selected Consolidated Financial Data" on page A-32 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement is incorporated herein by reference. For IP the information under the caption "Selected Consolidated Financial Data" on page A-32 of the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial - - ------- Condition and Results of Operations For Illinova the information under the caption "Management's Discussion and Analysis" on pages A-2 through A-9 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement is incorporated herein by reference. For IP the information under the caption "Management's Discussion and Analysis" on pages A-2 through A-9 of the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement is incorporated herein by reference. In December 1994, IP 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 canceled. On March 22, 1995, the ICC approved the common stock repurchase program. The ICC specified that IP may initiate the repurchase of shares of its common stock from Illinova subject to meeting certain financial tests. The ICC did not set a limit on the number of shares of common stock that can be repurchased. During 1995, IP repurchased 2,696,086 shares for a total of $67.3 million, averaging about $25 per share. For information regarding the redemption of IP preferred stock, see "Note 10 - Preferred Stock of Subsidiary" in the "Notes to Consolidated Financial Statements" in the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement or "Note 9 - Preferred Stock" in the "Notes to Consolidated Financial Statements" in the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement. Item 8. Financial Statements and Supplementary Data - - ------- For Illinova the consolidated financial statements and related notes on pages A-11 through A-31 and Report of Inde pendent Accountants on page A-10 of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement are incorporated herein by reference. With the exception of the aforementioned information and the information incorporated in Items 1, 3, 5, 6 and 7, the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement is not to be deemed filed as part of this Form 10-K Annual Report. For IP the consolidated financial statements and related notes on pages A-11 through A-31 and Report of Independent Accountants on page A-10 of the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement are incorporated herein by reference. With the exception of the aforementioned information and the information incorporated in Items 1, 3, 5, 6 and 7, the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement is not to be deemed filed as part of this form 10-K Annual Report. Item 9. Changes in and Disagreements With Accountants on - - ------- Accounting and Financial Disclosure None. PART III - - ----------------------------------------------------------------- Item 10. Directors and Executive Officers of the Registrants - - -------- For Illinova the information under the caption "Board of Directors" on pages 3 through 7 of Illinova's Proxy Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference. The information relating to Illinova's executive officers is set forth in Part I of this Annual Report on Form 10- K. For IP the information under the caption "Board of Directors" on pages 4 through 7 of IP's Information Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference. The information relating to Illinois Power Company's executive officers is set forth in Part I of this Annual Report on Form 10-K. Item 11. Executive Compensation - - -------- For Illinova the information under the caption "Executive Compensation" on pages 8 through 12 of Illinova's Proxy Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference. For IP the information under the caption "Executive Compensation" on pages 8 through 13 of IP's Information Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and ________ Management For Illinova the information under the caption "Security Ownership of Management and Certain Beneficial Owners" on page 7 and the information regarding securities owned by certain officers and directors under the caption "Board of Directors" on pages 3 through 7 of Illinova's Proxy Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference. For IP the information under the caption "Security Ownership of Management and Certain Beneficial Owners" on page 7 and the information regarding securities owned by certain officers and directors under the caption "Board of Directors" on pages 4 through 7 of IP's Information Statement for its 1996 Annual Meeting of Stockholders is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions - - -------- None. PART IV - - ------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules, and Reports on - - -------- Form 8-K (a) Documents filed as part of this report. (1a) Financial Statements: Page in 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement* ---------------- Report of Independent Accountants A-10 Consolidated Statements of Income for the three years ended December 31, 1995 A-11 Consolidated Balance Sheets at December 31, 1995 and 1994 A-12 Consolidated Statements of Cash Flows for the three years ended December 31, 1995 A-13 Consolidated Statements of Retained Earnings (Deficit) for the three years ended December 31, 1995 A-13 Notes to Consolidated Financial Statements A-14 - A-31 * Incorporated by reference from the indicated pages of the 1995 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement. (1b) Financial Statements: Page in 1995 Annual Report to Shareholders in the appendix to the IP Information Statement** --------------- Report of Independent Accountants A-10 Consolidated Statements of Income for the three years ended December 31, 1995 A-11 Consolidated Balance Sheets at December 31, 1995 and 1994 A-12 Consolidated Statements of Cash Flows for the three years ended December 31, 1995 A-13 Consolidated Statements of Retained Earnings (Deficit) for the three years ended December 31, 1995 A-13 Notes to Consolidated Financial Statements A-14 - A-31 ** Incorporated by reference from the indicated pages of the 1995 Annual Report to Shareholders in the appendix to the IP Information Statement (See page 21 of this Form 10-K). Item 14. Exhibits, Financial Statement Schedules, and Reports on - - -------- Form 8-K (Continued) (2) Financial Statement Schedules: All Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (3) Exhibits The exhibits filed with this Form 10-K are listed in the Exhibit Index located elsewhere herein. All management contracts and compensatory plans or arrangements set forth in such list are marked with a ~. (b) Reports on Form 8-K since September 30, 1995: None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ILLINOIS POWER COMPANY (REGISTRANT) By Larry D. Haab Larry D. Haab, Chairman, President and Chief Executive Officer Date: March 29, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated. Signature Title Date Larry D. Haab Chairman, President, Chief Larry D. Haab Executive Officer and Director (Principal Executive Officer) Larry F. Altenbaumer Senior Vice President, Larry F. Altenbaumer Chief Financial Officer (Principal Financial Officer) and Treasurer Cynthia G. Steward Controller Cynthia G. Steward (Principal Accounting Officer) Richard R. Berry Richard R. Berry Donald E. Lasater Donald E. Lasater Donald S. Perkins Donald S. Perkins Robert M. Powers Robert M. Powers Walter D. Scott Walter D. Scott Director Ronald L. Thompson Ronald L. Thompson Walter M. Vannoy Walter M. Vannoy Marilou von Ferstel Marilou von Ferstel John D. Zeglis John D. Zeglis Vernon K. Zimmerman Vernon K. Zimmerman Exhibit Index Exhibit Page Number - - ------- ----------- (3)(i) Articles of Incorporation Illinova Corporation (a)(1) Articles of Amendment to the Articles of Incorporation of Illinova Corporation, filed as of October 31, 1994. Filed as Exhibit 3(a) to the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended September 30, 1994 (File No. 1-3004). * (a)(2) Statement of Correction to the Articles of Incorporation of Illinova Corporation, filed as of October 31, 1994. Filed as Exhibit 3(b) to the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended September 30, 1994 (File No. 1-3004). * Illinois Power Company (b)(1) Amended and Restated Articles of Incorporation of Illinois Power Company, dated September 7, 1994. Filed as Exhibit 3(a) to the Current Report on Form 8-K dated September 7, 1994 (File No. 1-3004). * (3)(ii) By-Laws (a) By-laws of Illinova Corporation, as amended through December 14, 1994. Filed as Exhibit 3(b)(2)to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004). * (b) By-laws of Illinois Power Company, as amended through December 14, 1994. Filed as Exhibit 3(b)(1) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004). * (4) Instruments Defining Rights of Security Holders, Including Indentures Illinova Corporation (a) See (4)(b) below for instruments defining the rights of holders of long-term debt of Illinois Power Company. Illinois Power Company (b)(1) Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 2(b) Registration No. 2-14066. * (b)(2) Supplemental Indenture dated October 1, 1966. Filed as Exhibit 2(i) Registration No. 2-27783. * (b)(3) Supplemental Indenture dated May 1, 1974. Filed as Exhibit 2(v) Registration No. 2-51674. * (b)(4) Supplemental Indenture dated May 1, 1977. Filed as Exhibit 2(w) Registration No. 2-59465. * (b)(5) Supplemental Indenture dated July 1, 1979. Filed as Exhibit 2 to the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended June 30, 1979. * (b)(6) Supplemental Indenture dated March 1, 1985. Filed as exhibit 4(a) to the Quarterly Report on Form 10-Q under the Securities Exchange Act of 1934 for the quarter ended March 31, 1985 (File No. 1-3004). * (b)(7) Supplemental Indenture No. 1 dated February 1, 1987, providing for $25,000,000 principal amount of 7 5/8% First Mortgage Bonds, Pollution Control Series F, due December 1, 2016. Filed as Exhibit 4(ii) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1986 (File No. 1-3004). * (b)(8) Supplemental Indenture No. 2 dated February 1, 1987, providing for $50,000,000 principal amount of 7 5/8% First Mortgage Bonds, Pollution Control Series G, due December 1, 2016. Filed as Exhibit 4(jj) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1986 (File No. 1-3004). * (b)(9) Supplemental Indenture No. 3 dated February 1, 1987, providing for $75,000,000 principal amount of 7 5/8% First Mortgage Bonds, Pollution Control Series H, due December 1, 2016. Filed as Exhibit 4(kk) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1986 (File No. 1-3004). * (b)(10)Supplemental Indenture dated July 1, 1987, providing for $33,755,000 principal amount of 8.30% First Mortgage Bonds, Pollution Control Series I, due April 1, 2017. Filed as Exhibit 4(ll) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1987 (File No. 1-3004). * (b)(11)Supplemental Indenture dated December 13, 1989, providing for $300,000,000 principal amount of Medium-Term Notes, Series A. Filed as Exhibit 4(nn) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1989 (File No. 1-3004). * (b)(12)Supplemental Indenture dated July 1, 1991, providing for $84,710,000 principal amount of 7 3/8% First Mortgage Bonds due July 1, 2021. Filed as Exhibit 4(mm) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991 (File No. 1-3004). * (b)(13)Supplemental Indenture No. 1 dated June 1, 1992. Filed as Exhibit 4(nn) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 1-3004). * (b)(14)Supplemental Indenture No. 2 dated June 1, 1992. Filed as Exhibit 4(oo) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 1-3004). * (b)(15)Supplemental Indenture No. 1 dated July 1, 1992. Filed as Exhibit 4(pp) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 1-3004). * (b)(16)Supplemental Indenture No. 2 dated July 1, 1992. Filed as Exhibit 4(qq) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File No. 1-3004). * (b)(17)Supplemental Indenture dated September 1, 1992, providing for $72,000,000 principal amount of 6 1/2% First Mortgage Bonds due September 1, 1999. Filed as Exhibit 4(rr) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1992 (File No. 1-3004). * (b)(18)General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(cc) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(19)Supplemental Indenture dated February 15, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(dd) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(20)Supplemental Indenture dated February 15, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(ee) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(21)Supplemental Indenture No. 1 dated March 15, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(ff) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(22)Supplemental Indenture No. 1 dated March 15, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(gg) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(23)Supplemental Indenture No. 2 dated March 15, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(hh) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(24)Supplemental Indenture No. 2 dated March 15, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(ii) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1992 (File No. 1-3004). * (b)(25)Supplemental Indenture dated July 15, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(jj) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-3004). * (b)(26)Supplemental Indenture dated July 15, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(kk)to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-3004). * (b)(27)Supplemental Indenture dated August 1, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(ll) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-3004). * (b)(28)Supplemental Indenture dated August 1, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(mm) to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 (File No. 1-3004). * (b)(29)Supplemental Indenture dated October 15, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(nn) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-3004). * (b)(30)Supplemental Indenture dated October 15, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(oo) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-3004). * (b)(31)Supplemental Indenture dated November 1, 1993, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(pp) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-3004). * (b)(32)Supplemental Indenture dated November 1, 1993, to General Mortgage Indenture and Deed of Trust dated as of November 1, 1992. Filed as Exhibit 4(qq) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1993 (File No. 1-3004). * (b)(33)Supplemental Indenture dated February 1, 1994, to Mortgage and Deed of Trust dated November 1, 1943. Filed as Exhibit 4(hh) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1993 (File No. 1-3004). * (b)(34)Indenture dated October 1, 1994 between Illinois Power Company and the First National Bank of Chicago. Filed as Exhibit 4(a) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 1-3004). * (b)(35)Supplemental Indenture dated October 1, 1994, to Indenture dated as of October 1, 1994. Filed as Exhibit 4(b) to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 (File No. 1-3004). * (b)(36)Indenture dated January 1, 1996 between Illinois Power Company and Wilmington Trust Company. 37 (b)(37)First Supplemental Indenture dated January 1, 1996, between Illinois Power Company and Wilmington Trust Company. 97 (10) Material Contracts Illinova Corporation (a)(1) Illinova Corporation Deferred Compensation Plan for Certain Directors, as amended April 10, 1991. Filed as Exhibit 10(b) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991 (File No. 1-3004).~ * (a)(2) Illinova Corporation Director Emeritus Plan for Outside Directors. Filed as Exhibit 10(e) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1989 (File No. 1-3004).~ * (a)(3) Illinova Corporation Stock Plan for Outside Directors as amended and restated by the Board of Directors on April 9, 1992 and as further amended April 14, 1993. Filed as Exhibit 10(h) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1993 (File No. 1-3004).~ * (a)(4) Illinova Corporation Retirement Plan for Outside Directors, as amended through December 11, 1991. Filed as Exhibit 10(j) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991 (File No. 1-3004).~ * (a)(5) Illinova Corporation 1992 Long-Term Incentive Compensation Plan. Filed as Exhibit 10(k) to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1992 (File No. 1-3004).~ * (a)(6) Illinova Corporation Comprehensive Deferred Stock Plan for Outside Directors, as approved by the Board of Directors on February 7, 1996. Supersedes the Illinova Corporation Retirement Plan for Outside Directors, as amended through December 11, 1991 and filed as Exhibit 10(j) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991 (File No. 1-3004).~ 126 (a)(7) Form of Employee Retention Agreement in place between Illinova Corporation and its elected officers, Illinois Power Company's elected officers, and the Presidents of Illinova Corporation's subsidiaries. Filed as Exhibit 10(g) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1989 (File no. 1-3004). * Illinois Power Company (b)(1) Group Insurance Benefits for Managerial Employees of Illinois Power Company as amended January 1, 1983. Filed as Exhibit 10(a) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1983 (File No. 1-3004).~ * (b)(2) Illinois Power Company Incentive Savings Trust and Illinois Power Company Incentive Savings Plan and Amendment I thereto. Filed as Exhibit 10(d) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1984 (File No. 1-3004).~ * (b)(3) Illinois Power Company's Executive Incentive Compensation Plan. Filed as Exhibit 10(f) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1989 (File No. 1-3004).~ * (b)(4) Illinois Power Company Incentive Savings Plan, as amended and restated effective January 1, 1991. Filed as Exhibit 10(h) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1990 (File No. 1-3004).~ * (b)(5) Retirement and Consulting Agreement entered into as of June 1, 1991 between Illinois Power Company and Wendell J. Kelley. Filed as Exhibit 10(I) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1991 (File No. 1-3004).~ * (b)(6) Illinois Power Company Executive Deferred Compensation Plan. Filed as Exhibit 10(l) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1993. (File No. 1-3004)~ * (b)(7) Illinois Power Company Retirement Income Plan for salaried employees as amended and restated effective January 1, 1989, as further amended through January 1, 1994. Filed as Exhibit 10(m) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004).~ * (b)(8) Illinois Power Company Retirement Income Plan for employees covered under a collective bargaining agreement as amended and restated effective as of January 1, 1994. Filed as Exhibit 10(n)to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004).~ * (b)(9) Illinois Power Company Incentive Savings Plan as amended and restated effective January 1, 1991 and as further amended through amendments adopted December 28, 1994. Filed as Exhibit 10(o)to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004).~ * (b)(10)Illinois Power Company Incentive Savings Plan for employees covered under a collective bargaining agreement as amended and restated effective January 1, 1991 and as further amended through amendments adopted December 28, 1994. Filed as Exhibit 10(p) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004).~ * (12) Statement Re Computation of Ratios (a) Computation of ratio of earnings to fixed charges for Illinova Corporation. 133 (b) Computation of ratio of earnings to fixed charges for Illinois Power Company. 134 (13) Annual Reports to Shareholders (a) Illinova Corporation Proxy Statement and 1995 Annual Report to Shareholders. 135 (b) Illinois Power Company Information Statement and 1995 Annual Report to Shareholders. 183 (21) Subsidiaries of Registrants (a) Subsidiaries of Illinova Corporation and Illinois Power Company. 230 (23) Consents of Experts (a) Consent of Independent Accountants for Illinova Corporation. 232 (b) Consent of Independent Accountants for Illinois Power Company. 233 _ ____________________________ * Incorporated herein by reference. ~ Management contract and compensatory plans or arrangements. _______________________________ 1 EX-27 2 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the balance sheet, income statement, and cash flow statement of Illinois Power Company and is qualified in its entirety by reference to the balance sheet, income statement and cash flow statement of Illinois Power Company. YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 4664 16 393 494 0 5567 1348 0 130 1478 97 126 1677 131 0 229 62 0 62 33 1672 5567 1641 126 1191 1317 324 1 325 142 183 24 156 77 126 474 0 0
EX-4.2 3 SUPPLEMENTAL INDENTURE FIRST SUPPLEMENTAL INDENTURE between ILLINOIS POWER COMPANY and WILMINGTON TRUST COMPANY Dated as of January 1, 1996 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS SECTION 1.1. Definition of Terms 2 ARTICLE II GENERAL TERMS AND CONDITIONS OF THE SUBORDINATED DEBENTURES SECTION 2.1. Designation and Principal Amount 4 SECTION 2.2. Maturity 4 SECTION 2.3. Form and Payment 4 SECTION 2.4. Global Debenture 4 SECTION 2.5. Interest 6 ARTICLE III REDEMPTION OF THE SUBORDINATED DEBENTURES SECTION 3.1. Special Event Redemption 7 SECTION 3.2. Optional Redemption by Company 7 SECTION 3.3. No Sinking Fund 8 ARTICLE IV EXTENSION OF INTEREST PAYMENT PERIOD SECTION 4.1. Extension of Interest Payment Period 8 SECTION 4.2. Notice of Extension 9 SECTION 4.3. Limitation of Transactions 9 ARTICLE V EXPENSES SECTION 5.1. Payment of Expenses 10 SECTION 5.2. Payment Upon Resignation or Removal 10 ARTICLE VI SUBORDINATION SECTION 6.1. Agreement to Subordinate 11 SECTION 6.2. Default on Senior Indebtedness 11 SECTION 6.3. Liquidation; Dissolution; Bankruptcy 12 SECTION 6.4. Subrogation 13 SECTION 6.5. Trustee to Effectuate Subordination 14 SECTION 6.6. Notice by the Company 14 SECTION 6.7. Rights of the Trustee; Holders of Senior Indebtedness 15 SECTION 6.8. Subordination May Not Be Impaired 15 ARTICLE VII COVENANT TO LIST ON EXCHANGE SECTION 7.1. Listing on an Exchange 16 ARTICLE VIII FORM OF DEBENTURE SECTION 8.1. Form of Debenture 16 ARTICLE IX ORIGINAL ISSUE OF SUBORDINATED DEBENTURES SECTION 9.1. Original Issue of Subordinated Debentures 23 ARTICLE X MISCELLANEOUS SECTION 10.1.Ratification of Indenture 23 SECTION 10.2.Trustee Not Responsible for Recitals 23 SECTION 10.3.Governing Law 23 SECTION 10.4.Separability 23 SECTION 10.5.Counterparts 24 FIRST SUPPLEMENTAL INDENTURE, dated as of January 1, 1996 (the "First Supplemental Indenture"), between Illinois Power Company, an Illinois corporation (the "Company"), and Wilmington Trust Company, not in its individual capacity but solely as trust ee (the "Trustee") under the Indenture dated as of January 1, 1996 between the Company and the Trustee (the "Indenture"). W I T N E S S E T H: WHEREAS, the Company executed and delivered the Indenture to the Trustee to provide for the future issuance of the Company's unsecured junior subordinated debt securities to be issued from time to time in one or more series as might be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered as provided in the Indenture; WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a new series of its Debt Securities to be known as its 8% Junior Subordinated Deferrable Interest Debentures due 2045 (the "Subordinated Debentures"), the form and substance of such Subordinated Debentures and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this First Supplemental Indenture; WHEREAS, Illinois Power Financing I, a Delaware statutory business trust (the "Trust"), has offered to the public $100,000,000 aggregate liquidation amount of its 8% Trust Originated Preferred Securities (the "Preferred Securities"), representing undivided beneficial interests in the assets of the Trust and proposes to invest the proceeds from such offering, together with the proceeds of the issuance and sale by the Trust to the Company of $3,100,000 aggregate liquidation amount of its 8% Trust Originated Common Securities, in $103,100,000 aggregate principal amount of the Subordinated Debentures; and WHEREAS, the Company has requested that the Trustee execute and deliver this First Supplemental Indenture and all requirements necessary to make this First Supplemental Indenture a valid instrument in accordance with its terms, and to make the Subordinated Debentures, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed, and the execution and delivery of this First Supplemental Indenture has been duly authorized in all respects; NOW THEREFORE, in consideration of the purchase and acceptance of the Subordinated Debentures by the holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Subordinated Debentures and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows: ARTICLE I DEFINITIONS Section 1.1. Definition of Terms. Unless the context otherwise requires: (a) a term defined in the Indenture has the same meaning when used in this First Supplemental Indenture; (b) a term defined anywhere in this First Supplemental Indenture has the same meaning throughout; (c) the singular includes the plural and vice versa; (d) a reference to a Section or Article is to a Section or Article of this First Supplemental Indenture; (e) headings are for convenience of reference only and do not affect interpretation; (f) the following terms have the meanings given to them in the Declaration: (i) Business Day; (ii) Clearing Agency; (iii) Delaware Trustee; (iv) Depositary; (v) Dissolution Tax Opinion; (vi) No Recognition Opinion; (vii) Preferred Security Certificate; (viii) Pricing Agreement; (ix) Property Trustee; (x) Regular Trustees; (xi) Special Event; and (xii) Tax Event; and (xiii) Underwriting Agreement; (g) the following terms have the meanings given to them in this Section 1.1(g): "Additional Interest" shall have the meaning set forth in Section 2.5. "Compounded Interest" shall have the meaning set forth in Section 4.1. "Coupon Rate" shall have the meaning set forth in Section 2.5. "Declaration" means the Amended and Restated Declaration of Trust of Illinois Power Financing I, a Delaware statutory business trust, dated as of January 11, 1996, including the Terms of Securities attached thereto as Annex I. "Deferred Interest" shall have the meaning set forth in Section 4.1. "Dissolution Event" means that, as a result of the occurrence and continuation of a Special Event, the Trust is to be terminated in accordance with the Declaration, and the Subordinated Debentures held by the Property Trustee are to be distributed to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Declaration. "Extended Interest Payment Period" shall have the meaning set forth in Section 4.1. "Global Debenture" shall have the meaning set forth in Section 2.4. "Maturity Date" means the date on which the Subordinated Debentures mature and on which the principal shall be due and payable together with all accrued and unpaid interest thereon including Compounded Interest and Additional Interest, if any. "Non Book-Entry Preferred Securities" shall have the meaning set forth in Section 2.4. "Optional Redemption Price" shall have the meaning set forth in Section 3.2. "Senior Indebtedness" means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of such obligor for money borrowed and (B) indebtedness evidenced by securities, debentures, bonds or other similar instruments issued by such obligor, including, without limitation, indebtedness evidenced by securities issued pursuant to the Company's Mortgage and Deed of Trust dated November 1, 1943, as supplemented, and its General Mortgage Indenture and Deed of Trust dated November 1, 1992, as supplemented; (ii) all capital lease obligations of such obligor, (iii) all obligations of such obligor issued or assumed as the deferred purchase price of property, all conditional sale obliga tions of such obligor and all obligations of such obligor under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of such obligor for the reimbursement on any letter of credit, banker's acceptance, security purchase facility or similar credit transaction; (v) all obligations of the type referred to in clauses (i) through (iv) of other Persons for the payment of which such obligor is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) of other Persons secured by any lien on any property or asset of such obligor (whether or not such obligation is assumed by such obligor), except for (1) any such indebtedness that is by its terms subordinated to or pari passu with the Subordinated Debentures, and (2) any indebtedness between or among such obligor and its Affiliates, including all other debt securities and guarantees in respect of those debt securities, issued to any other trust, or a trustee of such trust, partnership or other entity affiliated with the Company which is a financing vehicle of the Company (a "Financing Entity") in connection with the issuance by such Financial Entity of preferred securities or other securities which rank pari passu with, or junior to, the Preferred Securities. ARTICLE II GENERAL TERMS AND CONDITIONS OF THE SUBORDINATED DEBENTURES SECTION 2.1. Designation and Principal Amount. There is hereby authorized a series of Debt Securities designated the "8% Junior Subordinated Deferrable Interest Debentures due 2045", limited in aggregate principal amount to $103,100,000, which amount shall be as set forth in any written order of the Company for the authentication and delivery of Subordinated Debentures pursuant to Section 2.04 of the Indenture. SECTION 2.2. Maturity. The Maturity Date is January 31, 2045. SECTION 2.3. Form and Payment. The Subordinated Debentures shall be issued in fully registered certificated form without interest coupons. Principal and interest on the Subordinated Debentures will be payable, the transfer of such Subordinated Debentures will be registrable and such Subordinated Debentures will be exchangeable for Subordinated Debentures bearing identical terms and provisions, at the office or agency of the Trustee; provided, however, that payment of interest may be made at the option of the Company by check mailed to the holder at such address as shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of any Subordinated Debentures is the Property Trustee, the payment of the principal of and interest (including Compound ed Interest and Additional Interest, if any) on such Subordinated Debentures held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. SECTION 2.4. Global Debenture. (a) In connection with a Dissolution Event: (i) the Subordinated Debentures may be presented to the Trustee by the Property Trustee in exchange for a global Subordinated Debenture in an aggregate principal amount equal to the aggregate principal amount of all outstanding Subordinated Debentures (a "Global Debenture"), to be registered in the name of the Depositary, or its nominee, and delivered by the Trustee to the Depositary for crediting to the accounts of its participants pursuant to the instructions of the Regular Trustees. The Company, upon any such presentation, shall execute a Global Debenture in such aggregate principal amount and deliver the same to the Trustee for authentication and delivery in accordance with the Indenture and this First Supplemental Indenture. Payments on the Subordinated Debentures issued as a Global Debenture will be made to the Depositary; and (ii) if any Preferred Securities are held in non book-entry certificated form, the Subordinated Debentures may be presented to the Trustee by the Property Trustee and any Preferred Security Certificate which represents Preferred Securities other than Preferred Securities held by the Clearing Agency or its nominee ("Non Book-Entry Preferred Securities") will be deemed to represent beneficial interests in Subordinated Debentures presented to the Trustee by the Property Trustee having an aggregate principal amount equal to the aggregate liquidation amount of the Non Book-Entry Preferred Securities until such Preferred Security Certificates are presented to the Security Registrar for transfer or reissuance at which time such Preferred Security Certificates will be cancelled and a Debenture, registered in the name of the holder of the Preferred Security Certificate or the transferee of the holder of such Preferred Security Certificate, as the case may be, with an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Security Certificate cancelled, will be executed by the Company and delivered to the Trustee for authentication and delivery in accordance with the Indenture and this First Supplemental Indenture. On issue of such Subordinated Debentures, Subordinated Debentures with an equivalent aggregate principal amount that were presented by the Property Trustee to the Trustee will be deemed to have been cancelled. (b) Except as provided in clause (c) below, a Global Debenture may be transferred, in whole but not in part, only to another nominee of the Depositary, or to a successor Depositary selected or approved by the Company or to a nominee of such successor Depositary. (c) If at any time the Depositary notifies the Company that it is unwilling or unable to continue as Depositary or if at any time the Depositary for such series shall no longer be registered or in good standing under the Exchange Act, or other applicable statute or regulation, and a successor Depositary for such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, the Company will execute, and, subject to Article II of the Indenture, the Trustee, upon written notice from the Company, will authenticate and deliver the Subordinated Debentures in definitive registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Debenture in exchange for such Global Debenture. In addition, the Company may at any time determine that the Subordinated Debentures shall no longer be represented by a Global Debenture. In such event the Company will execute, and subject to Section 2.11(c) of the Indenture, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and deliver the Subordinated Debentures in definitive registered form, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Debenture in exchange for such Global Debenture. Upon the exchange of the Global Debenture for such Subordinated Debentures in definitive registered form, in authorized denominations, the Global Debenture shall be cancelled by the Trustee. Such Subordinated Debentures in definitive registered form issued in exchange for the Global Debenture shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Subordinated Debentures to the Depositary for delivery to the Persons in whose names such Subordinated Debentures are so registered. SECTION 2.5. Interest. (a) Each Subordinated Debenture will bear interest at the rate of 8% per annum (the "Coupon Rate") from the original date of issuance until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest, at the Coupon Rate, compounded quarterly, payable (subject to the provisions of Article IV) quarterly in arrears on March 31, June 30, September 30 and December 31 of each year (each, an "Interest Payment Date"), commencing March 31, 1996, to the Person in whose name such Subordinated Debenture or any predecessor Subordinated Debenture is registered, at the close of business on the regular record date for such interest installment, which, in respect of any Subordinated Debentures of which the Property Trustee is the holder of a Global Debenture, shall be the close of business on the Business Day next preceding that Interest Payment Date. Notwithstanding the foregoing sentence, if the Preferred Securities are no longer in book-entry only form or, except if the Subordinated Debentures are held by the Property Trustee, the Subordinated Debentures are not represented by a Global Debenture, the Company may select a regular record date for such interest installment which shall be any date at least one Business Day before an Interest Payment Date. (b) The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months. Except as provided in the following sentence, the amount of interest payable for any period shorter than a full quarterly period for which interest is computed, will be computed on the basis of the actual number of days elapsed in such a 30-day period. In the event that any date on which interest is payable on the Subordinated Debentures is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. (c) If, at any time while the Property Trustee is the holder of any Subordinated Debentures, the Trust or the Property Trustee is required to pay any taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, then, in any case, the Company will pay as additional interest ("Additional Interest") on the Subordinated Debentures held by the Property Trustee, such additional amounts as shall be required so that the net amounts received and retained by the Trust and the Property Trustee after paying such taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust and the Property Trustee would have received had no such taxes, duties, assessments or other governmental charges been imposed. ARTICLE III REDEMPTION OF THE SUBORDINATED DEBENTURES SECTION 3.1. Special Event Redemption. If a Tax Event has occurred and is continuing and: (a) the Company has received a Redemption Tax Opinion; or (b) after receiving a Dissolution Tax Opinion, the Regular Trustees shall have been informed by tax counsel rendering the Dissolution Tax Opinion that a No Recognition Opinion cannot be delivered to the Trust, then, notwithstanding Section 3.2(a) but subject to Section 3.2(b), the Company shall have the right upon not less than 30 days nor more than 60 days notice to the holders of the Subordinated Debentures to redeem the Subordinated Debentures, in whole or in part, for cash within 90 days following the occurrence of such Tax Event (the "90-Day Period") at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Redemption Price"), provided that if at the time there is available to the Company the opportunity to eliminate, within the 90-Day Period, the Tax Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure which has no adverse effect on the Company, the Trust or the holders of the Trust Securities issued by the Trust, the Company shall pursue such Ministerial Action in lieu of redemp tion, and, provided, further, that the Company shall have no right to redeem the Subordinated Debentures while the Trust is pursuing any Ministerial Action pursuant to its obligations under the Declaration. SECTION 3.2. Optional Redemption by Company. (a) Subject to the provisions of Section 3.02(b) and to the provisions of Article III of the Indenture, except as otherwise may be specified in this First Supplemental Indenture, the Com pany shall have the right to redeem the Subordinated Debentures, in whole or in part, from time to time, on or after January 31, 2001, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon to the date of such redemption (the "Optional Redemption Price"). Any redemption pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days notice to the holder of the Subordinated Debentures, at the Optional Redemption Price. If the Subordinated Debentures are only partially redeemed pursuant to this Section 3.2, the Subordinated Debentures will be redeemed pro rata or by lot or by any other method utilized by the Trustee; provided, that if at the time of redemption the Subordinated Debentures are registered as a Global Debenture, the Depositary shall determine, in accordance with its procedures, the principal amount of such Subordinated Debentures held by each holder of Subordinated Debentures to be redeemed. (b) If a partial redemption of the Subordinated Debentures would result in the delisting of the Preferred Securities from any national securities exchange or other organization on which the Preferred Securities are then listed, the Company shall not be permitted to effect such partial redemption and may only redeem the Subordinated Debentures in whole. SECTION 3.3. No Sinking Fund. The Subordinated Debentures are not entitled to the benefit of any sinking fund. ARTICLE IV EXTENSION OF INTEREST PAYMENT SECTION 4.1. Extension of Interest Payment Period. The Company shall have the right, at any time and from time to time during the term of the Subordinated Debentures, to defer payments of interest by extending the interest payment period of such Subordinated Debentures for a period not exceeding 20 consecutive quarters (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 4.1, will bear interest thereon at the Coupon Rate compounded quarterly for each quarter of the Extended Interest Payment Period ("Compounded Interest"). At the end of the Extended Interest Payment Period, the Company shall pay all interest accrued and unpaid on the Subordinated Debentures, including any Additional Interest and Compounded Interest (together, "Deferred Interest") that shall be payable to the holders of the Subordinated Debentures in whose names the Subordinated Debentures are registered in the Security Register on the first record date after the end of the Extended Interest Payment Period. Before the termination of any Extended Interest Payment Period, the Company may further extend such period, provided that such period together with all such further extensions thereof shall not exceed 20 consecutive quarters. Upon the termination of any Extended Interest Payment Period and upon the payment of all Deferred Interest then due, the Company may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Company may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. SECTION 4.2. Notice of Extension. (a) If the Property Trustee is the only registered holder of the Subordinated Debentures at the time the Company elects an Extended Interest Payment Period, the Company shall give written notice to the Regular Trustees, the Property Trustee and the Trustee of its election of such Extended Interest Payment Period at least one Business Day before the earlier of (i) the next succeeding date on which Distributions on the Trust Securities issued by the Trust are payable, or (ii) the date the Trust is required to give notice of the record date, or the date such Distributions are payable, to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Preferred Securities, but in any event at least one Business Day before such record date. (b) If the Property Trustee is not the only holder of the Subordinated Debentures at the time the Company elects an Extended Interest Payment Period, the Company shall give the holders of the Subordinated Debentures and the Trustee written notice of its election of such Extended Interest Payment Period 10 Business Days before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to the New York Stock Exchange or other applicable self- regulatory organization or to holders of the Subordinated Debentures. (c) The quarter in which any notice is given pursuant to paragraphs (a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters permitted in the maximum Extended Interest Payment Period permitted under Section 4.1. SECTION 4.3. Limitation of Transactions. If (i) the Company shall exercise its right to defer payment of interest as provided in Section 4.1, or (ii) there shall have occurred any Event of Default, then (a) the Company shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock, provided, however, the Company may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (b) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by the Company which rank pari passu with or junior to the Subordinated Debentures; and (c) the Company shall not make guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee). ARTICLE V EXPENSES SECTION 5.1. Payment of Expenses. In connection with the offering, sale and issuance of the Subordinated Debentures to the Property Trustee and in connection with the sale of the Trust Securities by the Trust, the Company, in its capacity as borrower with respect to the Subordinated Debentures, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Subordinated Debentures, including commissions to the underwriters payable pursuant to the Underwriting Agreement and compensation of the Trustee under the Indenture in accordance with the provisions of Section 7.06 of the Indenture; (b) pay all costs and expenses of the Trust (including, but not limited to, costs and expenses relating to the organization of the Trust, the offering, sale and issuance of the Trust Securities (including commissions to the underwriters in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of Trust assets); and (c) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. SECTION 5.2. Payment Upon Resignation or Removal. Upon termination of this First Supplemental Indenture or the Indenture or the removal or resignation of the Trustee pursuant to this Section, the Company shall pay to the Trustee all amounts accrued to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.6 of the Declaration, the Company shall pay to the Property Trustee all amounts accrued to the date of such termination, removal or resignation. ARTICLE VI SUBORDINATION SECTION 6.1. Agreement to Subordinate. The Company covenants and agrees, and each holder of Subordinated Debentures issued hereunder, by such holder's acceptance thereof, likewise covenants and agrees, that all Subordinated Debentures shall be issued subject to the provisions of this Article; and each holder of a Subordinated Debenture, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, premium, if any, and interest on all Subordinated Debentures issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article shall prevent the occur rence of any default hereunder or Event of Default. SECTION 6.2. Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company, and any applicable grace period with respect to such default has expired and such default has not been cured or waived or ceased to exist, or in the event that the maturity of any Senior Indebtedness of the Company, as the case may be, has been accelerated because of a default, then, in either case, no payment shall be made by the Company with respect to the princi pal (including redemption and sinking fund payments) of, or premium, if any, or interest on the Subordinated Debentures. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section, such payment shall be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebted ness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebted ness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. SECTION 6.3. Liquidation; Dissolution; Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company on account of the principal (and premium, if any) or interest on the Subor dinated Debentures; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the holders of the Subordinated Debentures or the Trustee would be entitled to receive from the Company, except for the provisions of this Article, shall be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Subordinated Debentures or by the Trustee if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the holders of Subordinated Debentures or to the Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, and their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness of the Company, as the case may be, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article Six with respect to the Subordinated Debentures to the payment of all Senior Indebtedness of the Company, as the case may be, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article X of the Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article X of the Indenture. Nothing in Section 6.2 or in this Section 6.3 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 7.06 of the Indenture. SECTION 6.4. Subrogation. Subject to the payment in full of all Senior Indebtedness of the Company, the rights of the holders of the Subordinated Debentures shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, as the case may be, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Subordinated Debentures shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the holders of the Subordinated Debentures or the Trustee would be entitled except for the provisions of this Article, and no payment over pursuant to the provisions of this Article to or for the benefit of the holders of such Senior Indebtedness by holders of the Subordinated Debentures or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Subordinated Debentures, be deemed to be a payment by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article are and are intended solely for the purposes of defining the relative rights of the holders of the Subordinated Debentures, on the one hand, and the holders of such Senior Indebtedness on the other hand. Nothing contained in this Article or elsewhere in the Indenture, this First Supplemental Indenture or in the Subordinated Debentures is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Subordinated Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Subordinated Debentures the principal of (and premium, if any) and interest on the Subordinated Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Subordinated Debentures and creditors of the Company, as the case may be, other than the holders of Senior Indebtedness of the Company, as the case may be, nor shall anything herein or therein prevent the Trustee or the holder of any Subordinated Debenture from exercising all remedies otherwise permitted by applicable law upon default under the Indenture, subject to the rights, if any, under this Article of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, as the case may be, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article, the Trustee, subject to the provisions of Section 7.01 of the Indenture, and the holders of the Subordinated Debentures shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the holders of the Subordinated Debentures, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, as the case may be, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article. SECITON 6.5. Trustee to Effectuate Subordination. Each holder of Subordinated Debentures, by such holder's acceptance thereof, authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article and appoints the Trustee such holder's attorney-in-fact for any and all such purposes. SECTION 6.6 Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Subordinated Debentures pursuant to the provisions of this Article. Notwithstanding the provisions of this Article or any other provision of the Indenture and this First Supplemental Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Subordinated Debentures pursuant to the provisions of this Article, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 7.01 of the Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least two Business Days prior to the date upon which, by the terms hereof, any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Subordinated Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Trustee, subject to the provisions of Section 7.02 of the Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company, as the case may be (or a trustee on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 6.7. Rights of the Trustee; Holders of Senior Indebtedness. The Trustee in its individual capacity shall be enti tled to all the rights set forth in this Article in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into the Indenture or this First Supplemental Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Section 7.02 of the Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to holders of Subordinated Debentures, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article or otherwise. SECTION 6.8. Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, as the case may be, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, as the case may be, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Company may, at any time and from time to time, without the consent of or notice to the Trustee or the holders of the Subordinated Debentures, without incurring responsibility to the holders of the Subordinated Debentures and without impairing or releasing the subordination provided in this Article or the obligations hereunder of the holders of the Subordinated Debentures to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, as the case may be, and any other Person. ARTICLE VII COVENANT TO LIST ON EXCHANGE SECTION 7.1. Listing on an Exchange. If the Subordinated Debentures are to be issued as a Global Debenture in connection with the distribution of the Subordinated Debentures to the holders of the Preferred Securities upon a Dissolution Event, the Company will use its best efforts to list such Subordinated Debentures on the New York Stock Exchange or on such other exchange as the Preferred Secu rities are then listed. ARTICLE VIII FORM OF DEBENTURE SECTION 8.1. Form of Debenture. The Subordinated Debentures and the Trustee's Certifi cate of Authentication to be endorsed thereon are to be substantially in the following forms: (FORM OF FACE OF DEBENTURE) [IF THE Debenture IS TO BE A GLOBAL Debenture, INSERT - This Debenture is a Global Debenture within the meaning of the Indenture hereinafter referred to and is registered in the name of a Depositary or a nominee of a Depositary. This Debenture is exchangeable for Subordinated Debentures registered in the name of a person other than the Depositary or its nominee only in the limited circumstances described in the Indenture, and no transfer of this Debenture (other than a transfer of this Debenture as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary) may be registered except in limited circumstances. Unless this Debenture is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) to the issuer or its agent for registration of transfer, exchange or payment, and any Debenture issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL since the registered owner hereof, Cede & CO., has an interest herein.] No._______________ ILLINOIS POWER COMPANY 8% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE 2045 Illinois Power Company, an Illinois corporation (the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ______________, or registered assigns, the principal sum of One Hundred Three Million One Hundred Thousand Dollars ($103,100,000) on January 31, 2045, and to pay interest on said principal sum from January 17, 1996, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 31, June 30, September 30 and December 31 of each year commencing March 31, 1996, at the rate of 8% per annum until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded quarterly. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Debenture is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Debenture (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be the close of business on the business day next preceding such Interest Payment Date. [IF PURSUANT TO THE PROVISIONS OF THE INDENTURE THE SUBORDINATED DEBENTURES ARE NO LONGER REPRESENTED BY A GLOBAL DEBENTURE -- which shall be the close of business on the 15th day of the month in which such Interest Payment Date shall occur.] Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of this series of Subordinated Debentures not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Subordinated Debentures may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The principal of (and premium, if any) and the interest on this Debenture shall be payable at the office or agency of the Trustee maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of this Debenture is the Property Trustee, the payment of the principal of (and premium, if any) and interest on this Debenture will be made at such place and to such account as may be designated by the Property Trustee. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this instrument to be executed. Dated ILLINOIS POWER COMPANY By: Name: Title Attest: By: Name: Title: (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION This is one of the Subordinated Debentures of the series of Subordinated Debentures described in the within-mentioned Indenture. as Trustee or as Authentication Agent By By Authorized Signatory Authorized Signatory (FORM OF REVERSE OF DEBENTURE) This Debenture is one of a duly authorized series of Subordinated Debentures of the Company (herein sometimes referred to as the "Subordinated Debentures"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to an Indenture dated as of January 1, 1996, duly executed and delivered between the Company and Wilmington Trust Company, as Trustee (the "Trustee"), as supplemented by the First Supplemented Indenture dated as of January 1, 1996, between the Company and the Trustee (the Indenture as so supplemented, the "Indenture"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Subordinated Debentures. By the terms of the Indenture, the Subordinated Debentures are issuable in series that may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. This series of Subordinated Debentures is limited in aggregate principal amount as specified in said First Supplemental Indenture. Because of the occurrence and continuation of a Tax Event, in certain circumstances, this Debenture may become due and payable at the principal amount together with any interest accrued thereon (the "Redemption Price"). The Company shall have the right to redeem this Debenture at the option of the Company, without premium or penalty, in whole or in part at any time on or after January 31, 2001 (an "Optional Redemption"), or at any time in certain circumstances upon the occurrence of a Tax Event, at a redemption price equal to 100% of the principal amount plus any accrued but unpaid interest, to the date of such redemption (the "Optional Redemption Price"). Any redemption pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days notice, at the Optional Redemption Price. If the Subordinated Debentures are only partially redeemed by the Company pursuant to an Optional Redemption, the Subordinated Debentures will be redeemed pro rata or by lot or by any other method utilized by the Trustee; provided that if, at the time of redemption, the Subordinated Debentures are registered as a Global Debenture, the Depositary shall determine the principal amount of such Subordinated Debentures held by each Debentureholder to be redeemed in accordance with its procedures. In the event of redemption of this Debenture in part only, a new Debenture or Debentures of this series for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Subordinated Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than 66_% in aggregate principal amount of the Subordinated Debentures of each series affected at the time Outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Subordinated Debentures; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Subordinated Debentures of any series, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the holder of each Debenture so affected, or (ii) reduce the aforesaid percentage of Subordinated Debentures, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of each Debenture then Out standing and affected thereby. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Subordinated Debentures of any series at the time outstanding affected thereby, on behalf of all of the holders of the Subordinated Debentures of such series, to waive any past default in the performance of any of the covenants con tained in the Indenture, or established pursuant to the Indenture with respect to such series, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Subordinated Debentures of such series. Any such consent or waiver by the registered holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Debenture and of any Debenture issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Debenture. No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Debenture at the time and place and at the rate and in the money herein prescribed. The Company shall have the right at any time during the term of the Subordinated Debentures and from time to time to extend the interest payment period of such Subordinated Deben tures for up to 20 consecutive quarters (an "Extended Interest Payment Period"), at the end of which period the Company shall pay all interest then accrued and unpaid (together with interest thereon at the rate specified for the Subordinated Debentures to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extended Interest Payment Period, the Company may further extend such Extended Interest Payment Period, provided that such Extended Interest Payment Period together with all such further extensions thereof shall not exceed 20 consecutive quarters. At the termi nation of any such Extended Interest Payment Period and upon the payment of all accrued and unpaid interest and any additional amounts then due, the Company may commence a new Extended Inter est Payment Period. As provided in the Indenture and subject to certain limitations therein set forth, this Debenture is transferable by the registered holder hereof on the Security Register of the Company, upon surrender of this Debenture for registration of transfer at the office or agency of the Trustee in the City and State of New York accompanied by a written instrument or instru ments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or his attorney duly authorized in writing, and thereupon one or more new Subordinated Debentures of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmen tal charge payable in relation thereto. Prior to due presentment for registration of transfer of this Debenture, the Company, the Trustee, any paying agent and the Security Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Deben ture shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Security Regis trar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Security Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the princi pal of or the interest on this Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. [The Subordinated Debentures of this series are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof.] [This Global Debenture is exchangeable for Subordinated Debentures in definitive form only under certain limited circumstances set forth in the Indenture. Subordinated Debentures of this series so issued are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof.] As provided in the Indenture and subject to certain limitations herein and therein set forth, Subordinated Debentures of this series so issued are exchangeable for a like aggregate principal amount of Subordinated Debentures of this series of a different authorized denomination, as requested by the holder surrendering the same. All terms used in this Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. ARTICLE IX ORIGINAL ISSUE OF SUBORDINATED DEBENTURES SECTION 9.1. Original Issue of Subordinated Debentures. Subordinated Debentures in the aggregate principal amount of $103,100,000 may, upon execution of this First Supple mental Indenture, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Subordinated Debentures to or upon the written order of the Company, signed by its Chairman, its Vice Chairman, its President, or any Vice President and its Trea surer or an Assistant Treasurer, without any further action by the Company. ARTICLE X MISCELLANEOUS SECTION 10.1. Ratification of Indenture. The Indenture, as supplemented by this First Supple mental Indenture, is in all respects ratified and confirmed, and this First Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION 10.2. Trustee Not Responsible for Recitals. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this First Supplemental Indenture. SECTION 10.3. Governing Law. This First Supplemental Indenture and each Subordinated Debenture shall be deemed to be a contract made under the internal laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State. SECTION 10.4. Separability. In case any one or more of the provisions contained in this First Supplemental Indenture or in the Subordinated Deben tures shall for any reason be held to be invalid, illegal or un enforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this First Supplemental Indenture or of the Subordinated Debentures, but this First Supplemental Indenture and the Subordinated Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 10.5. Counterparts. This First Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, on the date or dates indicated in the acknowledgements and as of the day and year first above written. ILLINOIS POWER COMPANY By: /s/ Cynthia G. Steward Name: Cynthia G. Steward Title: Controller Attest: By: /s/ Leah Manning Stetzner Name: Leah Manning Stetzner Title: Vice President, General Counsel and Corporate Secretary [Seal] THE WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Trustee By: /s/ Emmett R. Harmon Name: Emmett R. Harmon Title: Vice President Attest: By: /s/ W. Chris Sponenberg Name: W. Chris Sponenberg Title: Financial Services Officer [Seal] SoftSolutions Document Identifier: CHI2:43297.1 Dataset: CHI2 Chicago - Floors 72 and 73 Doc #: 43297 Version: 1CHI2:43297.1 03.26.96 16.03 EX-99.1 4 DEFERRED STOCK PLAN Draft 3/20/96 ILLINOVA CORPORATION COMPREHENSIVE DEFERRED STOCK PLAN FOR OUTSIDE DIRECTORS SECTION 1 General 1.1. Purpose. Illinova Corporation (the "Company") has established the Illinova Corporation Comprehensive Deferred Stock Plan for Outside Directors (the "Plan") in order to continue to remain competitive in attracting and retaining outstanding individuals as outside directors. 1.2. Operation and Administration. The operation and administration of the Plan shall be subject to the provisions of Section 4. Capitalized terms in the Plan shall be defined as set forth in Section 5 or elsewhere in the Plan. SECTION 2 Stock Unit Awards and Accounts 2.1. Stock Unit Awards. Each Eligible Director shall be credited with "Stock Unit" awards under the Plan in accordance with the following: (a) On the date of the 1996 Annual Meeting of Stockholders, and on the date of each Annual Meeting of Stockholders thereafter, each Eligible Director who is continuing as a Director shall be awarded the number of Stock Units equal to $6,000 divided by the Fair Market Value of a share of Stock on the date such Stock Units are awarded. (b) As of the Effective Date, each Eligible Director will receive an initial grant of Stock Units equal to the dollar value of his Accumulated Benefit (defined below), if any, divided by the Fair Market Value of a share of Stock on such date. An Eligible Director's "Accumulated Benefit" means the net present value on the Effective Date of a stream of payments of $18,000 each, payable on April 1 of each year commencing with the April 1 coincident with or next following the Eligible Director's attainment of age 65, and continuing for the number of the Eligible Director's Years of Service not in excess of 10. Net present value for this purpose shall be determined using a discount rate of 8.5 percent, compounded annually. An Eligible Director's number of "Years of Service" means the number of 12- consecutive-month periods the Eligible Director served on the Board as an Outside Director prior to the Effective Date. 2.2. Accounts. An "Account" shall be established in the name of each Participant, which shall be adjusted as follows: (a) As of the date that Stock Units are awarded under subsection 2.1, the Participant's Account shall be credited with the number of Stock Units so awarded. (b) As of each dividend payment date with respect to the shares of Stock: (i) If such dividend is payable in cash, the Participant's Account shall be credited with the number of Stock Units determined by (A) multiplying the cash dividend payable with respect to a share of Stock by the number of Stock Units in the Participant's Account as of the applicable dividend record date, and (B) dividing the product obtained in (A) by the Fair Market Value of a share of Stock on the date the dividend is paid. (ii) If such dividend is payable in shares of Stock, the Participant's Account shall be credited with the number of Stock Units determined by multiplying the number of shares distributed in the dividend with respect to each share of Stock by the number of Stock Units in the Participant's Accounts as of the applicable dividend record date. (c) No additional Stock Units shall be credited to a Participant's Account under this Section 2 after the Participant's Date of Termination. The Company's sole obligation to the Participant under the Plan after his Date of Termination shall be payment of the Account Value in accordance with Section 3. SECTION 3 Distributions 3.1. Account Value. As of a Participant's Date of Termination, the Stock Units in his Account shall be converted to a dollar value, which shall be determined by multiplying the number of Stock Units in the Participant's Account as of his Date of Termination by the Fair Market Value of a share of Stock as of the last day of the month immediately preceding such Date of Termination (the "Account Value"). 3.2. Form of Payment. Payment of a Participant's Account Value shall be made solely in cash and shall be made, or commence to be made, as soon as practicable following the Participant's Date of Termination, as follows: (a) in a lump sum payment; or (b) in ten or fewer annual installments, as elected by the Participant; provided, however, any such election that has not been on file with the Committee at least 12 months prior to the Participant's Date of Termination shall be disregarded and payments shall be made in accordance with the Participant's most recent election form that has been on file with the Committee at least 12 months, or if no such election has been filed, in accordance with paragraph (a) next above. 3.3. Death of Participant. In the event of a Participant's death before he has received payment of his full Account Value, the remaining unpaid Account Value shall be paid to his designated beneficiary or beneficiaries as soon as practicable thereafter in a lump sum. If no designated beneficiary has been named or survives the Participant, the beneficiary will be the Participant's estate. SECTION 4 Operation and Administration 4.1. Administration. The authority to manage and control the operation and administration of the Plan shall be vested in the Compensation and Nominating Committee of the Board of Directors (the "Committee"). Subject to the limitations of the Plan, the Committee shall have the sole and complete authority to: (a) interpret the Plan and to adopt, amend and rescind administrative guidelines and other rules and regulations relating to the Plan; (b) correct any defect or omission or to reconcile any inconsistency in the Plan or in any payment made hereunder; and (c) to make all other determinations and to take all other actions necessary or advisable for the implementation and administration of the Plan. The Committee's determinations on matters within its control shall be conclusive and binding on the Company and all other persons. 4.2. Shares Subject to the Plan. Shares of Stock which may be distributed under the Plan may be either authorized and unissued shares or treasury shares (including, in the discretion of the Company, shares purchased in the open market). 4.3. Gender and Number. Where the context admits, words in one gender shall include the other gender, words in the singular shall include the plural and words in the plural shall include the singular. 4.4. Director and Shareholder Status. The Plan will not give any person the right to continue as a director of the Company, or any right or claim to any benefits under the Plan unless such right or claim has specifically accrued under the terms of the Plan. Participation in the Plan shall not create any rights in a director (or any other person) as a shareholder of the Company until shares of stock are registered in the name of the director (or such other person). 4.5. Source of Payments. The Plan constitutes only a promise of the Company to make payments or awards to Eligible Directors (or other persons) in the future in accordance with the terms of the Plan, and Participants shall have the status of general unsecured creditors of the Company. 4.6. Compliance With Applicable Laws and Withholding of Taxes. All payments under the Plan are subject to withholding of all applicable taxes. 4.7. Transferability. No award under the Plan, and no interest therein, may be transferred or otherwise voluntarily or involuntarily assigned or alienated. 4.8. Adjustments to Number of Stock Units Awarded Under the Plan. In the event of any change in the outstanding shares of Stock of the Company by reason of any stock dividend, split, spinoff, recapitalization, merger, consolidation, combination, exchange of shares or otherwise, the terms, type of shares, and the number of any outstanding Stock Units under the Plan will be equitably adjusted by the Committee in its sole discretion to preserve the benefit of the award for the Company and the Participant. 4.9. Amendment and Termination of Plan. The Board may at any time and in any way amend or terminate the Plan, provided that, subject to subsection 4.8 (relating to certain adjustments to shares), no such amendment or termination shall impair the rights of Participants with respect to awards made under the Plan prior to the date such amendment is adopted by the Board. 4.10. Governing Law. This Plan shall be governed by the internal laws of the state of Illinois without regard to any principles of conflict of laws. 4.11. Successors. The obligations of the Company under the Plan shall be binding upon any assignee or successor in interest thereto. SECTION 5 Defined Terms For purposes of the Plan, the terms listed below shall be defined as follows: (a) Board. The term "Board" shall mean the Board of Directors of the Company. (b) Date of Termination. A Participant's Date of Termination shall be the date following the last day on which he serves as an Outside Director. (c) Director. The term "Director" means a member of the Board. (d) Effective Date. The "Effective Date" of the Plan is February 7, 1996. (e) Eligible Director. As of any date, each individual who is then an Outside Director shall be an "Eligible Director". (f) Fair Market Value. The "Fair Market Value" of a share of Stock of the Company as of any date shall be the closing market composite price for such Stock as reported on the New York Stock Exchange Composite Tape on that date or, if Stock is not traded on that date, on the next preceding date on which Stock was traded. (g) Outside Director. The term "Outside Director" means a Director who is not an officer or employee of the Company or a Related Company. (h) Participant. A "Participant" is any Eligible Director who has received an award of Stock Units under Section 2 of the Plan. (i) Related Company. The term "Related Company" means any company during any period in which it is a subsidiary corporation (as that term is defined in section 424(f) of the Internal Revenue Code) with respect to the Company. (j) Stock. The term "Stock" shall mean shares of common stock of the Company. o:\ars\dstkplan.doc EX-99.2 5 IP EARNINGS TO FIXED CHARGES ILLINOIS POWER COMPANY STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars) Year Ended December 31, Supplemental ** 1991 1992 1993 1993 1994 1995 Earnings Available for Fixed Charges: Net Income (Loss) $109,244 $122,088 ($56,038) ($56,038) $180,242 $182,713 Add: Income Taxes: Current 29,369 22,930 25,260 25,260 58,354 98,578 Deferred - Net 45,990 63,739 82,057 82,057 71,177 34,137 Allocated income taxes (1,348) (6,632) (12,599) (12,599) (8,285) (8,417) Investment tax credit - deferred (11) (519) (782) (782) (11,331) (6,894) Income tax effect of disallowed costs - - (70,638) (70,638) - - Interest on long-term debt 176,179 160,795 154,110 135,115 125,581 Amortization of debt expense and premium-net, and other interest charges 9,004 12,195 17,007 17,007 15,826 29,558 One-third of all rentals (Estimated to be representative of the interest component) 4,996 5,117 5,992 5,992 5,847 5,221 Interest on in-core fuel 8,862 8,278 6,174 6,174 7,185 6,716 Disallowed Clinton plant costs - - - 270,956 - - -------- -------- -------- -------- -------- -------- Earnings (loss) available for fixed $382,285 $387,991 $150,543 $421,499 $454,130 $467,193 ======== ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $176,179 $160,795 $154,110 $154,110 $135,115 $125,581 Amortization of debt expense and premium-net, and other interest charges 25,553 25,785 27,619 27,619 25,381 38,147 One-third of all rentals (Estimated to be representative of the interest component) 4,996 5,117 5,992 5,992 5,847 5,221 Total Fixed Charges $206,728 $191,697 $187,721 $187,721 $166,343 $168,949 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.85 2.02 0.80 * 2.25 2.73 2.77 ======== ======== ======== ========= ======== ========
* Earnings are inadequate to cover fixed charges. Additional earnings (thousands) of $37,178 for 1993, are required to attain a one-to-one ratio of Earnings to Fixed Charges. ** Supplemental ratio of earnings to fixed charges presented to exclude nonrecurring item - Disallowed Clinton plant costs. EX-99.3 6 ILLINOVA EARNINGS TO FIXED CHARGES ILLINOVA CORPORATION STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars) Year Ended December 31, Supplemental ** 1991 1992 1993 1993 1994 1995 Earnings Available for Fixed Charges: Net Income (Loss) $78,378 $93,234 ($81,874) ($81,874) $151,786 $151,601 Add: Income Taxes: Current 29,369 22,930 25,260 25,260 58,354 98,578 Deferred - Net 45,990 63,739 82,057 82,057 71,177 34,137 Allocated income taxes (1,348) (6,632) (12,599) (12,599) (8,285) (11,851) Investment tax credit - deferred (11) (519) (782) (782) (11,331) (6,894) Income tax effect of disallowed costs - - (70,638) (70,638) - - Interest on long-term debt 176,179 160,795 154,110 154,110 135,115 125,581 Amortization of debt expense and premium-net, and other interest charges 9,004 12,195 17,007 17,007 15,826 29,558 One-third of all rentals (Estimated to be representative of the interest component4,996 5,117 5,992 5,992 5,847 5,221 Interest on in-core fuel 8,862 8,278 6,174 6,174 7,185 6,716 Disallowed Clinton plant costs - - - 270,956 - - -------- -------- ------- ------- ------ --------- Earnings (loss) available for fixed $351,419 $359,137 $124,707 $395,663 $425,674 $432,647 ======== ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt $176,179 $160,795 $154,110 $154,110 $135,115 $125,581 Amortization of debt expense and premium-net, and other interest charges 25,553 25,785 27,619 27,619 25,381 38,147 One-third of all rentals (Estimated to be representative of the interest component)4,996 5,117 5,992 5,992 5,847 5,221 ________ ________ ________ ________ ________ ________ Total Fixed Charges $206,728 $191,697 $187,721 $187,721 $166,343 $168,949 ======== ======== ======== ======== ======== ======== Ratio of earnings to fixed charges 1.70 1.87 0.66 * 2.11 2.56 2.56 ======== ======== ======== ======== ======== ========
* Earnings are inadequate to cover fixed charges. Additional earnings (thousands) of $63,014 for 1993, are required to attain a one-to-one ratio of Earnings to Fixed Charges. ** Supplemental ratio of earnings to fixed charges presented to exclude nonrecurring item - Disallowed Clinton plant costs. EX-13.1 7 ILLINOVA ANNUAL REPORT Measures of Our Success Illinova 1995 Proxy Statement and 1995 Annual Report to Stockholders we will be the best by the year 2000 - - -------------------------------------------- notice of annual meeting of shareholders Proxy Statement Table of Contents - - -------------------- Notice of Annual Meeting 2 Proxy Statement 3 Appendix: 1995 Annual Report to Shareholders A-1 To the Shareholders of Illinova Corporation: Notice is Hereby Given that the Annual Meeting of Shareholders of Illinova Corporation ("Illinova") will be held at 10 a.m. Wednesday, April 10, 1996, at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, for the following purposes: (1) To elect the Board of Directors for the ensuing year. (2) To transact any other business which may properly come before the meeting or any adjournment. Shareholders of record at the close of business on February 12, 1996, will be entitled to notice of and to vote at the Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, General Counsel and Corporate Secretary Decatur, Illinois March 1, 1996 IMPORTANT Illinova invites each of its approximately 35,000 shareholders to attend the Annual Meeting. Shareholders will be admitted on verification of record share ownership at the admission desk. Shareholders who own shares through banks, brokerage firms, nominees or other account custodians must present proof of beneficial share ownership (such as a brokerage account statement) at the admission desk. If you are unable to be present at the meeting, it is important that you, whether the owner of one or many shares, sign and return the enclosed proxy. An envelope on which postage will be paid by Illinova is enclosed for that purpose. Return of your executed proxy will ensure you are represented at the Annual Meeting. Your cooperation is appreciated. proxy statement Solicitation and Revocation of Proxies This Proxy Statement is furnished in connection with a solicitation of proxies by the Board of Directors of Illinova, for use at the Annual Meeting of Shareholders to be held at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, at 10 a.m. Wednesday, April 10, 1996, and at any adjournment thereof (the "Annual Meeting"). Any shareholder giving a proxy may revoke it at any time by giving a later proxy or by giving written notice of revocation to the Corporate Secretary of Illinova prior to the Annual Meeting. All duly executed proxies received prior to the Annual Meeting will be voted. Shares credited to the accounts of participants in Illinova's Automatic Reinvestment and Stock Purchase Plan, and Employees Stock Ownership Plan, and Illinois Power Company's ("Illinois Power") Incentive Savings Plans will be voted in accordance with the instructions of the participants or otherwise in accordance with the terms of such plans. Voting Rights Shareholders of record at the close of business on Monday, February 12, 1996 (the "Record Date"), will be entitled to receive notice of and to vote at the Annual Meeting. As of such date, Illinova had outstanding 75,674,837 shares of Common Stock. Shareholders who are present at the Annual Meeting in person or by proxy will be entitled to one vote for each share of Illinova's Common Stock which they held of record at the close of business on the Record Date. When voting for candidates nominated to serve as directors, all shareholders will be entitled to 11 votes (the number of directors to be elected) for each of their shares and may cast all of their votes for any one candidate whose name has been placed in nomination prior to the voting or distribute their votes among two or more such candidates in such proportions as they may determine. In voting on other matters presented for consideration at the Annual Meeting, each shareholder will be entitled to one vote for each share of Common Stock held of record at the close of business on the Record Date. The affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting is required for the election of directors. Annual Report, Proxy and Proxy Statement Accompanying this Proxy Statement, which includes Consolidated Financial Statements, is a Notice of Annual Meeting of Shareholders, a form of Proxy and the Summary Annual Report to Shareholders covering operations of Illinova for the year 1995. This Proxy Statement and accompanying documents are first being mailed to shareholders on or about March 1, 1996. Board of Directors Information Regarding the Board of Directors The Board of Directors held six Board meetings during 1995. All directors attended at least 75% of the aggregate meetings of the Board and Committees of which they were members during 1995. The Board has four standing committees: the Audit Committee, the Finance Committee, the Compensation and Nominating Committee, and the Business Development Committee. The duties and members of the standing committees are: Audit Committee (1) Review with the Chairman, President and Chief Executive Officer and the independent accountants the scope and adequacy of Illinova's system of internal controls; (2) review the scope and results of the annual examination performed by the independent accountants; (3) review the activities of Illinova's internal auditors; (4) report its findings to the Board and provide a line of communication between the Board and both the internal auditors and the independent accountants; and (5) recommend to the Board the appointment of the independent accountants and approval of the services performed by the independent accountants, considering their independence with regard thereto. The Audit Committee met three times during 1995. 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. Finance Committee (1) Review management's capital and operations and maintenance expenditure budgets, financial forecasts and financing program, and make recommendations to the Board regarding the approval of such budgets and plans; (2) review Illinova's banking relationships, short-term borrowing arrangements, dividend policies, arrangements with the transfer agent and registrar, investment objectives and the performance of Illinova's pension funds, evaluate fund managers, and make recommendations to the Board concerning such matters; and (3) act in an advisory capacity to management, the Board of Directors, and the Chairman, President and Chief Executive Officer on other financial matters as they may arise. The Finance Committee met three times during 1995. This Committee consists of the following members of the Board: Donald E. Lasater, Chairman, Richard R. Berry, Larry D. Haab, Walter D. Scott, Charles W. Wells (until his retirement on December 31, 1995), and Vernon K. Zimmerman. Compensation and Nominating Committee (1) Review performance and recommend salaries plus other forms of compensation of elected Illinova officers and the Board of Directors; (2) review Illinova's benefit plans for elected Illinova officers and make recommendations to the Board regarding any changes deemed necessary; (3) review with the Chairman, President and Chief Executive Officer any organizational or other personnel matters; and (4) recommend to the Board nominees to stand for election as director to fill vacancies in the Board of Directors as they occur. The Compensation and Nominating Committee will consider shareholders' recommendations for nominees for director made pursuant to timely notice in writing addressed to the Chairman of the Committee at the executive offices of Illinova, together with a full description of the qualifications and business and professional experience of the proposed nominees and a statement of the nominees' willingness to serve. To be timely, the notice shall be delivered to or mailed and received at the executive offices of Illinova not less than 90 nor more than 120 days prior to the Annual Meeting. The Compensation and Nominating Committee met four times during 1995. This Committee consists of the following Outside Directors: Donald S. Perkins, Chairman, Robert M. Powers, Walter D. Scott, Ronald L. Thompson, Marilou von Ferstel, and John D. Zeglis. Business development Committee (1) Review corporate objectives of Illinova, consider appropriate structure changes to meet corporate objectives and make recommendations to the Board concerning such matters; (2) review Illinova's program for long-term corporate activities and make recommendations to the Board regarding the approval of such programs; and (3) act in an advisory capacity to management and the Board of Directors on corporate development. The Business Development Committee met once during 1995. This Committee consists of the following members of the Board: Robert M. Powers, Chairman, Larry D. Haab, Donald S. Perkins, Walter D. Scott, Ronald L. Thompson, Marilou von Ferstel, and John D. Zeglis. Board Compensation The Outside Directors of Illinova receive a retainer fee of $18,000 per year. Outside Directors who also chair Board Committees receive an additional $2,000 per year retainer. Outside Directors receive a grant of 650 shares of Common Stock on the date of each Annual Shareholders Meeting, representing payment in lieu of attendance-based fees for all Board and Committee meetings to be held during the subsequent one-year period. Outside Directors elected to the Board between Annual Shareholders Meetings are paid $850 for each Board and Committee meeting attended prior to the first Annual Shareholders Meeting after their election to the Board. Illinova 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. On February 7, 1996, the Board of Directors approved a compensation plan that eliminates the Retirement Plan. Each former Outside Director whose right to receive the retirement benefit has vested will continue to receive such benefits in accordance with the terms of the Retirement Plan. All current Outside Directors will receive a lump sum payment based on the net present value of these benefits to them, were they to have retired under the Retirement Plan, based on the number of years they have served on the Board but not to exceed 10. Thereafter, each Outside Director will receive an annual award of stock units having a value of $6,000, to be paid to the Outside Director in cash on retirement, at once or in installments as the Director may elect, together with dividend equivalents attributable to such stock units. Pursuant to Illinova's Deferred Compensation Plan for Certain Directors, the Outside Directors may elect to defer all or any portion of their fees and stock grants until termination of their services as directors. Such deferred amounts are converted into stock units representing shares of Illinova's Common Stock with the value of each stock unit based upon the last reported sales 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 Common Stock which the director would have received if the director had been the record owner of the shares represented by stock units, and are converted into additional stock units. On termination of participating directors' services as directors, payment of their deferred fees and stock grants is made in shares of Common Stock in an amount equal to the aggregate number of stock units credited to their accounts. Such payment is made in such number of annual installments as Illinova may determine beginning in the year following the year of termination. Election of Directors Illinova'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 11 directors nominated by Illinova's Board of Directors. The names and certain additional information concerning each of the director nominees is set forth below. The dates shown for service as a director include service as a director of Illinois Power prior to the May 1994 merger in which Illinois Power became a wholly owned subsidiary of Illinova. If any nominee should be unable to serve as a director, another nominee will be selected by the current Board of Directors. Name of Director Nominee, Age, Year in Which First Business Experience and Elected a Director Other Information of Illinova Richard R. Berry, 64 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, 58 1986 - - ------------------------- Chairman, President and Chief Executive Officer of Illinova since December 1993, and of Illinois Power since June 1991, and an employee of Illinois Power since 1965. He is a director of First Decatur Bancshares, Inc., The First National Bank of Decatur and Firstech, Incorporated. C. Steven McMillan, 50 - - ------------------------- Executive Vice President and Director of Sara Lee Corporation, Chicago, Illinois, a global packaged food and consumer products company, since 1993. He had previously been Senior Vice President-Strategy Development from 1986 to 1993. He is Chairman of the Board of Electrolux Corporation and a director of J. P. Food Service. Donald S. Perkins, 68 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 a director of AT&T, Aon Corporation, Cummins Engine Company, Inc., Current Assets, Inland Steel Industries, Inc., LaSalle Street Fund, Inc., The Putnam Funds, Spring Industries, Inc., and Time Warner, Inc. Robert M. Powers, 64 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 a director of A. E. Staley Manufacturing Company. Walter D. Scott, 64 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, 46 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, a director of McDonnell Douglas Corporation, and a director of Teachers Insurance and Annuity Association. Walter M. Vannoy, 68 1990 - - ----------------------------- Prior to retirement in May 1995, Mr. Vannoy was Chairman and Chief Executive Officer of Figgie International, Inc., Willoughby, Ohio, a diversified operating company serving consumer, industrial, technical, and service markets world-wide, since 1994. He is a director of Figgie International, Inc. Marilou von Ferstel, 58 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 1981 to 1990. Ms. von Ferstel is a director of Walgreen Company. John D. Zeglis, 48 1993 - - ------------------------------ Senior Executive Vice President-General Counsel, Government Affairs, and Policy Development of AT&T, Basking Ridge, New Jersey, a diversified communications company, since 1995. He had been Senior Vice President-General Counsel and Government Affairs from 1989 to 1995. He is a director of the Helmerich & Payne Corporation. Vernon K. Zimmerman, 67 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 ICH Corporation. Security Ownership of Management and Certain Beneficial Owners The following table shows shares of stock beneficially owned as of January 31, 1996, by each director nominee and the executive officers named in the Summary Compensation Table. To the best of Illinova's knowledge, no owner holds more than 5 percent of Illinova Common Stock. Number of Shares Name of Class Beneficially Percent Beneficial Owner of Stock Owned (1) of Class - - ------------------------------------------------------------ Richard R. Berry Common 3,580 (2) Larry D. Haab Common 10,185 (2) C. Steven McMillan Common 0 (2) Donald S. Perkins Common 8,112 (2) Robert M. Powers Common 7,250 (2) Walter D. Scott Common 3,850 (2) Ronald L. Thompson Common 3,127 (2) Walter M. Vannoy Common 3,350 (2) Marilou von Ferstel Common 4,112 (2) John D. Zeglis Common 2,390 (2) Vernon K. Zimmerman Common 8,401 (2) Charles W. Wells Common 8,585 (2) Paul L. Lang Common 2,734 (2) Larry F. Altenbaumer Common 4,179 (2) Larry S. Brodsky Common 1,713 (2) (1) The nature of beneficial ownership for shares shown is sole voting and/or investment power, except for Mr. Wells, who disclaims beneficial ownership of 1,000 shares held in the name of his wife. (2) No director or executive officer owns any other equity securities of Illinova. No director or executive officer owns as much as 1% of the Common Stock. All directors and executive officers of both Illinova and Illinois Power Company as a group own 80,299 shares of Common Stock (less than 1%). Executive Compensation The following table sets forth a summary of the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of Illinova and Illinois Power Company, its principal subsidiary, for the years indicated. The compensation shown includes all compensation paid for service to Illinova and its subsidiaries, including Illinois Power. Summary Compensation Table Long-Term Compensation _________________________________________________ Annual Compensation Awards Payouts ------------------------------- ------------------------ --------- Other Restricted Securities LTIP All Other Bonus Annual Stock Awards Underlying Payouts Compensation Name and Principal Position (1) Year Salary (2) Compensation (3) Options (4) (5) Larry D. Haab 1995 $472,250 $76,975 $19,088 $76,975 20,000 shs. $43,597 $2,550 Chairman, President and 1994 451,375 42,881 15,783 20,900 shs. 360 Chief Executive Officer of 1993 437,500 22,531 13,199 20,000 shs. 480 Illinova and Illinois Power Charles W. Wells 1995 $318,863 $ 33,734 $ 22,342 $ 33,734 -- $ 24,392 $2,470 Executive Vice President 1994 276,625 25,242 12,404 8,500 shs. 330 of Illinois Power 1993 265,875 12,629 9,697 6,500 shs. 357 Paul L. Lang 1995 $ 222,812 $ 20,499 $ 8,265 $ 20,499 6,500 shs. $ 20,360 $ 2,510 Senior Vice President 1994 213,562 20,289 8,672 6,800 shs. 440 of Illinois Power 1993 205,625 9,767 7,508 6,000 shs. 440 Larry F. Altenbaumer 1995 $ 204,937 $ 17,317 $ 7,686 $ 17,317 6,500 shs. $ 16,084 $ 2,378 Chief Financial Officer, 1994 196,562 18,674 8,975 6,800 shs. 400 Treasurer and Controller 1993 187,750 8,918 7,093 6,000 shs. 480 of Illinova, and Senior Vice President, Chief Financial Officer, and Treasurer of Illinois Power Larry S. Brodsky 1995 $ 196,000 $ -- $ 5,120 $ - 6,500 shs. $ 14,179 $ 2,190 Senior Vice President 1994 $ 174,186 $ 16,548 $ 4,973 4,400 shs. 400 of Illinois Power 1993 157,875 8,131 4,220 4,500 shs. 400
(1) Mr. Wells retired from Illinois Power on December 31, 1995. Mr. Brodsky resigned from Illinois Power on January 2, 1996. (2) The amounts shown in this column are the cash award portion of grants made to these individuals under the Executive Incentive Compensation Plan ("Compensation Plan") for 1995, including amounts deferred under the Executive Deferred Compensation Plan. See the Compensation Plan description in footnote (3) below. (3) This table sets forth stock unit awards for 1995 under the Compensation Plan. One-half of each year's award under this plan is converted into stock units representing shares of Illinova Common Stock based on the closing price of Common Stock on the last trading day of the award year. The other one-half of the award is paid to the recipient in cash and is included under Bonus in the Summary Compensation Table. Stock units awarded in a given year, together with cash representing the accumulated dividend equivalents on those stock units, become fully vested after a three-year holding period. Stock units are converted into cash and piad based on the closing price of Common Stock on the first trading day of the distriubtion year. Particpants (or beneficiears 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. Particpants whose employment is terminated for reasons other than retirement, disability, or death forfeit all unvested awards. In the event of a termination of employment within two years after a change in control of Illinova, without good cause or by any participant with good reason, all awards of the paricipant becme fully vested and payable. As of December 31, 1995, named executive officers were credited with the following total aggregate number of unvested stock units under the Compensation Plan since its inception, valued on the basis of the closing price of Common Stock on December 31, 1995: Mr. Haab, 8,253 units valued at $247,603; Mr. Wells, 3,758 units valued at $112,759; Mr. Lang, 2,807 units valued at $84,211; Mr. Altenbaumer, 2,439 units valued at $73,187; Mr. Brodsky, 474 units valued at $14,238. Although stock units have been rounded, valuation is based on total stock units, including partial shares. (4) The amounts shown in this column reflect the cash value of the stock units granted in 1993 for the year 1992, including amounts deferred, under the Compensation Plan. See the Compensation Plan description in footnote (3) above. (5) The amounts shown in this column are Illinois Power's contributions under the Incentive Savings Plan (including the market value of shares of Illinova Common Stock at the time of allocation). The following tables summarize grants during 1995 of stock options under Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards outstanding at year end for the individuals named in the Summary Compensation Table. No options were exercisable or exercised during 1995. Option Grants In 1995 Individual Grants Number of Securities % of Total Options Underlying Options Granted to Employees Exercise or Base Grant Date Granted(1) in 1995 Price Per Share(1) Expiration Date Present Value (2) ----------------------------------------------------------------------------- Larry D. Haab 20,000 29% $ 24.875 6/14/2004 $ 117,800 Charles W. Wells 0 Paul L. Lang 6,500 9% 24.875 6/14/2004 38,285 Larry F. Altenbaumer 6,500 9% 24.875 6/14/2004 38,285 Larry S. Brodsky 6,500 9% 24.875 6/14/2004 38,285
(1) Each option becomes exercisable on June 30, 1998. In addition to the specified expiration date, the grant expires on the first anniversary of the recipient's death and/or the 90th day following retirement, and is not exercisable in the event a recipient's employment terminates. In the event of certain change-in-control circumstances, the Compensation and Nominating Committee may declare the option immediately exercisable. The exercise price of each option is equal to the fair market value of the Common Stock on the date of the grant. Recipients shall also receive, on or shortly after June 30, 1998, a payment equal to a percentage of the total dividends declared and paid on Illinova Common Stock during the period between the date of this grant and June 30, 1998 calculated by multiplying the number of shares of Common Stock granted hereunder times the total amount of dividends paid per share of Common Stock during the holding period, times a percentage based on Illinova total shareholder return ranking relative to the S & P Electric Utility Group. At the discretion of the Board of Directors, the foregoing payment may be made in the form of Illinova Common Stock of equivalent value based on the average New York Stock Exchange price of the stock during June 1998, or in cash. (2) The Grant Date Present Value has been calculated using the Black-Scholes option pricing model. Disclosure of the Grant Date Present Value, or the potential realizable value of option grants assuming 5% and 10% annualized growth rates, is mandated by regulation; however, Illinova does not necessarily view the Black-Scholes pricing methodology, or any other present methodology, as a valid or accurate means of valuing stock option grants. The calculation was based on the following assumptions: (i) An annual dividend yield on Illinova Common Stock of 3.80%; (ii) A risk-free interest rate of 6.40%, based on the yield of a zero-coupon government bond maturing at the end of the option term; and (iii) Stock volatility of 19.73%. Aggregated Option and Fiscal Year-End Option Value Table Number of Securities Underlying Unexercised Value of Unexercised In-the-Money Options at Fiscal Year-End Options at Fiscal Year-End Name Exercisable/Unexercisable Exercisable/Unexercisable Larry D. Haab 0 shs./76,900 shs. 0/$514,212 Charles W. Wells 0 shs./21,000 shs. 0/$154,687 Paul L. Lang 0 shs./24,300 shs. 0/$162,987 Larry F. Altenbaumer 0 shs./24,300 shs. 0/$162,987 Larry S. Brodsky 0 shs./18,400 shs. 0/$119,212
Pension Benefits Illinois Power maintains a Retirement Income Plan for Salaried Employees (the "Retirement Plan") providing pension benefits for all eligible salaried employees. In addition to the Retirement Plan, Illinois Power also maintains a nonqualified Supplemental Retirement Income Plan for Salaried Employees (the "Supplemental Plan") that covers all elected officers eligible to participate in the Retirement Plan and provides for payments from general funds of Illinois Power of any monthly retirement income not payable under the Retirement Plan because of the 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, 1995, for purposes of both the Retirement Plan and the Supplemental Plan, Messrs. Haab, Wells, Lang, Altenbaumer, and Brodsky had completed 30, 32, 9, 23, and 21 years of credited service, respectively. Employee Retention Agreements Illinova has entered into Employee Retention Agreements with each of its executive officers and officers of its subsidiaries. Under each agreement, the officer would be entitled to receive a lump sum cash payment if his or her employment were terminated by Illinova without good cause or voluntarily by the officer for good reason within two years following a change in control of Illinova 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 of the officer's employment with Illinova terminated; plus (2) three times the latest bonus earned by the officer during the three calendar years preceding termination of employment. Under the agreement, the officer would continue, after any such termination of employment, to participate in and receive benefits under other benefit plans of Illinova. Such coverage would contnue for 36 months following termination of employment, or, if earlier, until the officer reached age 65 or was employed by another employer; provided that, if the officer was 50 years of age or older at the time of such termination, then coverage under health, life insurance and similar welfare plans would continue until the officer became 55 years of age, at which time he or she would be eligible to receive the benefits extended to the employees of Illinova who elect early retirement. Compensation and Nominating Committee Report on Officer Compensation The six-member Compensation and Nominating Committee of the Board of Directors (the "Committee") is composed entirely of Outside Directors. The Committee's role includes a review of the performance of the elected officers and the establishment of specific officer salaries subject to Board approval. The Committee establishes performance goals for the officers under the Compensation Plan, approves payments made pursuant to the Compensation Plan and recommends grants under the Long-Term Incentive Compensation Plan approved by the shareholders in 1992. The Committee also reviews other forms of compensation and benefits making recommendations to the Board on changes whenever appropriate. The Committee carries out these responsibilities with assistance from an executive compensation consulting firm and with input from the Chief Executive Officer and management as it deems appropriate. Officer Compensation Philosophy Illinova's compensation philosophy reflects a commitment to compensate officers competitively with other companies in the electric and gas utility industry while rewarding executives for achieving levels of operational excellence and financial returns consistent with continuous improvement in customer satisfaction and shareholder value. Illinova's compensation policy is to provide a total compensation opportunity targeted to all utilities in the Edison Electric Institute (EEI) database. Eighty-four percent of the companies in the S&P Utilities Index are also in the EEI database. The S&P Utilities Index is used to relate Illinova's shareholder value in the following performance graphs. The S&P index covers the utility 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 Illinova's shareholders. The compensation program is structured so that, depending on the salary level, between 25 and 45 percent of an officer's total compensation target is composed of incentive compensation. Base Salary Plan The Committee determines base salary ranges for executive officers based on competitive pay practices of a peer group of utilities. Officer salaries correspond to approximately the average of the companies in the compensation peer group. Individual increases are based on several factors including the officer's performance during the year and the relationship of the officer's salary to the market salary level for the position. Annual Incentive Compensation Plan Annual incentive awards are earned based on the achievement of specific annual financial and operational goals by the elected officer group as a whole and consideration of the officer's individual contribution. If payment is earned under this Plan, one-half of the bonus is payable in cash during the year following the award year and one-half is credited to the participant in the form of Common Stock units, the number of which is determined by dividing half of the earned bonus amount by the closing price of the Common Stock on the last trading day of the award year. The officer's interest in the stock units vests at the end of the three-year period which begins the year after the award year. The officer receives this award in cash equal to (1) the closing stock price on the first trading day of the distribution year times the number of units held plus (2) dividend equivalents that would have been received if the stock had actually been issued. For 1995, 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. Up to 25 percent of the awarded amount is based on an assessment of the individual officer's performance during the year. Awards shown under Bonus in the Summary Compensation Table for performance during 1995 were based on the following results. Earnings per Share, Customer Satisfaction and Cost Management were at or better than the threshold level for the award. Employee Teamwork results were not known at the time of printing. Long-Term Incentive Compensation Plan 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, dividend equivalents or restricted stock grants. The stock options and dividend equivalents granted to the officers for 1995 represent a long-term incentive award based on Illinova and individual performance as evaluated by the Chairman and reviewed by the Committee. The actual number of dividend equivalents earned is determined by Illinova's total shareholder return compared to the companies in the S&P Utility Index. CEO Compensation Larry Haab became Chairman, President, and Chief Executive Officer ("CEO") of Illinois Power on June 12, 1991, and Chairman, President and Chief Executive Officer of Illinova in December 1993. Illinova based Mr. Haab's 1995 compensation on the policies and plans described above. The Committee invokes the active participation of all non-management directors in reviewing Mr. Haab's performance before it makes recommendations regarding his compensation. The Committee is responsible for administering the processes for completing this review. The process starts early in the year when the Board of Directors works with Mr. Haab to establish his personal goals and short- and long-term strategic goals for Illinova. At the conclusion of the year Mr. Haab reviews his performance with the non-management directors. The Committee oversees this review and recomends to the board appropriate adjustments to compensation. In setting the CEO's salary for 1995, the Committee, with the participation of all Outside Directors, determined that important goals were achieved and the results for Illinova for the year were excellent. Mr. Haab's vision of the industry's evolution has led, and is continuing to lead, to appropriate redeployment of Illinova resources. The Committee concluded that in 1995 Mr. Haab's performance continued to advance Illinova toward the accomplishment of its strategic objectives. The 1995 Annual Incentive Compensation Plan award for the Chief Executive Officer 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 2,566 stock units which vest over a three-year period as described above. The 20,000 option shares and dividend equivalents granted to the CEO reflect the Committee's recognition of his work in directing Illinova towards its long-term objectives of outstanding customer satisfaction and sustained growth in shareholder return. Compensation and Nominating Committee Donald S. Perkins, Chairman Robert M. Powers Walter D. Scott Ronald L. Thompson Marilou von Ferstel John D. Zeglis Stock Performance Graphs The following performance graphs compare the cumulative total shareholder return on Illinova's Common Stock to the cumulative total return on the S&P 500 Index, S&P MidCap 400 Index and S&P Utilities Index from (i) December 31, 1990, through December 31, 1995, and (ii) December 31, 1992, through December 31, 1995. Comparison of Five-Year Cumulative Total Return Among Illinova, S&P 500 Index, S&P Midcap 400 Index, and S&P Utilities Index. 1991 1992 1993 1994 1995 Illinova 146 142 147 151 216 S & P 500 130 140 155 157 215 S & P MidCap 400 150 168 191 185 242 S & P Utilities 114 124 141 130 184 Assumes $100 invested on December 31, 1990, in Illinova's Common Stock, S&P 500 Index, S&P MidCap 400 Index, and S&P Utilities Index. * Fiscal year ended December 31 Comparison of Three-Year Cumulative Total Return Among Illinova, S&P 500 Index, S&P Midcap 400 Index, and S&P Utilities Index. 1993 1994 1995 Illinova 103 106 152 S&P 500 110 112 153 S&P MidCap 400 114 110 144 S&P Utilities 114 105 149 Assumes $100 invested on December 31, 1992, in Illinova's Common Stock, S&P 500 Index, S&P MidCap 400 Index, and S&P Utilities Index. *Fiscal year ended December 31 Independent Auditors The Board of Directors of Illinova has selected Price Waterhouse LLP as independent auditors for Illinova for 1996. 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 1995 Summary Annual Report to Shareholders was mailed to shareholders commencing on March 1, 1996. Copies of Illinova's Annual Report on Form 10-K will be available to shareholders, after its filing with the Securities and Exchange Commission on or before March 31, 1996. Requests should be addressed to Investor Relations, G-21, Illinova Corporation, 500 South 27th Street, Decatur, Illinois 62525-1805. Any proposal by a shareholder to be presented at the next Annual Meeting must be received at Illinova's executive offices not later than November 1, 1996. Other Business Management does not know of any matter which will be presented for consideration at the Annual Meeting other than the matters described in the accompanying Notice of Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, General Counsel and Corporate Secretary Decatur, Illinois March 1, 1996 appendix: 1995 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 Illinois Power Company 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 Illinois Power Company Statistics for information concerning consolidated financial position and results of operations. A discussion of the factors having significant impact upon consolidated financial position and consolidated results of operations since January 1, 1993, is below. Illinova Subsidiaries The Consolidated Financial Statements include the accounts of: Illinova Corporation (Illinova), a holding company; Illinois Power Company (IP), a combination electric and gas utility; Illinova Generating Company (IGC), which invests in energy-related projects throughout the world; and Illinova Power Marketing, Inc. (IPMI), which is in the business of marketing energy, energy-related services and natural gas. On May 16, 1995, IPMI gained Federal Energy Regulatory Commission (FERC) approval to buy electricity from various producers not affiliated with IP and to sell electricity at market rates to such wholesale customers as utilities, electric cooperatives and municipalities. In January 1995, IPMI established operating headquarters in Salt Lake City, Utah. See" Note 2-Illinova Subsidiaries" of the "Notes to Consolidated Financial Statements" for additional information. IP's consolidated financial position and results of operations are currently the principal factors affecting Illinova's consolidated financial position and results of operations. Open Access and Wheeling On March 29, 1995, the FERC issued a Notice of Proposed Rulemaking (NOPR) designed to encourage a more fully competitive wholesale electric market through mandated open access to public utility transmission facilities, at rates to be determined, at the outset, by the FERC. Transmission of electricity for a customer who is not an end-user, or for delivery to an end-user who is not a customer of the transmitting utility is called, respectively, wholesale wheeling and retail wheeling. Under the FERC's proposal, all transmission-owning public utilities were required to file nondiscriminatory open-access transmission tariffs, available to all wholesale sellers and buyers of electric energy. On March 20, 1995, IP filed three transmission service tariffs that offer eligible transmission customers the same or comparable transmission service on terms comparable to service IP provides itself. On May 16, 1995, the FERC accepted IP's open-access tariff filings. It's too soon to predict the long- term financial inpact of increasing access and other issues arising from such access. Competition In March 1995, IP was instrumental in developing a legislative proposal, Energy Choice 2000, which is designed to reform Illinois' regulatory laws governing utilities. Energy Choice 2000 establishes the framework for a managed transition for utilities to operate in an increasingly competitive environment. The proposal outlines a time frame for all classes of customers to benefit from competition, beginning in the year 2000. In May 1995, the Illinois General Assembly passed Senate Joint Resolution 21, which established the Joint Committee on Electric Utility Regulatory Reform and directed it to use Energy Choice 2000 "as a key element for developing legislative proposals for reducing regulation, increasing customer choice and promoting and facilitating competition in Illinois' electirc utility industry." The Joint Committee on Electric Utility Regulation Reform is directed to proivde a final legisltaion proposal during the fourth quarter of 1996. On September 11, 1995, IP filed a proposal with the Illinois Commerce Commission (ICC) seeking its approval to conduct an open-energy access experiment beginning in 1996. The experiment would allow approximately 20 industrial customers to purchase electricity and related services from other sources. IP would transmit (wheel) the electricity over its lines. IP will seek FERC approval of the experiment after receipt of ICC approval, anticipated in the second quarter of 1996. The maximum total load involved in this experiment represents approximately 1 percent of IP's total load, or about $7.5 million in net annual revenue. IP expects the earnings impact to be immaterial. Any loss of sales would be partially offset by revenues obtained by selling the surplus energy and capacity on the open market and by transmission and ancillary service charges necessary for customers to obtain energy from an alternative supplier, as well as by corresponding reductions in fuel and other variable operating costs. The open-access experiment will allow IP to evaluate the financial, operational and service impacts of transporting power from other suppliers to customers. Additionally, regulators and legislators will benefit from the experiment by observing open-energy access in a "laboratory setting" while they look for ways to bring the benefits of competition to all customers. Finally, it will give customers opportunity to gain experience in arranging their power supplies and transmission requirements and managing their operations under an open-energy access scenario. The issue of competition is one that raises both risks and opportunities. At this time, the ultimate effect of competition on Illinova's consolidated financial position and results of operations is uncertain. See "Note 1-Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" for additional discussion of the effects of regulation. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement and severance programs. During the fourth quarter of 1995, 727 employees accepted enhanced retirement or severance under these programs. At January 1, 1996, Illinova employed 3,596 people, as compared to 4,350 at December 31, 1994. The combined enhanced retirement and severance programs generated a pre-tax charge of $38 million against fourth quarter 1995 earnings and will generate savings of approximately $36 million annually, starting in 1996. Consolidated Results of Operations Overview Earnings (loss) applicable to common stock were $148 million for 1995, $158 million for 1994 and $(82) million for 1993. Earnings (loss) per common share were $1.96 for 1995 ($2.26 before the one-time charge of $38 million for enhanced retirement and severance), $2.09 for 1994 and $(1.08) for 1993. The 1995 earnings per share include $(.30) net-of-tax for the enhanced retirement and severance program and $(.05) for the carrying amount under consideration paid for IP preferred stock redeemed in December 1995. The 1995 earnings also reflect increased electric sales due to unseasonably warm summer weather, partially offset by increased operating and maintenance expenses due to the Clinton Power Station (Clinton) refueling and maintenance outage. The 1994 earnings per share include $.08 for the carrying amount over consideration paid for IP preferred stock redeemed in December 1994 and an increase in gas rates as a result of IP's 1994 gas rate order. The 1994 earnings also reflect increased electric sales, lower operating and maintenance expenses due to ongoing cost management efforts, no Clinton refueling and maintenance outage and lower financing costs. In 1993, Illinova's earnings were $118 million, or $1.57 per common share, excluding the September write-off of disallowed Clinton post-construction costs of $200 million, or $2.65 per share, net of income taxes. The 1993 earnings before the write-off reflect increased electric and gas sales due to closer-to-normal temperatures, increased interchange sales, lower operating and maintenace expenses and lower interest expense as a result of refinancing efforts. The ICC and FERC determine IP's rates, at the retail and wholesale levels, respectively, for electric service, and the ICC determines IP's rates for gas service. These rates are designed to recover the cost of service and allow shareholders the opportunity to earn a fair rate of return. Future electric and natural gas sales, including interchange sales, will continue to be affected by an increasingly competitive marketplace, changes in the regulatory environment, increased transmission access, weather conditions, competing fuel sources, interchange market conditions, plant availability, fuel cost recoveries, customer conservation efforts and the overall economy. Operating Revenues (Millions of Dollars) 1995 $1,641.4 1994 1,589.5 1993 1,581.2 1992 1,479.5 1991 1,474.9 Illinois Power - Results of Operations Electric Operations - For the years 1993 through 1995, electric revenues including interchange increased 8.1% and the gross electric margin increased 8.7% as follows: - - --------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - --------------------------------------------------------- Electric revenues $ 1,252.6 $ 1,177.5 $ 1,135.6 Interchange revenues 116.3 110.0 130.8 Fuel cost & power purchased (333.4) (319.2) (313.6) - - --------------------------------------------------------- Electric margin $ 1,035.5 $ 968.3 $ 952.8 ========================================================= The components of annual changes in electric revenues: - - --------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - --------------------------------------------------------- Price $ 13.3 $ (23.2) $ (30.0) Volume and other 42.7 44.1 72.1 Fuel cost recoveries 19.1 21.0 (24.4) - - --------------------------------------------------------- Revenue increase $ 75.1 $ 41.9 $ 17.7 ========================================================= 1995 - The 6.4% increase in electric revenues was primarily due to a 1.9% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher residential sales (4.8%) and higher commercial sales (8.2%) due to an improving economy and warmer summer temperatures compared to 1994. Industrial sales remained essentially unchanged from 1994. Interchange revenues increased $6.3 million (5.8%) as a result of increased sales opportunities. 1994 - The 3.7% increase in electric revenues was primarily due to a 6.3% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher commercial sales (8.3%) and higher industrial sales (7.0%) due to an improving economy. Residential sales remained essentially unchanged from 1993 primarily due to milder temperatures in 1994 as compared to 1993. Interchange sales decreased 19.6% from 1993 levels primarily due to unusually large sales opportunities in 1993. Major Sources of Electric Energy (Millions of Megawatt-hours) 1995 1994 1993 Fossil 14.5 13.2 13.1 Nuclear 5.3 6.4 5.1 Purchases 3.2 3.1 5.1 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. The cost of meeting IP's system requirements was reflected in fuel costs for electric plants and power purchased. Changes in these costs are below: - - ---------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - ---------------------------------------------------- Fuel for electric plants Volume and other $ 9.8 $ 13.8 $ 3.5 Price (35.5) (14.3) 7.4 Emission allowances 18.5 --- --- Fuel cost recoveries 14.5 32.0 (24.6) - - ---------------------------------------------------- 7.3 31.5 (13.7) Power purchased 6.9 (25.9) 54.5 - - ---------------------------------------------------- Total increase $ 14.2 $ 5.6 $ 40.8 ==================================================== Weighted average system generating fuel cost ($/MWH)$ 11.41 $ 12.72 $ 13.88 ==================================================== System load requirements, generating unit availability, fuel prices, purchased power prices, resale of energy to other utilities, emission allowance purchases and fuel cost recovery through the Uniform Fuel Adjustment Clause (UFAC) caused changes in these costs. Equivalent Availability - Clinton and Fossil Clinton Fossil 1995 76% 81% 1994 92% 78% 1993 73% 85% 1992 62% 82% 1991 76% 81% Changes in factors affecting the cost of fuel for electric generation are below: - - ------------------------------------------------------ 1995 1994 1993 - - ------------------------------------------------------ Increase in generation 1.9% 8.2% 2.5% Generation mix Coal and other 73% 67% 72% Nuclear 27% 33% 28% ====================================================== 1995 - The cost of fuel increased 2.8% and electric generation increased 1.9%. The increase in fuel cost was attributable to the effects of the UFAC, the increase in higher-cost fossil generation and the cost of emission allowances. Clinton's equivalent availability and generation were lower in 1995 as compared to 1994 due to the scheduled refueling and maintenance outage. Clinton returned to service April 29, 1995, after completing its fifth refueling and maintenance outage, which began March 13, 1995. Power purchased increased $6.9 million. Fuel Cost Per Million BTU Fuel Cost Percent of Generation Coal $1.34 70.8% Nuclear .81 27.7% Gas 2.08 1.1%\ Oil 4.44 .1% Tires .88 .3% 1994 - The cost of fuel increased 13.4% and electric generation increased 8.2%. The increase in fuel cost was attributable to the effects of the UFAC, partially offset by a decrease in fossil generation and an increase in lower-cost nuclear generation. Clinton's equivalent availability and generation were higher in 1994 as compared to 1993 due to no refueling and maintenance outage. Power purchased for the period decreased $25.9 million. Unusually large interchange sales opportunities during 1993, which did not recur in 1994, were the primary cause of the decrease in power purchased. 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 UFAC and lower generation at IP's largest fossil plant. The decrease was partially offset by an increase in transportation costs due to flooding in the Midwest and a 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. Gas Operations - For the years 1993 through 1995, gas revenues including transportation decreased 13.4% while the gross margin on gas revenues increased 4.9% as follows: - - --------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - --------------------------------------------------- Gas revenues $ 264.5 $ 293.2 $ 306.8 Gas cost (138.8) (172.4) (187.3) Transportation revenues 8.0 8.8 8.0 - - ---------------------------------------------------- Gas margin $ 133.7 $ 129.6 $ 127.5 ==================================================== (Millions of therms) Therms sold 588 584 597 Therms transported 273 262 229 - - ---------------------------------------------------- Total consumption 861 846 826 ==================================================== Changes in the cost of gas purchased for resale: - - -------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - -------------------------------------------------------- Gas purchased for resale Cost (excluding take-or-pay) $ (43.1) $ (6.4) $ 13.3 Take-or-pay costs (.4) 2.8 5.3 Volume 25.3 (13.6) (3.4) Gas cost recoveries (15.4) 2.3 .2 - - -------------------------------------------------------- Total increase (decrease) $(33.6) $ (14.9) $ 15.4 - - -------------------------------------------------------- Average cost per therm delivered$ .201 $ .261 $ .275 ======================================================== The 1995 decrease in the cost of gas purchased was due to lower gas prices caused by unusually warm winter weather nationwide. The 1994 decrease in the cost of gas purchased was primarily due to lower gas prices, the expanded use of additional gas storage and a decrease in therms purchased. Also contributing to the higher gas margins in 1995 and 1994 was the 6.1% increase in the 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. 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) 1995 1994 1993 - - --------------------------------------------------------- Other operating expenses $(.3) $(9.2) $(2.1) Maintenance 10.4 (11.2) (1.3) Depreciation and amortization 7.2 6.4 6.0 ========================================================== The increase in maintenance expense for 1995 is primarily due to the refueling and maintenance outage at Clinton. The decrease in operating and maintenance expenses for 1994 is due to 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 1995 and 1994 increases in depreciation expense are due primarily to a higher utility plant balance in 1995 and1994 as compared to 1994 and 1993. The 1993 increase in depreciation expense was 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 1994 and 1993 increases in depreciation expense are partially offset by the decrease in deferred Clinton costs as a result of the September 1993 write-off of disallowed Clinton post-construction costs. Operating and Maintenance Expenses (Millions of Dollars) 1995 $359.7 1994 349.6 1993 370.0 1992 373.4 1991 340.6 Other Income and Deductions - Total allowance for funds used during construction (AFUDC), a non-cash item of income, decreased in 1995 compared to non-cash item of income, decreased in 1995 compared to 1994 due to decreased eligible capital expenditures. 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 6.5%, 7.0% and 7.5% in 1995, 1994 and 1993, respectively. The 1994 increase was primarily due to a decrease in allocated income taxes. Interest Charges - Total interest charges increased $4.1 million in 1995, and decreased $21.0 million in 1994 and $3.7 million in 1993. The 1995 increase was due to increased short-term borrowings at higher rates. The 1994 and 1993 decreases were primarily due to the refinancing with lower-cost debt and 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, IP issued approximately $1.4 billion of new debt at a weighted average interest rate of 6.97%. Inflation - Inflation, as measured by the Consumer Price Index, was 2.5%, 2.5% and 3.1% in 1995, 1994 and 1993, respectively. IP recovers historical rather than current plant costs in rates. LIQUIDITY AND CAPITAL RESOURCES Regulatory Matters UFAC Suspension - On June 26, 1995, IP filed a petition with the ICC for permission to eliminate its UFAC by adjusting base rates to include projected fuel costs. IP filed its petition under a procedure that allows the ICC to grant or deny the specific proposal, but not to subject it to hearings or require that it be modified. IP believes that continuation of the UFAC creates disincentives to efficient decisions made on a total cost basis; that the UFAC is inconsistent with a competitive environment; and that the significance of fuel costs as a component of total costs has diminished, thereby reducing the need for a UFAC as a risk-reduction mechanism. On August 8, 1995, the ICC voted three to two to deny IP's petition. IP is currently reviewing its alternatives in light of the decision. 1994 Gas Rate Order - On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. For customers, the increase is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Concurrent with the gas rate increase, IP's gas utility plant composite depreciation rate decreased to 3.4%. Dividends On December 13, 1995, Illinova increased the quarterly common stock dividend 12%, declaring the common stock dividend for the first quarter of 1996 at $.28 per share, payable February 1, 1996, to shareholders of record as of January 10, 1996. On October 12, 1994, Illinova increased the quarterly common stock dividend 25%, declaring the common stock dividend for the first quarter of 1995 at $.25 per share. Capital Resources and Requirements Illinova and IP need cash for operating expenses, interest and dividend payments, debt and certain IP preferred stock retirements, and construction programs. To meet these needs, Illinova and IP have used internally generated funds and external financings including the issuance of IP preferred stock, debt and revolving lines of credit. The timing and amount of external financings depend primarily on economic and financial market conditions, cash needs and capitalization ratio objectives. To a significant degree, the availability and cost of external financing depend on the financial health of the company seeking those funds. Cash flows from operations during 1995 provided sufficient working capital to meet ongoing operating requirements, to service existing common and IP preferred stock dividends and debt requirements, and to meet all of IP's construction requirements. Additionally, Illinova expects future cash flows will enable it to meet future operating requirements and continue to service IP's existing debt, IP's preferred and Illinova's common stock dividends, IP's sinking fund requirements and all of IP's anticipated construction requirements. 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 Illinova's and IP's financial position and may affect the cost of securities, as well as the willingness of investors to invest in these securities. Under current market conditions, these ratings are unlikely to impair Illinova's or IP's ability to issue, or significantly increase the cost of issuing additional securities through external financing. Illinova and IP have adequate short-term and intermediate-term bank borrowing capacity. In 1993, Standard & 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 "somewhat 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 August 1995, S&P changed the assessment to "low average" and revised its ratings outlook to positive from stable. In February 1996, Moody's also revised its ratings outlook to positive from stable. IP's revised rating assessments reflect prospects for continued financial strengthening driven by gradual debt reduction, rigorous cost controls and moderate sales growth. In February, 1995, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock. In May 1995, IP redeemed the remaining $24 million of 8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed $.2 million of 7.56% serial preferred stock and $3 million of 8.24% serial preferred stock. In December 1995, IP redeemed $34.7 million of 8.00% serial preferred stock, $33.6 million of 7.56% serial preferred stock and $27 million of 8.24% serial preferred stock. In February 1994, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock and issued $35.6 million of First Mortgage Bonds, 5.7% Series due 2024 (Pollution Control Series K). In May 1994, IP retired $35.6 million of First Mortgage Bonds, 11 5/8% Series due 2014 (Pollution Control Series D) with the proceeds of the debt issuance. In August 1994, IP retired $100 million of 8 1/2% debt securities. Illinois Power Financing I (IPFI), is a statutory business trust in which IP serves as sponsor. IPFI issued $100 million of trust originated preferred securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. The TOPrS were issued by IPFI, which invested the proceeds in an equivalent amount of IP subordinated debentures due in 2045. The proceeds were used by IP to repay short-term indebtedness on varying dates on or before March 1, 1996. IP incurred the indebtedness in December 1995, to redeem $95.3 million (principal value) of higher-cost outstanding preferred stock of IP. The carrying amount under consideration paid for redeemed IP preferred stock amounted to $3.5 million which was recorded in equity and included in Net income applicable to common stock. See "Note 10-Preferred Stock of Subsidiary" of the "Notes to Consolidated Financial Statements" for additional information. Illinois Power Capital, L.P., (IP Capital), is a limited partnership in which IP serves as a general partner. IP Capital issued $97 million of tax- advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-tax rate) in October 1994. The proceeds were loaned to IP and were used to redeem $97 million (principal value) of higher-cost outstanding preferred stock of IP. The carrying amount over consideration paid for redeemed preferred stock amounted to $6.4 million which was recorded in equity and included in Net income applicable to common stock. See "Note 10- Preferred Stock of Sudsidiary" 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 were used to retire $84.1 million of First Mortgage Bonds, 10 3/4% Series due 2015 (Pollution Control Series E). In August 1995, IP purchased $5 million of 8.75% First Mortgage Bonds on the open market. See "Note 9--Long-Term Debt of Subsidiary" of the "Notes to Consolidated Financial Statements" for additional information. For the years 1995, 1994 and 1993, changes in long-term debt and IP preferred stock outstanding, including normal maturities and elective redemptions, were as follows: (Millions of dollars) 1995 1994 1993 Bonds $ (5) $ (10) $ 35 Other long-term debt - (100) - Preferred stock (135) 6 (51) Total decrease $ (140) $ (104) $ (16) The amounts shown in the preceding table for debt retirements do not include all mortgage sinking fund requirements. IP has generally met these requirements by pledging property additions as permitted under IP's 1943 Mortgage and Deed of Trust. For additional information, see "Note 9--Long- Term Debt of Subsidiary" and "Note 10-- Preferred Stock of Subsidiary" of the "Notes to Consolidated Financial Statements." See "Note 4--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, IP executed a new general obligation mortgage (New Mortgage) to replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both mortgages are secured by liens on substantially all of IP's properties. A corresponding issue of First Mortgage bonds, under the First Mortgage, secures bonds issued under the New Mortgage. At December 31, 1995, based on the most restrictive earnings test contained in the First Mortgage, IP could issue approximately $1.2 billion of additional First Mortgage bonds for other than refunding purposes. The amount of available unsecured borrowing capacity totaled $144 million at December 31, 1995. Also at December 31, 1995, the unused portion of Illinova and IP total bank lines of credit was $404 million. As of December 31, 1995, IP had $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. Capital expenditures for the years 1993 through 1995 were approximately $680.7 million, including $22.5 million of AFUDC. Illinova estimates that $1.56 billion will be required for construction and capital expenditures during the 1996-2000 period as follows: Five-Year Period - - -------------------------------------------------------------------- (Millions of dollars) 1996 1996-2000 - - -------------------------------------------------------------------- Construction requirements Electric generating facilities $ 45 $ 236 Electric transmission and distribution facilities 68 249 General plant 24 86 Gas facilities 28 110 Total construction requirements 165 681 Nuclear fuel 25 135 Debt retirements 62 362 Investments in subsidiaries 77 381 - - ---------------------------------------------------------------------- Total $ 329 $ 1,559 ====================================================================== See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information. Internal cash generation will meet substantially all construction and capital requirements. Environmental Matters See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of the Clean Air Act and manufactured- gas plant sites. Tax Matters See "Note 7--Income Taxes" of the "Notes to Consolidated Financial Statements" for a discussion of effective tax rates and other tax issues. Accounting Matters In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" (FAS 121), effective for fiscal years beginning after December 15, 1995. FAS 121 requires that an entity review long-lived assets for impairment when events indicate that the carrying amount of an asset may not be recoverable. For regulated enterprises, FAS 121 amends FASB Statement No. 71, "Accounting for the Effects of Certain Types of REgulation" (FAS71), requiring that an impairment be recognized for regulatory assets no longer meeting the criteria of paragraph 9 of FAS 71. This standard is not currently expected to materially impact the consolidated financial position or results of operations of Illinova or IP. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), effective for fiscal years beginning after December 15, 1995. FAS 123 establishes a fair- value based method of accounting for employee stock-based compensation plans and encourages companies to adopt that method. However, it also allows companies to continue to apply the intrinsic value-based method currently prescribed under APB Opinion No. 25 and related pronouncements, provided certain fair-value pro forma disclosures are made. Illinova is continuing to evaluate its alternatives under this standard. The FASB continues to review the accounting for liabilities related to closure and removal of long-lived assets, including decommissioning. See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of decommissioning. 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 Illinova's financial position, results of operations and cash flows. Illinova believes that its accounting and internal accounting control systems are maintained so that these systems provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing the consolidated financial statements. The consolidated financial statements have been audited by Illinova's independent accountants, Price Waterhouse LLP, in accordance with generally accepted auditing standards. Such standards include the evaluation of internal accounting controls to establish a basis for developing the scope of the examination of the consolidated financial statements. In addition to the use of independent accountants, Illinova maintains a professional staff of internal auditors who conduct financial, procedural and special audits. To assure their independence, both Price Waterhouse LLP and the internal auditors have direct access to the Audit Committee of the Board of Directors. The Audit Committee is composed of members of the Board of Directors who are not active or retired employees of Illinova. The Audit Committee meets with Price Waterhouse LLP and the internal auditors and makes recommendations to the Board of Directors concerning the appointment of the independent accountants and services to be performed. Additionally, the Audit Committee meets with Price Waterhouse LLP to discuss the results of their annual audit, Illinova's internal accounting controls and financial reporting matters. The Audit Committee meets with the internal auditors to assess the internal audit work performed, including tests of internal accounting controls. Larry D. Haab Larry F. Altenbaumer Chairman, President Chief Financial Officer, and Chief Executive Officer Treasurer and Controller report of independent accountants Price Waterhouse LLP To the Board of Directors of Illinova Corporation In our opinion, the consolidated financial statements of Illinova Corporation and its subsidiaries appearing on pages A-11 through A-31 of this report present fairly, in all material respects, the financial position of Illinova Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP St. Louis, Missouri February 2, 1996 Illinova Corporation consolidated statements of income (Millions of dollars except per share amounts) - - ------------------------------------------------------------------------------ For the Years Ended December 31, 1995 1994 1993 Operating Revenues Electric $ 1,252.6 $ 1,177.5 $ 1,135.6 Electric interchange 116.3 110.0 130.8 Gas 272.5 302.0 314.8 - - ------------------------------------------------------------------------------- Total 1,641.4 1,589.5 1,581.2 - - ------------------------------------------------------------------------------- Operating Expenses and Taxes Fuel for electric plants 273.9 266.6 235.1 Power purchased 59.5 52.6 78.5 Gas purchased for resale 138.8 172.4 187.3 Other operating expenses 259.7 260.0 269.2 Maintenance 100.0 89.6 100.8 Enhanced retirement and severance 37.8 -- -- Depreciation and amortization 186.5 179.3 172.9 General taxes 135.0 130.3 125.6 Income taxes 125.8 118.3 106.5 - - ------------------------------------------------------------------------------- Total 1,317.0 1,269.1 1,275.9 - - ------------------------------------------------------------------------------- Operating income 324.4 320.4 305.3 - - ------------------------------------------------------------------------------- Other Income and Deductions Allowance for equity funds used during construction --- 3.8 2.7 Disallowed Clinton costs --- --- (271.0) Income tax effects of disallowed costs --- --- 70.6 Miscellaneous-net (7.1) (9.1) (3.0) - - -------------------------------------------------------------------------------- Total (7.1) (5.3) (200.7) - - -------------------------------------------------------------------------------- Income before interest charges 317.3 315.1 104.6 - - -------------------------------------------------------------------------------- Interest Charges Interest expense 148.0 143.9 164.9 Allowance for borrowed funds used during construction (6.0) (5.5) (4.5) Preferred dividend requirements of subsidiary 23.7 24.9 26.1 - - -------------------------------------------------------------------------------- Total 165.7 163.3 186.5 - - -------------------------------------------------------------------------------- Net income (loss) 151.6 151.8 (81.9) Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary (3.5) 6.4 --- - - -------------------------------------------------------------------------------- Net income (loss) applicable to common stock $148.1 $158.2 $(81.9) ================================================================================ Earnings (loss) per common share $ 1.96 $ 2.09 $(1.08) Cash dividends declared per common share $ 1.03 $ .65 $ .40 Cash dividends paid per common share $ 1.00 $ .80 $ .80 Weighted average common shares 75,643,937 75,643,937 75,643,937 See notes to consolidated financial statements which are an integral part of these statements. Illinova Corporation consolidated balance sheets (Millions of dollars) - - -------------------------------------------------------------------------------- December 31, 1995 1994 Assets Utility Plant, At Original Cost Electric (includes construction work in progress of $199.8 million and $202.8 million, respectively) $6,189.0 $6,023.1 Gas (includes construction work in progress of $10.2 million and $16.8 million, respectively) 625.9 606.1 - - ------------------------------------------------------------------------------- 6,814.9 6,629.2 Less -- accumulated depreciation 2,251.7 2,102.7 - - ------------------------------------------------------------------------------- 4,563.2 4,526.5 Nuclear fuel in process 5.7 6.2 Nuclear fuel under capital lease 95.2 111.5 - - ------------------------------------------------------------------------------- 4,664.1 4,644.2 Investments and Other Assets 65.8 37.4 Current Assets Cash and cash equivalents 11.3 50.7 Notes receivable 6.1 - Accounts receivable (less allowance for doubtful accounts of $3 million) Service 129.4 110.4 Other 13.2 30.5 Accrued unbilled revenue 89.1 78.9 Materials and supplies, at average cost Fossil fuel 9.9 18.7 Gas in underground storage 18.5 23.1 Operating materials 82.7 92.1 Prepaid and refundable income taxes 19.6 11.5 Prepayments and other 20.8 23.5 400.6 439.4 Deferred Charges Deferred Clinton costs 107.3 110.8 Recoverable income taxes 128.7 147.3 Other 243.3 197.6 479.3 455.7 $5,609.8 $5,576.7 Capital and Liabilities Capitalization Common stock -- No par value, 200,000,000 shares authorized; 75,643,937 shares outstanding, stated at $1,424.6 $1,424.6 Less -- Deferred compensation -- ESOP 18.4 23.5 Retained earnings 129.6 58.8 Less -- Capital stock expense 8.8 9.7 Total common stock equity 1,527.0 1,450.2 Preferred stock of subsidiary 125.6 224.7 Mandatorily redeemable preferred stock of subsidiary 97.0 133.0 Long-term debt of subsidiary 1,739.3 1,946.1 Total capitalization 3,488.9 3,754.0 Current Liabilities Accounts payable 119.9 108.2 Notes payable 359.6 238.8 Long-term debt and lease obligations of subsidiary maturing within one year 95.0 33.5 Dividends declared 23.0 23.4 Taxes accrued 44.8 32.3 Interest accrued 39.0 38.4 Other 66.2 55.8 747.5 530.4 Deferred Credits Accumulated deferred income taxes 1,012.8 978.6 Accumulated deferred investment tax credits 222.8 230.9 Other 137.8 82.8 (Commitments and Contingencies Note 4) 1,373.4 1,292.3 $5,609.8 $5,576.7 See notes to consolidated financial statements which are an integral part of these statements. Illinova Corporation consolidated statements of cash flows (Millions of dollars) For the Years Ended December 31, 1995 1994 1993 Cash Flows From Operating Activities Net income (loss) $ 151.6 $ 151.8 $ (81.9) Items not requiring (providing) cash-- Disallowed Clinton costs, net of income taxes - - 200.4 Depreciation and amortization 190.0 182.3 176.6 Allowance for funds used during construction (6.0) (9.3) (7.2) Deferred income taxes 39.1 36.4 67.9 Enhanced retirement and severance 37.8 - - Changes in assets and liabilities -- Accounts and notes receivable (7.8) (18.2) (21.3) Accrued unbilled revenue (10.2) (29.9) 42.9 Materials and supplies 22.8 (2.3) 6.2 Accounts payable (13.6) (20.6) 13.8 Interest accrued and other, net 9.5 (21.6) (27.7) Net cash provided by operating activities 413.2 268.6 369.7 Cash Flows From Investing Activities Construction expenditures (209.3) (193.7) (277.7) Allowance for funds used during construction 6.0 9.3 7.2 Other investing activities (34.9) (19.7) (8.2) Net cash used in investing activities (238.2) (204.1) (278.7) Cash Flows From Financing Activities Dividends on common stock (75.6) (60.5) (60.5) Redemptions -- Short-term debt (213.6) (259.3) (254.5) Long-term debt of subsidiary (5.2) (230.0) (832.0) Preferred stock of subsidiary (134.5) (91.0) (94.4) Issuances -- Short-term debt 209.5 405.8 279.7 Long-term debt of subsidiary - 119.8 866.8 Preferred stock of subsidiary - 97.0 43.5 Discount (premium) paid on redemption of long-term debt of subsidiary -- - (2.8) (25.8) Other financing activities 5.0 (2.7) (12.6) Net cash used in financing activities (214.4) (23.7) (89.8) Net change in cash and cash equivalents (39.4) 40.8 1.2 Cash and cash equivalents at beginning of year 50.7 9.9 8.7 Cash and cash equivalents at end of year $ 11.3 $ 50.7$ 9.9 Illinova Corporation consolidated statements of retained earnings (deficit) (Millions of dollars) For the Years Ended December 31, 1995 1994 1993 Balance (deficit) at beginning of year $ 58.8 $ (64.6)$ 41.0 Net income (loss) before dividends 175.3 176.7 (55.8) 234.1 112.1 (14.8) Less -- Dividends -- Preferred stock of subsidiary 23.6 11.1 20.1 Common stock 77.4 48.6 29.7 Plus -- Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary (3.5) 6.4 - (104.5) (53.3) (49.8) Balance (deficit) at end of year $ 129.6 $ 58.8 $ (64.6) 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 The consolidated financial statements include the accounts of Illinova Corporation (Illinova), a holding company, Illinois Power Company (IP), a combination electric and gas utility, Illinova Generating Company (IGC), a wholly owned subsidiary that invests in energy- related projects throughout the world and competes in the independent power market and Illinova Power Marketing, Inc. (IPMI), a wholly owned subsidiary in the business of marketing energy and energy-related services to various customers. See "Note 2--Illinova Subsidiaries" of the "Notes to Consolidated Financial Statements" for additional information. IP's consolidated financial position and results of operations are currently the principal factors affecting Illinova's consolidated financial position and results of operations. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. All nonutility operating transactions are included in the section titled Other Income and Deductions, "Miscellaneous-net" in the Consolidated Statements of Income. Preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. Prior year amounts have been reclassified on a basis consistent with the December 31, 1995, 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 requires that the effects of the ratemaking process be recorded. Such effects primarily concern the time at which various items enter into the determination of net income in order to follow the principles of matching cost 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 non-cash charge to income would be recorded in order to remove the effects of the actions of regulators from the consolidated financial position and results of operations. Illinova'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 Significant regulatory assets include deferred Clinton Power Station (Clinton) post-construction costs, unamortized losses on reacquired debt, recoverable income taxes 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 1995, 1994 and 1993, the pre-tax rate used for all construction projects was 6.5%, 7.0% 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 1995, 1994 and 1993, provisions for depreciation were 2.8% of the average depreciable cost for Clinton. Provisions for depreciation for all other electric plant were 2.6% in 1995 and 2.5% in 1994 and 1993. Provisions for depreciation of gas utility plant, as a percentage of the average depreciable cost, were 3.4% in 1995 and 1994 and 4% in 1993. Amortization of Nuclear Fuel IP leases nuclear fuel from Illinois Power Fuel Company (Fuel Company) under a capital lease. Amortization of nuclear fuel (including related financing costs) is determined on a unit of production basis. See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" 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 began. Although cash is not currently realized from these deferrals, it is realized under the ratemaking process over the service life of Clinton through increased revenues, resulting from a higher rate base and higher amortization expense. Unamortized Debt Discount, Premium and Expense Discount, premium and expense associated with long-term debt are amortized over the lives of the related issues. Costs related to refunded debt are amortized over the lives of the related new debt issues or the remaining life of the old debt if no new debt is issued. Revenue and Energy Cost IP records revenue for services provided but not yet billed to more closely match revenues with expenses. Unbilled revenues represent the estimated amount customers will be billed for service delivered from the time meters were last read to the end of the accounting period. Operating revenues include related taxes that have been billed to customers in the years 1995, 1994 and 1993 in the amount of $66 million, $66 million and $65 million, respectively. The cost of fuel for the generation of electricity, purchased gas adjustment clauses. Accordingly, allowable energy costs that are to be passed on to customers in a subsequent accounting period are deferred. The recovery of costs deferred under these clauses is subject to review and approval by the ICC. On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. The increase to customers is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Income Taxes Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), deferred tax assets and liabilities are recognized for the tax consequences of transactions that have been treated differently for financial reporting and tax return purposes, measured on the basis of the statutory tax rates. In accordance with FAS 71, a regulatory asset (recoverable income taxes) has been recorded representing the probable recovery from customers of additional deferred income taxes established under 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. Illinova and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss. See "Note 7--Income Taxes" of the "Notes to Consolidated Financial Statements" for additional discussion. Preferred Dividend Requirements of Subsidiary Preferred dividend requirements of IP reflected in the Consolidated Statements of Income are recorded on the accrual basis 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 flows increased by $19 million, $28 million and $27 million during 1995, 1994 and 1993, respectively. Income taxes and interest paid are as follows: Years ended December 31, (Millions of dollars) 1995 1994 1993 Income taxes $ 64.7 $ 71.1 $ 26.0 Interest $ 152.4 $ 165.9 $ 166.4 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 Illinova's or IP's financial position or results of operations. See "Note 7--Income Taxes" of the "Notes to Consolidated Financial Statements" for additional information. Interest Rate Cap Premiums paid for the purchased interest rate cap agreements are being amortized to interest expense over the terms of the caps. Unamortized premiums are included in Current Assets, "Prepayments and Other," in the Consolidated Balance Sheets. Amounts to be received under the cap agreements are recognized as a reduction in interest expense. Note 2--Illinova Subsidiaries Illinova, a holding company, is the parent of IP, IGC and IPMI. IP, the primary business and subsidiary of Illinova, is engaged in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the state of Illinois. IGC, Illinova's wholly owned independent power subsidiary, invests in energy- related projects throughout the world and competes in the independent power market. IPMI, Illinova's wholly owned subsidiary, is in the business of marketing energy and energy-related services to various customers. In 1993, IGC invested in a 168 MW co-generation project in Teesside, England. In 1994, IGC became an equity partner with Tenaska, Inc., in four natural gas-fired generation plants, of which two are in operation, one is under construction and one is suspended. Tenaska, Inc. is an Omaha, Nebraska-based developer of independent power projects throughout the U.S. In August 1994, IGC purchased 50 percent of the North American Energy Services Company (NAES). NAES supplies a broad range of operations, maintenance and support services to the worldwide independent power generation industry and will operate the Tenaska generation plants in which IGC purchased an equity interest. In November 1994, IGC became an equity partner in an 80 MW operating diesel engine-powered generating plant in Puerto Cortez, Honduras. In March 1995, IGC invested in Brazos, a 258 MW plant located near Claiborne, Texas. In May 1995, IGC became an equity partner in the Indeck North American Power Fund (Fund). The Fund's first project, in June 1995, a 70 MW plant, was the Harbor Cogeneration Project in Long Beach, California. In August 1995, the Fund acquired the Pepperell Cogeneration Project, a 38 MW gas-fired combined cycle facility located in Pepperell, Massachusetts. In the fourth quarter of 1995, IGC completed its first investment in the People's Republic of China by investing in the Xinchang Project, a 24 MW coal-fired plant located in Zhejiang Province. Additionally, IGC invested in the Carbontec Project located near Gillette, Wyoming. This coal-drying facility will utilize a recently developed proprietary CARBONDRY process to dry moderate to high moisture coals. In December 1995, IGC signaled a limited liability company agreement to complete an initial investment in a 146 MW power project located near Aguaytia, Peru. Also, in December 1995, IGC invested in the Jamaica Energy Partners Project, a 74 MW barge-mounted facility located in Old Harbour, Jamaica. In 1996, IGC plans to make an equity investment in a 400 MW operating plant located in Columbia. See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for information about IGC contingencies. At December 31, 1995, Illinova's net investment in IGC was $49 million. On May 16, 1995, IPMI obtained approval from the FERC to conduct business as a marketer of electric power and gas to various customers outside IP's present service territory. In September 1995, IPMI began buying and selling wholesale electricity in the western United States. IPMI acquired 50 percent ownership in Tenaska Marketing Ventures (TMV) on April 17, 1995, with the ownership interest retroactive to January 1, 1995. In October 1995, IPMI and TMV formed a natural gas company, Tenaska Marketing Canada, to market gas in Canada. IPMI secured sales commitments of $12 million for 1996. See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for information about IPMI contingencies. At December 31, 1995, Illinova's net investment in IPMI was $9 million. In December 1995, Illinova established a new division, Illinova Energy Services, to provide energy-related services to customers inside and outside IP's service territory. These services involve the ways energy is used and distributed after its delivery at the meter. Note 3--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 51% of Illinova's total assets at December 31, 1995. IP's 86.8% share of Clinton-related costs represented 34% of Illinova's total 1995 other operating, maintenance and depreciation expenses. Clinton's equivalent availability was 76%, 92% and 73% for 1995, 1994 and 1993, respectively. Clinton's equivalent availability was higher in 1994 due to no refueling outage. Ownership of an operating nuclear generating unit exposes IP to significant risks, including increased and changing regulatory, safety and environmental requirements and the uncertain future cost of closing and dismantling the unit. IP expects to be allowed to continue to operate Clinton; however, if any unforeseen or unexpected developments prevent IP from doing so, Illinova and IP would be materially adversely affected. See "Note 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" 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 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 on IP's assessment of the Appellate Court Decision and in accordance with FAS 71, IP recorded a loss of $271 million ($200 million or $2.65 per share, net of income taxes) in September 1993. Note 4--Commitments and Contingencies Commitments Estimated capital requirements in 1996 are $267 million, which includes $113 million for electric facilities, $28 million for gas facilities, $25 million for nuclear fuel, $24 million for general plant and $77 million for non- regulated subsidiary activities. The estimated five-year construction program for 1996 through 2000 is $1.2 billion. These expenditures do not include capital expenditures for full compliance with the Clean Air Act, as discussed below. In addition, IP has substantial commitments for the purchase of coal under long-term contracts. Estimated coal contract commitments for 1996 through 2000 are $664 million (excluding price escalation provisions). Total coal purchases for 1995, 1994 and 1993 were $168 million, $191 million and $184 million, respectively. IP has contracts with various natural gas suppliers and interstate pipelines to provide natural gas supply, transportation and leased storage. Estimated committed natural gas, transportation and leased storage costs (including pipeline transition costs) for 1996 through 2000 total $39 million. Total natural gas purchased for 1995, 1994 and 1993 was $150 million, $168 million and $188 million, respectively. IP's share of estimated nuclear fuel commitments for Clinton is approximately $26 million for uranium concentrates through 1998, $7 million for conversion through 2002, $47 million for enrichment through 1999 and $213 million for fabrication through 2017. IP is committed to purchase approximately $74 million of emission allowances through 1999. IP anticipates that all of these costs will be recoverable under IP's electric fuel and purchased gas adjustment clauses, 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 on 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 station site in accordance with the 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 will cover 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 would materially exceed the limits of current or available insurance coverage. IP also covers 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 coverage, involving Clinton or other stations insured by the industry-owned mutual insurance company would result in retrospective premium assessments of up to approximately $13 million. IP would allocate this assessment between IP and Soyland based on their respective ownership interest in Clinton. All United States nuclear power station operators are subject to the Price- Anderson Act. This act currently limits public liability for a nuclear incident to $8.9 billion. Private insurance covers the first $200 million. Retrospective premium assessments against each licensed nuclear reactor in the United States provide excess coverage. Currently, the liability to these reactor operators/owners for such an assessment would be up to $79.3 million per incident, not including premium taxes which may be applicable, payable in annual installments of not more than $10 million. A Master Worker Policy covers worker tort claims alleging bodily injury, sickness or disease as a result of initial radiation exposure occurring on or after January 1, 1988. The policy has an aggregate limit of $200 million that applies to the commercial nuclear industry as a whole. If the policy pays, then a provision for automatic reinstatement of policy limits up to an additional $200 million takes effect. 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. IP and Soyland would allocate, based on their respective ownership in Clinton, any retrospective premium assessments pertaining to the Master Worker Policy or the Price- Anderson Act. 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 may have a substantial adverse effect on Illinova's and IP's 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 electric rates based on an ICC-approved formula that allows IP to adjust rates annually for changes in decommissioning cost estimates. Based on NRC regulations that establish a minimum funding level, IP estimates its 86.8% share of Clinton decommissioning costs to be approximately $376 million (1995 dollars) or $692 million (2026 dollars, assuming a 2% inflation factor). The NRC bases the minimum only on the cost of removing radioactive plant structures. IP is concluding a site-specific study to estimate the costs of dismantlement, removal and disposal of Clinton. This study is expected to result in projected decommissioning costs higher than the NRC- specified funding level. External decommissioning trusts, as prescribed under Illinois law and authorized by the ICC, accumulate funds based on the expected service life of the plant for the future decommissioning of Clinton. For the years 1995, 1994 and 1993, IP contributed $5.0 million, $5.5 million and $3.9 million, respectively, to its external nuclear decommissioning trust funds. The balances in these nuclear decommissioning funds at December 31, 1995, and 1994, were $32.7 million and $22.4 million, respectively. IP recognizes earnings and expenses from the trust fund as changes in its assets and liabilities relating to these funds. In November 1994, the ICC granted IP permission to invest up to 60% of the nuclear decommissioning trust assets in selected equity securities. The FASB is reviewing the accounting for removal costs of nuclear generating stations, including decommissioning. Changing current electric utility industry accounting practices for such decommissioning may result in: 1) increasing annual provisions for decommissioning through increases in depreciation; 2) recording the estimated total cost for decommissioning as a liability with a gross-up to plant balances; and 3) reporting trust fund income from the external decommissioning trusts as investment income rather than as a reduction to decommissioning expense. Changes to current electric utility industry accounting practices for decommissioning will likely be effective in 1997. IP believes that, based on current information, these changes will not have an adverse effect on results of operations due to existing and anticipated future ability to recover decommissioning costs through rates. In 1992, the ICC entered an order in which it expressed concern that IP take all reasonable action to ensure that Soyland contributes its ownership share of the current or any revised estimate of decommissioning costs. The order also states that if IP becomes liable for decommissioning expenses attributable to Soyland, the ICC will then decide whether that expense should be the responsibility of IP stockholders or its customers. If Soyland were to fail to meet these or other obligations related to its ownership of Clinton, then IP could become liable for such payments. Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel. The DOE currently charges one mill ($.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. At December 31, 1995, approximately $24 million in costs for the suspended Baldwin scrubber program continue to be recorded by Illinois Power as plant held for future use. After suspending scrubber construction, IP reconsidered its alternatives for complying with Phase I of the 1990 Clean Air Act Amendments. To comply with the sulfur dioxide (SO2) emission reduction requirements of Phase I (1995-1999) of the 1990 Clean Air Act Amendments, IP continues to purchase emission allowances. An emission allowance is the authorization by the United States Environmental Protection Agency (U.S.EPA) to emit one ton of SO2. The ICC approved IP's Phase I Clean Air Act compliance plan in September 1993, and IP is continuing to implement that plan. IP has acquired sufficient emission allowances to meet most of its anticipated needs for 1996 and will purchase the remainder on the spot market. In 1993, the Illinois General Assembly passed and the governor signed legislation authoirzing, but not requiring, the ICC to permit expenditures from emission allowance purchases and sales to be included in rates charged to customers as a cost of fuel. In December 1994, the ICC approved the recovery of emission allownace costs through the Uniform Fuel Adjustment Clause. IP's compliance plan will defer, until at 2000, any need for scrubbers or other capital projects associated with SO2 emission reductions. Phase II (2000 and beyond) SO2 emission requirements of the Clean Air Act will require additional actions and may result in capital expenditures. To comply with the Phase I nitrogen oxide (NOx) emission reduction requirements of the acid rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin Unit 3 and Vermilion Unit 2. On November 29, 1994, the U.S. Appellate Court remanded the Phase I NOx rules back to the U.S.EPA. On April 13, 1995, the U.S.EPA reinstated, with some modifications, the Phase I NOx rules effective January 1, 1996. IP was positioned to comply with these revised rules without additional modifications to any of its generating plants. The U.S. EPA will issue Phase II NOx emission limits by January 1, 1997. IP anticipates additional capital expenditures prior to 2000 to comply with the Phase II NOx requirements, as well as potential requirements to further reduce NOx emissions from IP plants to help achieve compliance with air quality standards in the St. Louis and 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. IP is monitoring the developments of several emerging clean air compliance issues which could have a significant impact on its fossil-fueled generating plants. These issues include global climate change (theorized to result from emissions of "greenhouse gasses" such as carbon dioxide), controls on "hazardous air pollutants," and standards for fine particulates. Compliance with potential new regulations in these areas may require significant expenditures prior to 2000. Manufactured-Gas Plant (mgp) In September 1995, IP increased its liability for MGP site remediation by $41 million to a total of $76 million. This amount represents IP's current best estimate of its cost to remediate MGP sites for which it is responsible. This estimate reflects the results of a site-by-site survey utilizing current site information and remediation techniques. The estimate, determined by IP with assistance from several external environmental consultants, is in accordance with Electric Power Research Institute guidelines. Because of the unknown and unique characteristics of each site and uncertain regulatory requirements, IP is not able to determine its ultimate liability for remediation of the 24 sites. The previously recorded liability of $35 million was an estimate of the minimum cost based on ongoing remediation efforts at eight sites and ongoing investigations of the remaining 16 sites. IP is currently recovering MGP site cleanup costs from its customers through tariff riders approved by the ICC in April 1993. On April 20, 1995, the Illinois Supreme Court issued a ruling that upheld the ICC authorization of cost recovery and reversed the ICC's disallowance of carrying costs, mandating the ICC to reissue an order providing for recovery of prudently incurred MGP site cleanup costs, including carrying costs. On November 20, 1995, the ICC issued an order on remand allowing full recovery of all such MGP site cleanup costs. Accordingly IP has recorded a regulatory asset in the amount of $76 million, reflecting management's expectation that remediation costs will be recovered from customers. IP has begun settlement discussions with its insurance carriers regarding the recovery of estimated MGP site remediation costs. A settlement has been reached with one carrier and an agreement in principle has been reached with two other carriers. On October 17, 1995, IP filed a lawsuit in the Circuit Court of Macon County seeking a declaratory judgment and damages regarding insurance coverage for four MGP sites. Any insurance recoveries received will be credited to IP's customers through the tariff rider mechanisms. Electric and Magnetic Fields (EMF) The possibility that exposure to EMF emanating from power lines, household appliances and other electric sources may result in adverse health effects continues to be the subject of litigation and governmental, medical and media attention. Litigants have also claimed that EMF concerns justify recovery from utilities for the loss in value of real property exposed to power lines, substations and other such sources of EMF. 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 Illinova's and IP's consolidated financial position. Other Legal Proceedings - Illinova and IP are involved in legal or administrative proceedings before various courts and agencies with respect to matters occurring in the ordinary course of business, some of which involve substantial amounts of money. Management believes that the final disposition of these proceedings will not have a material adverse effect on the consolidated financial position or the results of operations. Accounts Receivable - IP sells electric energy and natural gas to residential, commercial and industrial customers throughout Illinois. At December 31, 1995, 67%, 17% and 16% of Accounts receivable--Service were from residential, commercial and industrial customers, respectively. IP maintains reserves for potential credit losses and such losses have been within management's expectations. Contingencies IPMI is a 50% partner with TMV which markets natural gas. At its April 1995 meeting, the Illinova Board authorized IPMI to provide certain guarantees on its behalf in the performance of IPMI's business. Illinova guarantees the performance of TMV up to an aggregate of $50 million for net accounts payable or delivery obligations incurred during the ordinary course of purchasing and reselling natural gas. The level of payable guarantees in place during December 1995 peaked at $19 million. Illinova also guarantees performance by TMV of all obligations to parties providing price-hedging services. The guarantees to the parties providing heding services are a function of the market price of gas. Management believes that the exposure is minimal. See "Note 2--Illinova Subsidiaries" of the "Notes to Consolidate Financial Statements" for additional information about IPMI. IGC has signed equity contribution agreements up to an aggregate amount of $32 million secured by Illinova Corporation parent guarantees. See "Note 2--Illinova Subsidiaries" of the "Notes to Consolidated Financial Statements" for additional information about IGC. Note 5--Lines of Credit and Short-Term Loans IP has total lines of credit represented by bank commitments amounting to $354 million, all of which were unused at December 31, 1995. These lines of credit are renewable in May 1996, August 1996 and May 2000. 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 .175% per annum on $350 million of the total lines of credit, regardless of usage. The interest rate on borrowings under these agreements is, at IP's option, based upon the lending banks' reference rate, their Certificate of Deposit rate, the borrowing rate of key banks in the London interbank market or competitive bid. IP has letters of credit totaling $204 million and pays fees up to .45% per annum on the unused amount of credit. In addition, IP Fuel Company has a short-term financing option to obtain funds not to exceed $30 million. IP Fuel Company pays no fees for this uncommitted facility and funding is subject to availability upon request. For the years 1995, 1994 and 1993, 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) 1995 1994 1993 - - ----------------------------------------------------------------- Short-term borrowings at December 31, $ 359.6 $ 238.8 $ 92.3 Weighted average interest rate at December 31, 6.0% 6.2% 3.5 % Maximum amount outstanding at any month end $ 359.6 $ 238.8 $ 123.7 Average daily borrowings outstanding during the year $ 306.5 $ 165.4 $ 85.0 Weighted average interest rate during the year 6.2% 4.6% 3.5 % - - ------------------------------------------------------------------ Illinova's total lines of credit represented by bank commitments amount to $50 million, all of which was unused at December 31, 1995. Illinova's letters of credit total $6.5 million. Illinova has derivative financial instruments, however, it does not use them for trading purposes. Illinova uses them to manage well defined interest rate and commodity risks. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate debt. IP has two variable rate interest rate cap agreements covering up to $189 million of commercial paper. These agreements entitle IP to receive from a counterparty on a monthly basis the amount, if any, by which IP's interest payments on a nominal amount of commercial paper exceed the interest rate set by the cap. On December 31, 1995, the cap rates were set at 6.25% and 7.0% while the current market rate available to IP was 5.9%. Note 6--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 is required to provide Soyland with 12.0% (436 megawatts) of the electrical capacity from its fossil-fueled generating plants until the agreement expires or is terminated. This is in addition to the capacity Soyland receives as an owner of Clinton. IP is compensated with capacity charges and for energy costs and variable operating expenses. IP transmits energy for Soyland through IP's transmission and subtrasmission systems. Under provisions of the PCA, Soyland has the option of participating financial 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 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of the Clean Air Act. At any time after December 31, 2004, either IP or Soyland may terminate the PCA by giving not less than seven years' prior written notice to the other party. The party to whom termination notice has been given may designate an earlier effective date of termination which shall be not less than 12 months after receiving notice. Note 7--income taxes Deferred tax assets and liabilities were comprised of the following: Balances as of December 31, - - ---------------------------------------------------------------------------- (Millions of dollars) 1995 1994 - - ---------------------------------------------------------------------------- Deferred Tax Assets: - - ---------------------------------------------------------------------------- Current: Misc. book/tax recognition differences $ 26.1 $ 19.7 - - ---------------------------------------------------------------------------- Noncurrent: Depreciation and other property related 45.5 52.6 Alternative minimum tax 183.1 186.0 Tax credit and net operating loss carryforward 32.4 27.6 Unamortized investment tax credit 126.1 122.0 Misc. book/tax recognition differences 66.7 57.0 - - ---------------------------------------------------------------------------- 453.8 445.2 - - ---------------------------------------------------------------------------- Total deferred tax assets $ 479.9 $ 464.9 ============================================================================ Deferred Tax Liabilities: - - ---------------------------------------------------------------------------- Current: Misc. book/tax recognition differences $ 6.5 $ 8.2 - - ---------------------------------------------------------------------------- Noncurrent: Depreciation and other property related 1,303.5 1,252.0 Deferred Clinton costs 60.1 62.1 Misc. book/tax recognition differences 103.0 109.7 - - ---------------------------------------------------------------------------- 1,466.6 1,423.8 - - ---------------------------------------------------------------------------- Total deferred tax liabilities $ 1,473.1 $ 1,432.0 ============================================================================ Income taxes included in the Consolidated Statements of Income consist of the following components: Years Ended December 31, - - ---------------------------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - ---------------------------------------------------------------------------- Current taxes-- Included in operating expenses and taxes $ 98.6 $ 58.3 $ 25.3 Included in other income and deductions (20.3) -- -- - - ---------------------------------------------------------------------------- Total current taxes 78.3 58.3 25.3 - - ---------------------------------------------------------------------------- Deferred taxes-- Included in operating expenses and taxes Property-related differences 62.2 60.0 72.3 Alternative minimum tax 2.9 (50.4) (31.8) Gain/loss on reacquired debt (1.9) -- 16.5 Net operating loss carryforward (.2) 62.0 22.8 Enhanced retirement and severance (15.0) -- -- Misc. book/tax recognition differences (13.9) (7.8) 4.1 Internal Revenue Service interest on tax issues -- 7.5 (1.9) Included in other income and deductions Property-related differences 9.7 10.0 6.0 Net operating loss carryforward -- (17.4) (15.4) Misc. book/tax recognition differences (1.2) (.7) (2.5) Disallowed Clinton costs -- -- (62.2) - - ----------------------------------------------------------------------------- Total deferred taxes 42.6 63.2 7.9 - - ----------------------------------------------------------------------------- Deferred investment tax credit--net Included in operating expense and taxes (6.9) (11.3) (.8) Included in other income and deductions -- (.3) (.7) Disallowed investment tax credit --- -- (8.4) - - ---------------------------------------------------------------------------- Total investment tax credit (6.9) (11.6) (9.9) - - ---------------------------------------------------------------------------- Total income taxes $ 114.0 $ 109.9 $ 23.3 ============================================================================= The reconciliations of income tax expense to amounts computed by applying the statutory tax rate to reported pretax results for the period are set below: Years Ended December 31, - - ---------------------------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - ---------------------------------------------------------------------------- Income tax expense at the federal statutory tax rate $ 92.9 $ 91.6 $ (20.5) Increases/(decreases) in taxes resulting from-- State taxes, net of federal effect 12.4 13.8 5.8 Investment tax credit amortization (6.9) (7.8) (8.8) Depreciation not normalized 7.4 4.3 7.1 Preferred dividend requirement of subsidiary 5.8 8.7 9.1 Disallowed Clinton costs (including ITC) -- -- 27.4 Other--net 2.4 (.7) 3.2 - - ----------------------------------------------------------------------------- Total income taxes $ 114.0 $ 109.9 $ 23.3 ============================================================================= Combined federal and state effective income tax rates were 42.9%, 42.0% and (39.8%) for the years 1995, 1994 and 1993, 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 is 44.2%. Illinova is subject to the provisions of the Alternative Minimum Tax System (AMT). As a result, Illinova has an AMT credit carryforward at December 31, 1995, of approximately $183 million. This credit can be carried forward indefinitely to offset future regular income tax liabilities in excess of the tentative minimum tax. In 1994, the Internal Revenue Service (IRS) completed its audit of IP's federal income tax returns for the years 1989 through 1990. IP and the IRS reached an agreement on all audit issues. The results of the agreement did not have a material effect on Illinova's or IP's consolidated financial positions or results of operations. Note 8--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 1995, 1994 and 1993 were $41 million, $52 million and $45 million, respectively, including financing costs of $7 million, $7 million and $6 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 4--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of decommissioning and nuclear fuel disposal costs. Nuclear fuel lease payments are included with Fuel for electric plants on Illinova's Consolidated Statements of Income. At December 31, 1995 and 1994, current obligations under capital lease for nuclear fuel were $33.3 million. Over the next five years, estimated payments under capital leases are as follows: - - --------------------------------------------------------------------------- (Millions of dollars) - - --------------------------------------------------------------------------- 1996 $ 37.9 1997 31.1 1998 17.3 1999 12.4 2000 4.5 Thereafter 1.9 - - --------------------------------------------------------------------------- 105.1 Less: Interest 10.0 - - --------------------------------------------------------------------------- Total $ 95.1 =========================================================================== Note 9--Long-Term Debt of Subsidiary (Millions of dollars) _____________________________________________________________________________ December 31, 1995 1994 First mortgage bonds-- 5.85% series due 1996 $ 40.0 $ 40.0 61/2 % series due 1999 72.0 72.0 6.60% series due 2004 (Pollution Control Series A) 6.8 7.0 7.95% series due 2004 72.0 72.0 6% series due 2007 (Pollution Control Series B) 18.7 18.7 75/8% series due 2016 (Pollution Control Series F, G and H) 150.0 150.0 8.30% series due 2017 (Pollution Control Series I) 33.8 33.8 73/8% series due 2021 (Pollution Control Series J) 84.7 84.7 83/4% series due 2021 120.0 125.0 5.70% series due 2024 (Pollution Control Series K) 35.6 35.6 7.40% series due 2024 (Pollution Control Series L) 84.1 84.1 _____________________________________________________________________________ Total first mortgage bonds 717.7 722.9 _____________________________________________________________________________ New mortgage bonds-- 61/8% series due 2000 40.0 40.0 5.625% series due 2000 110.0 110.0 61/2% series due 2003 100.0 100.0 63/4% series due 2005 70.0 70.0 8% series due 2023 235.0 235.0 71/2% 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 1,584.5 1,589.7 _____________________________________________________________________________ Short-term debt to be refinanced as long-term debt - 125.0 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 175.0 300.0 _____________________________________________________________________________ 1,759.5 1,889.7 Unamortized discount on debt (20.3) (21.6) _____________________________________________________________________________ Total long-term debt excluding capital lease obligations 1,739.2 1,868.1 Obligation under capital leases 95.1 111.5 _____________________________________________________________________________ 1,834.3 1,979.6 Long-term debt and lease obligations maturing within one year (95.0) (33.5) _____________________________________________________________________________ Total long-term debt $ 1,739.3 $ 1,946.1 _____________________________________________________________________________ In August 1995, $5.0 million of 8 3/4% First Mortgage Bonds due 2021 were purchased on the open market. Short-term debt to be refinanced as long-term debt consisted of commercial paper that would be renewed regularly on a long-term basis. In September 1995, IP reclassified the $125 million to short-term debt in accordance with Statement of Financial Accounting Standards No. 6, "Classification of Short- Term Obligations Expected to be Refinanced." In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At December 31, 1995, 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 5.3% to 5.5% at December 31, 1995. For the years 1996, 1997, 1998, 1999 and 2000, IP has long-term debt maturities and cash sinking fund requirements in the aggregate of (in millions) $61.7, $10.8, $68.8, $72.8 and $150.8, respectively. These amounts exclude capital lease requirements. See "Note 8--Capital Leases" of the "Notes to Consolidated Financial Statements." Certain supplemental indentures to the First Mortgage require that IP make annual deposits, as a sinking and property fund, in amounts not to exceed $1.8 million in each of the years 1997 through 2000. These amounts are subject to reduction and historically have been met by pledging property additions, as permitted by the First Mortgage. At December 31, 1995, the aggregate total of unamortized debt expense and unamortized loss on reacquired debt was approximately $105.8 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, 1995, was approximately $1.4 billion. Note 10--Preferred Stock of Subsidiary (Millions of dollars) December 31, 1995 1994 Serial Preferred Stock of Subsidiary, cumulative, $50 par value-- Authorized 5,000,000 shares; 1,356,800 and 3,325,815 shares outstanding, respectively series shares redemption prices 4.08% 300,000 $ 51.50 $ 15.0 $ 15.0 4.26% 150,000 51.50 7.5 7.5 4.70% 200,000 51.50 10.0 10.0 4.42% 150,000 51.50 7.5 7.5 4.20% 180,000 52.00 9.0 9.0 8.24% - - - 30.0 7.56% - - - 33.8 8.00% - - - 34.7 7.75% 376,800 50.00 after July 1, 2003 18.8 18.8 Net premium on preferred stock .2 .8 ______________________________________________________________________________ Total Preferred Stock of Subsidiary, $50 par value $ 68.0 $ 167.1 ______________________________________________________________________________ Serial Preferred Stock of Subsidiary, cumulative, without par value-- Authorized 5,000,000 shares; 1,152,550 and 1,512,550 shares outstanding, respectively (including 0 and 360,000 shares, respectively, of redeemable preferred stock) series shares redemption prices A 742,300 $50.00 $ 37.1 $ 37.1 B 410,250 50.00 20.5 20.5 ______________________________________________________________________________ Total Preferred Stock of Subsidiary, without par value $ 57.6 $ 57.6 ______________________________________________________________________________ Preference Stock of Subsidiary, cumulative, without par value-- Authorized 5,000,000 shares; none outstanding - - ______________________________________________________________________________ Total Serial Preferred Stock, Preference Stock and Preferred Securities of Subsidiary $ 125.6 $ 224.7 ______________________________________________________________________________ Company Obligated Mandatorily Redeemable preferred Securities of Illinois Power Capital, L.P. Monthly Income Preferred Securities, cumulative, $25 liquidation preference-- 3,880,000 shares authorized and outstanding $ 97.0 $ 97.0 Mandatorily Redeemable Serial Preferred Stock of Subsidiary, cumulative -- series shares par value 8.00% - - - 36.0 ______________________________________________________________________________ Total Mandatorily Redeemable Preferred Stock of Subsidiary $ 97.0 $ 133.0 ______________________________________________________________________________ Serial Preferred Stock ($50 par value) is redeemable at the option of IP in whole or in part at any time with not less than 30 days and not more than 60 days notice by publication. Quarterly dividend rates for Serial Preferred Stock, Series A, are determined based on market interest rates of certain U.S. Treasury securities. Dividends paid in 1995 and 1994 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 1995 and 1994 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. In October 1994, Illinois Power Capital issued $97 million of tax-advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-tax rate) with a liquidation preference of $25 per share. The proceeds were loaned to IP and were used to redeem $97 million (principal value) of higher-cost outstanding preferred stock of IP. The 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 1995 and 1994, IP redeemed $12.0 million of the 8.00% mandatorily redeemable serial preferred stock. In May 1995, IP redeemed the remaining $24.0 million of the 8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed $.2 million of the 7.56% serial preferred stock and $3.0 million of the 8.24% serial preferred stock. In December 1995, IP redeemed $34.7 million of its 8.00% serial preferred stock, $33.6 million of its 7.56% serial preferred stock and $27.0 million of its 8.24% serial preferred stock. The carrying amount under consideration paid for redeemed preferred stock amounted to $3.5 million, which was recorded in equity and included in net income applicable to common stock. Note 11--Common Stock and Retained Earnings 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, 1995. 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, 1995. Illinova has an Employees' Stock Ownership Plan (ESOP) that includes an incentive compensation feature which is tied to employee achievement of specified corporate performance goals. This arrangement began in 1991 when IP loaned $35 million to the Trustee of the Plans, which used the loan proceeds to purchase 2,031,445 shares of IP's common stock on the open market. The loan and common shares were converted to Illinova instruments with the formation of Illinova in May 1994. These shares are held in a suspense account under the Plans and are being distributed to the accounts of participating employees as the loan is repaid by the Trustee with funds contributed by IP, together with dividends on the shares acquired with the loan proceeds. IP financed the loan with funds borrowed under its bank credit agreements. For the year ended December 31, 1995, 75,729 shares were allocated to salaried employees and 70,830 shares to employees covered under the Collective Bargaining Agreement through the matching contribution feature of the ESOP arrangement. Under the incentive compensation feature, 109,662 shares were allocated to employees for the year ended December 31, 1995. During 1995, IP contributed $6.0 million to the ESOP and using the shares allocated method, recognized $4.4 million of expense. Interest paid on the ESOP debt was approximately $2.1 million in 1995 and dividends used for debt service were approximately $2.0 million. Illinova has an Automatic Reinvestment and Stock Purchase Plan and an Employees' Stock Ownership Plan for which, at December 31, 1995, 3,270,236 and 29,115 shares, respectively, of common stock were designated for issuance. Illinova has the responsibility for administering both of these plans. The plans allow purchases of shares on the open market, as well as purchases of new issue shares directly from Illinova. 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 $ 233/8 1996 1993 73,500 $ 241/4 1997 1994 82,650 $ 207/8 1997 1995 69,300 $ 247/8 1998 _____________________________________________________________________________ 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, 1995. Under the Restated Articles of Incorporation, common stock dividends are subject to the preferential rights of the holders of preferred and preference stock. Note 12--Pension and Other Benefit Costs 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 1995, 1994 and 1993, include the following components: Years Ended December 31, ______________________________________________________________________________ (Millions of dollars) 1995 1994 1993 ______________________________________________________________________________ Service cost on benefits earned during the year $ 10.4 $ 11.9 $ 11.3 Interest cost on projected benefit obligation 23.6 21.8 20.8 Return on plan assets (58.3) (7.9) (28.1) Net amortization and deferral 29.6 (19.2) 1.9 Effect of enhanced retirement program 15.7 - - _____________________________________________________________________________ Net periodic pension cost $ 21.0 $ 6.6 $ 5.9 _____________________________________________________________________________ The estimated funded status of the plans at December 31, 1995 and 1994, using discount rates of 7.75% and 8.75%, respectively, and future compensation increases of 4.5% was as follows: Balances as of December 31, _____________________________________________________________________________ (Millions of dollars) 1995 1994 _____________________________________________________________________________ Actuarial present value of: Vested benefit obligation $ (276.8) $ (209.6) _____________________________________________________________________________ Accumulated benefit obligation $ (297.5) $ (220.8) _____________________________________________________________________________ Projected benefit obligation $ (343.6) $ (267.3) Plan assets at fair value 331.5 284.0 _____________________________________________________________________________ Funded status (12.1) 16.7 Unrecognized net (gain)/loss (5.1) (38.8) Unrecognized net asset at transition (34.6) (15.0) Unrecognized prior service cost 21.2 24.5 _____________________________________________________________________________ Accrued pension cost included in accounts payable $ (30.6) $ (12.6) _____________________________________________________________________________ The plan's 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, 1995 and 1994, were $258 million and $230 million, respectively, including vested benefits of $239 million and $213 million, respectively. The pension cost for 1995, 1994 and 1993 was calculated using: a discount rate of 8.75%, 7.75% and 8.25%, respectively; future compensation increases of 4.5% for 1995, 4.5% for 1994 and 5.5% for 1993; and a return on assets of 9% for 1995, 1994 and 1993. The unrecognized net asset at transition and unrecognized prior service cost are amortized on a straight-line basis over the average remaining service period of employees who are expected to receive benefits under the plan. IP did not make any cash contributions during 1993 for the pension plans due to its overfunded status. IP made cash contributions of $2 million in 1995 and $10 million in 1994. 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 1995 and 1994 included the following components: Years Ended December 31, - - ----------------------------------------------------------------------------- (Millions of dollars) 1995 1994 - - ----------------------------------------------------------------------------- Service cost on benefits earned during the year $ 2.1 $ 3.3 Interest cost on projected benefit obligation 5.5 6.2 Return on plan assets (4.7) .2 Amortization of unrecognized transition obligation 6.3 2.1 Effect of enhanced retirement program 9.5 -- - - ----------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 18.7 $ 11.8 - - ----------------------------------------------------------------------------- The net periodic postretirement benefit cost in the preceeding table includes amortization of the previously unrecognized accumulated postretirement benefit obligation, which was $52.3 million and $55.2 million as of January 1, 1995 and 1994, respectively, over 20 years on a straight-line basis. IP has established two separate trusts for those retirees who were subject to a collectively bargained agreement and all other retirees to fund retiree health care and life insurance benefits. IP's funding policy is to contribute annually an amount at least equal to the revenues collected for the amount of postretirement benefit costs allowed in rates. The plan assets consist of common stocks and fixed income securities at December 31, 1995 and 1994. The estimated funded status of the plans at December 31, Balances as of December 31, - - ------------------------------------------------------------------------------ (Millions of dollars) 1995 1994 - - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation Retirees $ (54.5) $ (26.7) Other fully eligible participants (3.0) (11.6) Other active plan participants (27.5) (27.3) - - ------------------------------------------------------------------------------ Total benefit obligation (85.0) (65.6) Plan assets at fair value 25.6 15.2 - - ------------------------------------------------------------------------------ Funded status (59.4) (50.4) Unrecognized transition obligation 44.2 52.3 Unrecognized net (gain)/loss -- (7.8) - - ------------------------------------------------------------------------------ Accrued postretirement benefit cost included in accounts payable $ ( 15.2) $ ( 5.9) - - ------------------------------------------------------------------------------ The pre-65 health-care-cost trend rate decreases from 7.6% to 5.5% over nine years and the post-65 health-care-cost trend rate is level at 1.5%. A 1 percent increase in each future year's assumed health-care-cost trend rates increases the service and interest cost from $7.6 million to $8.5 million and the accumulated postretirement benefit obligation from $85.0 million to $93.0 million. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement programs. During the fourth quarter of 1995, enhanced retirement and severance reduced the number of employees by 492 and 235, respectively. At January 1, 1996, Illinova employed 3,596 people, as compared to 4,350 at December 31, 1994. The enhanced retirement and severance programs generated pre-tax charges of approximately $26 and $12 million, respectively, against fourth quarter 1995 earnings and will generate savings of approximately $36 million annually, starting in 1996. Note 13--Segments of Business (Millions of dollars) - - ---------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 Total Total Total Electric Gas Corporation Electric Gas Corporation Electric Gas Corporation - - ---------------------------------------------------------------------------------------------------------------------- Operation information -- Operating revenues $1,368.9 $272.5 $1,641.4 $1,287.5 $302.0 $1,589.5 $1,266.4 $314.8 $1,581.2 Operating expenses, excluding provision for income taxes and deferred Clinton costs 942.7 245.0 1,187.7 872.6 274.7 1,147.3 873.9 286.2 1,160.1 Deferred Clinton costs 3.5 - 3.5 3.5 - 3.5 9.3 - 9.3 - - ----------------------------------------------------------------------------------------------------------------------- Pre-tax operating income 422.7 27.5 450.2 411.4 27.3 438.7 383.2 28.6 411.8 Allowance for funds used during construction (AFUDC) 5.5 .5 6.0 8.9 .4 9.3 6.2 1.0 7.2 Disallowed Clinton costs (net of taxes) - - - - - - (200.4) - (200.4) - - ------------------------------------------------------------------------------------------------------------------------ Pre-tax operating income, including AFUDC and disallowed Clinton costs $428.2 $28.0 $456.2 $420.3 $27.7 $448.0 $189.0 $29.6 $218.6 - - -------------------------------------------------------------- ----------------- ----------------- Other deductions, net 18.9 17.5 15.6 Interest charges 148.0 143.9 164.9 Provision for income taxes 114.0 109.9 93.9 Preferred dividend requirements of subsidiary 23.7 24.9 26.1 - - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) 151.6 151.8 (81.9) Carrying value over (under) consideration paid for redeemed preferred stock of subsidiary (3.5) 6.4 - - - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $148.1 $158.2 $(81.9) =========================================================================================================================== Other information -- Depreciation $161.4 $21.6 $183.0 $156.1 $21.1 $177.2 $148.2 $21.0 $169.2 - - --------------------------------------------------------------------------------------------------------------------------- Capital expenditures $185.7 $23.6 $209.3 $173.1 $20.6 $193.7 $221.3 $56.4 $277.7 - - ---------------------------------------------------------------------------------------------------------------------------- Investment information -- Identifiable assets* $4,580.4 $446.3 $5,026.7 $4,589.0 $442.6 $5,031.6 $4,526.8 $406.4 $4,933.2 - - --------------------------------------------------------------- ------------------ ---------------- Nonutility plant and other investments 65.5 37.2 19.9 Assets utilized for overall operations 517.6 507.9 470.4 - - ----------------------------------------------------------------------------------------------------------------------------- Total assets $5,609.8 $5,576.7 $5,423.5 ============================================================================================================================== *Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs and prepaid and deferred energy costs. Note 14--Fair Value of Financial Instruments 1995 1994 - - ---------------------------------------------------------------------------- (Millions of dollars) Carrying Fair Carrying Fair Value Value Value Value - - ----------------------------------------------------------------------------- Nuclear decommissioning trust funds $ 32.7 $ 32.7 $ 22.4 $ 22.4 Cash and cash equivalents 11.3 11.3 50.7 50.7 Mandatorily redeemable preferred stock of subsidiary 97.0 108.2 133.0 133.0 Long-term debt of subsidiary 1,739.2 1,855.8 1,868.1 1,750.7 Notes payable 359.6 359.6 238.8 238.8 - - ------------------------------------------------------------------------------ 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 of Subsidiary and Long-Term Debt of Subsidiary - The fair value of IP mandatorily redeemable preferred stock and IP long-term debt is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to IP for debt of the same remaining maturities, as advised by IP's bankers. Notes Payable - The carrying amount of notes payable approximates fair value due to the short maturity of these instruments. Note 15--quarterly consolidated financial information and common stock data (unaudited) (Millions of dollars except per common share amounts) - - --------------------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter 1995 1995 1995 1995 - - -------------------------------------------------------------------------------------------------- Operating revenues $425.5 $344.3 $486.1 $385.5 Operating income 78.3 67.1 137.2 41.8 Net income 32.4 26.3 89.9 3.0 Net income (loss) applicable to common stock 32.4 26.3 89.9 (.5) Earnings per common share $.43 $.35 $1.18 $ .00 Common stock prices and dividends High $23 5/8 $26 $27 1/4 $30 Low $21 1/4 $22 3/4 $24 1/4 $27 Dividends declared $.25 $.25 $.25 $.28 First Quarter Second Quarter Third Quarter Fourth 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 27.3 29.5 71.8 23.2 Net income applicable to common stock 27.3 29.5 71.8 29.6 Earnings per common share $ .36 $ .39 $ .95 $ .39 Common stock prices and dividends High $ 22 1/2 $ 22 5/8 $ 21 1/2 $ 21 7/8 Low $ 19 7/8 $ 18 1/4 $ 18 1/8 $ 18 7/8 Dividends declared $ .00 $ .20 $ .20 $ .25 The 1995 fourth quarter earnings include $23 million net of tax, $(.30) per share, for the enhanced retirement and severance program and $3.5 million, $(.05) per share, for the carrying amount under consideration paid for redeemed preferred stock of IP. The 1994 fourth quarter earnings include $6.4 million, $.08 per share, for the carrying amount over consideration paid for redeemed preferred stock of IP. The common stock is listed on the New York Stock Exchange and the Chicago Stock Exchange. The stock prices above are the prices reported on the Composite Tape. There were 35,035 registered holders of common stock at January 10, 1996. On May 31, 1994, common shares of Illinois Power began trading as common shares of Illinova. Illinova Corporation __________________________________________________________________________________________________________ selected consolidated financial data* (Millions of dollars) 1995 1994 1993 1992 1991 1985 __________________________________________________________________________________________________________ Operating revenues Electric $ 1,252.6 $ 1,177.5 $ 1,135.6 $ 1,117.9 $ 1,101.2 $ 766.5 Electric interchange 116.3 110.0 130.8 73.0 85.5 36.0 Gas 272.5 302.0 314.8 288.6 288.2 400.9 ___________________________________________________________________________________________________________ Total operating revenues $ 1,641.4 $ 1,589.5 $ 1,581.2 $ 1,479.5 $ 1,474.9 $ 1,203.4 ___________________________________________________________________________________________________________ Net income (loss) $ 151.6 $ 151.8 $ (81.9) $ 93.2 $ 78.4 $ 207.2 Effective income tax rate 42.9% 42.0% (39.8)% 46.0% 48.6% 29.1% ____________________________________________________________________________________________________________ Net income (loss) appli- cable to common stock $ 148.1 $ 158.2 $ (81.9) $ 93.2 $ 78.4 $ 207.2 Earnings (loss) per common share $ 1.96 $ 2.09 $ (1.08) $ 1.23 $ 1.04 $ 3.48 Cash dividends declared per common share $ 1.03 $ .65 $ .40 $ 1.40 $ .40 $ 2.64 Dividend payout ratio (declared) 52.3% 30.7% N/A 112.9% 38.4% 76.6% Book value per common share $ 20.19 $ 19.17 $ 17.46 $ 18.81 $ 19.25 $ 24.51 Price range of common shares High $ 30 $ 22 5/8 $ 25 7/8 $ 25 1/8 $ 24 1/8 $ 27 1/2 Low $ 21 1/4 $ 18 1/8 $ 20 1/8 $ 19 1/4 $ 15 3/8 $ 21 3/8 Weighted average number of common shares outstanding during the period (thousands) 75,644 75,644 75,644 75,644 75,644 59,619 ______________________________________________________________________________________________________________ Total assets** $ 5,609.8 $ 5,576.7 $ 5,423.5 $ 5,331.7 $ 5,271.8 $ 4,894.6 ______________________________________________________________________________________________________________ Capitalization Common stock equity $ 1,527.0 $ 1,450.2 $ 1,321.0 $ 1,422.7 $ 1,456.1 $ 1,539.3 Preferred stock of subsidiary 125.6 224.7 303.7 303.1 303.1 315.2 Mandatorily redeemable preferred stock of subsidiary 97.0 133.0 48.0 100.0 110.0 86.0 Long-term debt of subsidiary** 1,739.3 1,946.1 1,926.3 2,017.4 2,153.1 1,997.5 ___________________________________________________________________________________________________________ Total capitalization** $ 3,488.9 $ 3,754.0 $ 3,599.0 $ 3,843.2 $ 4,022.3 $ 3,938.0 ___________________________________________________________________________________________________________ Embedded cost of long-term debt 7.9% 7.6% 7.5% 8.3% 8.7% 10.0% ____________________________________________________________________________________________________________ Retained earnings (deficit) $ 129.6 $ 58.8 $ (64.6) $ 41.0 $ 75.8 $ 398.8 _____________________________________________________________________________________________________________ Capital expenditures $ 209.3 $ 193.7 $ 277.7 $ 244.4 $ 141.2 $ 870.7 Cash flows from operations $ 413.2 $ 268.6 $ 369.7 $ 344.8 $ 281.3 $ 242.7 AFUDC as a percent of earnings applicable to common stock 4.1% 5.9% N/A 5.6% 3.7% 78.2% Return on average common equity 10.2% 11.0% (6.0)% 6.5% 5.5% 14.4% Ratio of earnings to fixed charges 2.56 2.56 .66 1.87 1.70 2.66 =========================================================================================================== * Millions of dollars except earnings (loss) per common share, cash dividends declared per common share, book value per common share and price range of common shares. ** Restated for the effect of capitalized nuclear fuel lease. Illinova Corporation selected illinois power company statistics 1995 1994 1993 1992 1991 1985 - - ------------------------------------------------------------------------------------------------------------ Electric Sales In KWH (millions) Residential 4,754 4,537 4,546 4,138 4,620 3,927 Commercial 3,804 3,517 3,246 3,055 3,111 2,706 Industrial 8,670 8,685 8,120 8,083 7,642 6,933 Other 367 536 337 466 699 861 ____________________________________________________________________________________________________________ Sales to ultimate consumers 17,595 17,275 16,249 15,742 16,072 14,427 Interchange 4,444 4,837 6,015 2,807 3,360 1,692 Wheeling 642 622 569 402 292 - ____________________________________________________________________________________________________________ Total electric sales 22,681 22,734 22,833 18,951 19,724 16,119 ____________________________________________________________________________________________________________ Electric Revenues (millions) Residential $ 500 $ 471 $ 463 $ 435 $ 447 $ 276 Commercial 321 295 269 263 251 179 Industrial 392 378 360 381 355 277 Other 37 30 40 38 47 34 ____________________________________________________________________________________________________________ Revenues from ultimate consumers 1,250 1,174 1,132 1,117 1,100 766 Interchange 116 110 131 73 86 36 Wheeling 3 3 3 1 1 - _____________________________________________________________________________________________________________ Total electric revenues $ 1,369 $ 1,287 $ 1,266 $1,191 $ 1,187 $ 802 _____________________________________________________________________________________________________________ Gas Sales In Therms (millions) Residential 356 359 371 339 339 365 Commercial 144 144 148 138 133 166 Industrial 88 81 78 136 98 136 ______________________________________________________________________________________________________________ Sales to ultimate consumers 588 584 597 613 570 667 Transportation of customer-owned gas 273 262 229 204 253 - _______________________________________________________________________________________________________________ Total gas sold and transported 861 846 826 817 823 667 Interdepartmental sales 21 5 7 12 8 1 _______________________________________________________________________________________________________________ Total gas delivered 882 851 833 829 831 668 _______________________________________________________________________________________________________________ Gas Revenues (millions) Residential $ 173 $ 192 $ 200 $ 181 $ 84 $ 228 Commercial 60 66 68 61 61 89 Industrial 24 31 34 37 31 68 _______________________________________________________________________________________________________________ Revenues from ultimate consumers 257 289 302 279 276 385 Transportation of customer-owned gas 8 9 8 7 9 - Miscellaneous 7 4 5 3 3 16 ________________________________________________________________________________________________________________ Total gas revenues $ 272 $ 302 $ 315 $ 289 $ 288 $ 401 ________________________________________________________________________________________________________________ System peak demand (native load) in kw (thousands) 3,667 3,395 3,415 3,109 3,272 2,929 Firm peak demand (native load) in kw (thousands) 3,576 3,232 3,254 2,925 3,108 2,771 Net generating capability in kw (thousands) 3,862 4,121 4,045 4,052 3,909 3,770 ________________________________________________________________________________________________________________ Electric customers (end of year) 529,966 553,869 554,270 549,391 565,421 537,047 Gas customers (end of year) 374,299 388,170 394,379 386,261 401,763 382,442 Employees (end of year) 3,559 4,350 4,540 4,624 4,514 4,550 _________________________________________________________________________________________________________________
EX-13.2 8 IP ANNUAL REPORT Measures of Our Success Illinois Power 1995 Information Statement and 1995 Annual Report to Stockholders we will be the best by the year 2000 - - -------------------------------------------- notice of annual meeting of shareholders Proxy Statement Table of Contents - - -------------------- Notice of Annual Meeting 2 Proxy Statement 3 Appendix: 1995 Annual Report to Shareholders A-1 To the Shareholders of Illinova Corporation: Notice is Hereby Given that the Annual Meeting of Shareholders of Illinova Corporation ("Illinova") will be held at 10 a.m. Wednesday, April 10, 1996, at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, for the following purposes: (1) To elect the Board of Directors for the ensuing year. (2) To transact any other business which may properly come before the meeting or any adjournment. Shareholders of record at the close of business on February 12, 1996, will be entitled to notice of and to vote at the Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, General Counsel and Corporate Secretary Decatur, Illinois March 1, 1996 IMPORTANT Illinova invites each of its approximately 35,000 shareholders to attend the Annual Meeting. Shareholders will be admitted on verification of record share ownership at the admission desk. Shareholders who own shares through banks, brokerage firms, nominees or other account custodians must present proof of beneficial share ownership (such as a brokerage account statement) at the admission desk. If you are unable to be present at the meeting, it is important that you, whether the owner of one or many shares, sign and return the enclosed proxy. An envelope on which postage will be paid by Illinova is enclosed for that purpose. Return of your executed proxy will ensure you are represented at the Annual Meeting. Your cooperation is appreciated. proxy statement Solicitation and Revocation of Proxies This Proxy Statement is furnished in connection with a solicitation of proxies by the Board of Directors of Illinova, for use at the Annual Meeting of Shareholders to be held at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, at 10 a.m. Wednesday, April 10, 1996, and at any adjournment thereof (the "Annual Meeting"). Any shareholder giving a proxy may revoke it at any time by giving a later proxy or by giving written notice of revocation to the Corporate Secretary of Illinova prior to the Annual Meeting. All duly executed proxies received prior to the Annual Meeting will be voted. Shares credited to the accounts of participants in Illinova's Automatic Reinvestment and Stock Purchase Plan, and Employees Stock Ownership Plan, and Illinois Power Company's ("Illinois Power") Incentive Savings Plans will be voted in accordance with the instructions of the participants or otherwise in accordance with the terms of such plans. Voting Rights Shareholders of record at the close of business on Monday, February 12, 1996 (the "Record Date"), will be entitled to receive notice of and to vote at the Annual Meeting. As of such date, Illinova had outstanding 75,674,837 shares of Common Stock. Shareholders who are present at the Annual Meeting in person or by proxy will be entitled to one vote for each share of Illinova's Common Stock which they held of record at the close of business on the Record Date. When voting for candidates nominated to serve as directors, all shareholders will be entitled to 11 votes (the number of directors to be elected) for each of their shares and may cast all of their votes for any one candidate whose name has been placed in nomination prior to the voting or distribute their votes among two or more such candidates in such proportions as they may determine. In voting on other matters presented for consideration at the Annual Meeting, each shareholder will be entitled to one vote for each share of Common Stock held of record at the close of business on the Record Date. The affirmative vote of the holders of a majority of the shares of Common Stock present in person or represented by proxy and entitled to vote at the Annual Meeting is required for the election of directors. Annual Report, Proxy and Proxy Statement Accompanying this Proxy Statement, which includes Consolidated Financial Statements, is a Notice of Annual Meeting of Shareholders, a form of Proxy and the Summary Annual Report to Shareholders covering operations of Illinova for the year 1995. This Proxy Statement and accompanying documents are first being mailed to shareholders on or about March 1, 1996. Board of Directors Information Regarding the Board of Directors The Board of Directors held six Board meetings during 1995. All directors attended at least 75% of the aggregate meetings of the Board and Committees of which they were members during 1995. The Board has four standing committees: the Audit Committee, the Finance Committee, the Compensation and Nominating Committee, and the Business Development Committee. The duties and members of the standing committees are: Audit Committee (1) Review with the Chairman, President and Chief Executive Officer and the independent accountants the scope and adequacy of Illinova's system of internal controls; (2) review the scope and results of the annual examination performed by the independent accountants; (3) review the activities of Illinova's internal auditors; (4) report its findings to the Board and provide a line of communication between the Board and both the internal auditors and the independent accountants; and (5) recommend to the Board the appointment of the independent accountants and approval of the services performed by the independent accountants, considering their independence with regard thereto. The Audit Committee met three times during 1995. 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. Finance Committee (1) Review management's capital and operations and maintenance expenditure budgets, financial forecasts and financing program, and make recommendations to the Board regarding the approval of such budgets and plans; (2) review Illinova's banking relationships, short-term borrowing arrangements, dividend policies, arrangements with the transfer agent and registrar, investment objectives and the performance of Illinova's pension funds, evaluate fund managers, and make recommendations to the Board concerning such matters; and (3) act in an advisory capacity to management, the Board of Directors, and the Chairman, President and Chief Executive Officer on other financial matters as they may arise. The Finance Committee met three times during 1995. This Committee consists of the following members of the Board: Donald E. Lasater, Chairman, Richard R. Berry, Larry D. Haab, Walter D. Scott, Charles W. Wells (until his retirement on December 31, 1995), and Vernon K. Zimmerman. Compensation and Nominating Committee (1) Review performance and recommend salaries plus other forms of compensation of elected Illinova officers and the Board of Directors; (2) review Illinova's benefit plans for elected Illinova officers and make recommendations to the Board regarding any changes deemed necessary; (3) review with the Chairman, President and Chief Executive Officer any organizational or other personnel matters; and (4) recommend to the Board nominees to stand for election as director to fill vacancies in the Board of Directors as they occur. The Compensation and Nominating Committee will consider shareholders' recommendations for nominees for director made pursuant to timely notice in writing addressed to the Chairman of the Committee at the executive offices of Illinova, together with a full description of the qualifications and business and professional experience of the proposed nominees and a statement of the nominees' willingness to serve. To be timely, the notice shall be delivered to or mailed and received at the executive offices of Illinova not less than 90 nor more than 120 days prior to the Annual Meeting. The Compensation and Nominating Committee met four times during 1995. This Committee consists of the following Outside Directors: Donald S. Perkins, Chairman, Robert M. Powers, Walter D. Scott, Ronald L. Thompson, Marilou von Ferstel, and John D. Zeglis. Business development Committee (1) Review corporate objectives of Illinova, consider appropriate structure changes to meet corporate objectives and make recommendations to the Board concerning such matters; (2) review Illinova's program for long-term corporate activities and make recommendations to the Board regarding the approval of such programs; and (3) act in an advisory capacity to management and the Board of Directors on corporate development. The Business Development Committee met once during 1995. This Committee consists of the following members of the Board: Robert M. Powers, Chairman, Larry D. Haab, Donald S. Perkins, Walter D. Scott, Ronald L. Thompson, Marilou von Ferstel, and John D. Zeglis. Board Compensation The Outside Directors of Illinova receive a retainer fee of $18,000 per year. Outside Directors who also chair Board Committees receive an additional $2,000 per year retainer. Outside Directors receive a grant of 650 shares of Common Stock on the date of each Annual Shareholders Meeting, representing payment in lieu of attendance-based fees for all Board and Committee meetings to be held during the subsequent one-year period. Outside Directors elected to the Board between Annual Shareholders Meetings are paid $850 for each Board and Committee meeting attended prior to the first Annual Shareholders Meeting after their election to the Board. Illinova 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. On February 7, 1996, the Board of Directors approved a compensation plan that eliminates the Retirement Plan. Each former Outside Director whose right to receive the retirement benefit has vested will continue to receive such benefits in accordance with the terms of the Retirement Plan. All current Outside Directors will receive a lump sum payment based on the net present value of these benefits to them, were they to have retired under the Retirement Plan, based on the number of years they have served on the Board but not to exceed 10. Thereafter, each Outside Director will receive an annual award of stock units having a value of $6,000, to be paid to the Outside Director in cash on retirement, at once or in installments as the Director may elect, together with dividend equivalents attributable to such stock units. Pursuant to Illinova's Deferred Compensation Plan for Certain Directors, the Outside Directors may elect to defer all or any portion of their fees and stock grants until termination of their services as directors. Such deferred amounts are converted into stock units representing shares of Illinova's Common Stock with the value of each stock unit based upon the last reported sales 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 Common Stock which the director would have received if the director had been the record owner of the shares represented by stock units, and are converted into additional stock units. On termination of participating directors' services as directors, payment of their deferred fees and stock grants is made in shares of Common Stock in an amount equal to the aggregate number of stock units credited to their accounts. Such payment is made in such number of annual installments as Illinova may determine beginning in the year following the year of termination. Election of Directors Illinova'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 11 directors nominated by Illinova's Board of Directors. The names and certain additional information concerning each of the director nominees is set forth below. The dates shown for service as a director include service as a director of Illinois Power prior to the May 1994 merger in which Illinois Power became a wholly owned subsidiary of Illinova. If any nominee should be unable to serve as a director, another nominee will be selected by the current Board of Directors. Name of Director Nominee, Age, Year in Which First Business Experience and Elected a Director Other Information of Illinova Richard R. Berry, 64 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, 58 1986 - - ------------------------- Chairman, President and Chief Executive Officer of Illinova since December 1993, and of Illinois Power since June 1991, and an employee of Illinois Power since 1965. He is a director of First Decatur Bancshares, Inc., The First National Bank of Decatur and Firstech, Incorporated. C. Steven McMillan, 50 - - ------------------------- Executive Vice President and Director of Sara Lee Corporation, Chicago, Illinois, a global packaged food and consumer products company, since 1993. He had previously been Senior Vice President-Strategy Development from 1986 to 1993. He is Chairman of the Board of Electrolux Corporation and a director of J. P. Food Service. Donald S. Perkins, 68 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 a director of AT&T, Aon Corporation, Cummins Engine Company, Inc., Current Assets, Inland Steel Industries, Inc., LaSalle Street Fund, Inc., The Putnam Funds, Spring Industries, Inc., and Time Warner, Inc. Robert M. Powers, 64 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 a director of A. E. Staley Manufacturing Company. Walter D. Scott, 64 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, 46 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, a director of McDonnell Douglas Corporation, and a director of Teachers Insurance and Annuity Association. Walter M. Vannoy, 68 1990 - - ----------------------------- Prior to retirement in May 1995, Mr. Vannoy was Chairman and Chief Executive Officer of Figgie International, Inc., Willoughby, Ohio, a diversified operating company serving consumer, industrial, technical, and service markets world-wide, since 1994. He is a director of Figgie International, Inc. Marilou von Ferstel, 58 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 1981 to 1990. Ms. von Ferstel is a director of Walgreen Company. John D. Zeglis, 48 1993 - - ------------------------------ Senior Executive Vice President-General Counsel, Government Affairs, and Policy Development of AT&T, Basking Ridge, New Jersey, a diversified communications company, since 1995. He had been Senior Vice President-General Counsel and Government Affairs from 1989 to 1995. He is a director of the Helmerich & Payne Corporation. Vernon K. Zimmerman, 67 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 ICH Corporation. Security Ownership of Management and Certain Beneficial Owners The following table shows shares of stock beneficially owned as of January 31, 1996, by each director nominee and the executive officers named in the Summary Compensation Table. To the best of Illinova's knowledge, no owner holds more than 5 percent of Illinova Common Stock. Number of Shares Name of Class Beneficially Percent Beneficial Owner of Stock Owned (1) of Class - - ------------------------------------------------------------ Richard R. Berry Common 3,580 (2) Larry D. Haab Common 10,185 (2) C. Steven McMillan Common 0 (2) Donald S. Perkins Common 8,112 (2) Robert M. Powers Common 7,250 (2) Walter D. Scott Common 3,850 (2) Ronald L. Thompson Common 3,127 (2) Walter M. Vannoy Common 3,350 (2) Marilou von Ferstel Common 4,112 (2) John D. Zeglis Common 2,390 (2) Vernon K. Zimmerman Common 8,401 (2) Charles W. Wells Common 8,585 (2) Paul L. Lang Common 2,734 (2) Larry F. Altenbaumer Common 4,179 (2) Larry S. Brodsky Common 1,713 (2) (1) The nature of beneficial ownership for shares shown is sole voting and/or investment power, except for Mr. Wells, who disclaims beneficial ownership of 1,000 shares held in the name of his wife. (2) No director or executive officer owns any other equity securities of Illinova. No director or executive officer owns as much as 1% of the Common Stock. All directors and executive officers of both Illinova and Illinois Power Company as a group own 80,299 shares of Common Stock (less than 1%). Executive Compensation The following table sets forth a summary of the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of Illinova and Illinois Power Company, its principal subsidiary, for the years indicated. The compensation shown includes all compensation paid for service to Illinova and its subsidiaries, including Illinois Power. Summary Compensation Table Long-Term Compensation _________________________________________________ Annual Compensation Awards Payouts ------------------------------- ------------------------ --------- Other Restricted Securities LTIP All Other Bonus Annual Stock Awards Underlying Payouts Compensation Name and Principal Position (1) Year Salary (2) Compensation (3) Options (4) (5) Larry D. Haab 1995 $472,250 $76,975 $19,088 $76,975 20,000 shs. $43,597 $2,550 Chairman, President and 1994 451,375 42,881 15,783 20,900 shs. 360 Chief Executive Officer of 1993 437,500 22,531 13,199 20,000 shs. 480 Illinova and Illinois Power Charles W. Wells 1995 $318,863 $ 33,734 $ 22,342 $ 33,734 -- $ 24,392 $2,470 Executive Vice President 1994 276,625 25,242 12,404 8,500 shs. 330 of Illinois Power 1993 265,875 12,629 9,697 6,500 shs. 357 Paul L. Lang 1995 $ 222,812 $ 20,499 $ 8,265 $ 20,499 6,500 shs. $ 20,360 $ 2,510 Senior Vice President 1994 213,562 20,289 8,672 6,800 shs. 440 of Illinois Power 1993 205,625 9,767 7,508 6,000 shs. 440 Larry F. Altenbaumer 1995 $ 204,937 $ 17,317 $ 7,686 $ 17,317 6,500 shs. $ 16,084 $ 2,378 Chief Financial Officer, 1994 196,562 18,674 8,975 6,800 shs. 400 Treasurer and Controller 1993 187,750 8,918 7,093 6,000 shs. 480 of Illinova, and Senior Vice President, Chief Financial Officer, and Treasurer of Illinois Power Larry S. Brodsky 1995 $ 196,000 $ -- $ 5,120 $ - 6,500 shs. $ 14,179 $ 2,190 Senior Vice President 1994 $ 174,186 $ 16,548 $ 4,973 4,400 shs. 400 of Illinois Power 1993 157,875 8,131 4,220 4,500 shs. 400
(1) Mr. Wells retired from Illinois Power on December 31, 1995. Mr. Brodsky resigned from Illinois Power on January 2, 1996. (2) The amounts shown in this column are the cash award portion of grants made to these individuals under the Executive Incentive Compensation Plan ("Compensation Plan") for 1995, including amounts deferred under the Executive Deferred Compensation Plan. See the Compensation Plan description in footnote (3) below. (3) This table sets forth stock unit awards for 1995 under the Compensation Plan. One-half of each year's award under this plan is converted into stock units representing shares of Illinova Common Stock based on the closing price of Common Stock on the last trading day of the award year. The other one-half of the award is paid to the recipient in cash and is included under Bonus in the Summary Compensation Table. Stock units awarded in a given year, together with cash representing the accumulated dividend equivalents on those stock units, become fully vested after a three-year holding period. Stock units are converted into cash and piad based on the closing price of Common Stock on the first trading day of the distriubtion year. Particpants (or beneficiears 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. Particpants whose employment is terminated for reasons other than retirement, disability, or death forfeit all unvested awards. In the event of a termination of employment within two years after a change in control of Illinova, without good cause or by any participant with good reason, all awards of the paricipant becme fully vested and payable. As of December 31, 1995, named executive officers were credited with the following total aggregate number of unvested stock units under the Compensation Plan since its inception, valued on the basis of the closing price of Common Stock on December 31, 1995: Mr. Haab, 8,253 units valued at $247,603; Mr. Wells, 3,758 units valued at $112,759; Mr. Lang, 2,807 units valued at $84,211; Mr. Altenbaumer, 2,439 units valued at $73,187; Mr. Brodsky, 474 units valued at $14,238. Although stock units have been rounded, valuation is based on total stock units, including partial shares. (4) The amounts shown in this column reflect the cash value of the stock units granted in 1993 for the year 1992, including amounts deferred, under the Compensation Plan. See the Compensation Plan description in footnote (3) above. (5) The amounts shown in this column are Illinois Power's contributions under the Incentive Savings Plan (including the market value of shares of Illinova Common Stock at the time of allocation). The following tables summarize grants during 1995 of stock options under Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards outstanding at year end for the individuals named in the Summary Compensation Table. No options were exercisable or exercised during 1995. Option Grants In 1995 Individual Grants Number of Securities % of Total Options Underlying Options Granted to Employees Exercise or Base Grant Date Granted(1) in 1995 Price Per Share(1) Expiration Date Present Value (2) ----------------------------------------------------------------------------- Larry D. Haab 20,000 29% $ 24.875 6/14/2004 $ 117,800 Charles W. Wells 0 Paul L. Lang 6,500 9% 24.875 6/14/2004 38,285 Larry F. Altenbaumer 6,500 9% 24.875 6/14/2004 38,285 Larry S. Brodsky 6,500 9% 24.875 6/14/2004 38,285
(1) Each option becomes exercisable on June 30, 1998. In addition to the specified expiration date, the grant expires on the first anniversary of the recipient's death and/or the 90th day following retirement, and is not exercisable in the event a recipient's employment terminates. In the event of certain change-in-control circumstances, the Compensation and Nominating Committee may declare the option immediately exercisable. The exercise price of each option is equal to the fair market value of the Common Stock on the date of the grant. Recipients shall also receive, on or shortly after June 30, 1998, a payment equal to a percentage of the total dividends declared and paid on Illinova Common Stock during the period between the date of this grant and June 30, 1998 calculated by multiplying the number of shares of Common Stock granted hereunder times the total amount of dividends paid per share of Common Stock during the holding period, times a percentage based on Illinova total shareholder return ranking relative to the S & P Electric Utility Group. At the discretion of the Board of Directors, the foregoing payment may be made in the form of Illinova Common Stock of equivalent value based on the average New York Stock Exchange price of the stock during June 1998, or in cash. (2) The Grant Date Present Value has been calculated using the Black-Scholes option pricing model. Disclosure of the Grant Date Present Value, or the potential realizable value of option grants assuming 5% and 10% annualized growth rates, is mandated by regulation; however, Illinova does not necessarily view the Black-Scholes pricing methodology, or any other present methodology, as a valid or accurate means of valuing stock option grants. The calculation was based on the following assumptions: (i) An annual dividend yield on Illinova Common Stock of 3.80%; (ii) A risk-free interest rate of 6.40%, based on the yield of a zero-coupon government bond maturing at the end of the option term; and (iii) Stock volatility of 19.73%. Aggregated Option and Fiscal Year-End Option Value Table Number of Securities Underlying Unexercised Value of Unexercised In-the-Money Options at Fiscal Year-End Options at Fiscal Year-End Name Exercisable/Unexercisable Exercisable/Unexercisable Larry D. Haab 0 shs./76,900 shs. 0/$514,212 Charles W. Wells 0 shs./21,000 shs. 0/$154,687 Paul L. Lang 0 shs./24,300 shs. 0/$162,987 Larry F. Altenbaumer 0 shs./24,300 shs. 0/$162,987 Larry S. Brodsky 0 shs./18,400 shs. 0/$119,212
Pension Benefits Illinois Power maintains a Retirement Income Plan for Salaried Employees (the "Retirement Plan") providing pension benefits for all eligible salaried employees. In addition to the Retirement Plan, Illinois Power also maintains a nonqualified Supplemental Retirement Income Plan for Salaried Employees (the "Supplemental Plan") that covers all elected officers eligible to participate in the Retirement Plan and provides for payments from general funds of Illinois Power of any monthly retirement income not payable under the Retirement Plan because of the 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, 1995, for purposes of both the Retirement Plan and the Supplemental Plan, Messrs. Haab, Wells, Lang, Altenbaumer, and Brodsky had completed 30, 32, 9, 23, and 21 years of credited service, respectively. Employee Retention Agreements Illinova has entered into Employee Retention Agreements with each of its executive officers and officers of its subsidiaries. Under each agreement, the officer would be entitled to receive a lump sum cash payment if his or her employment were terminated by Illinova without good cause or voluntarily by the officer for good reason within two years following a change in control of Illinova 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 of the officer's employment with Illinova terminated; plus (2) three times the latest bonus earned by the officer during the three calendar years preceding termination of employment. Under the agreement, the officer would continue, after any such termination of employment, to participate in and receive benefits under other benefit plans of Illinova. Such coverage would contnue for 36 months following termination of employment, or, if earlier, until the officer reached age 65 or was employed by another employer; provided that, if the officer was 50 years of age or older at the time of such termination, then coverage under health, life insurance and similar welfare plans would continue until the officer became 55 years of age, at which time he or she would be eligible to receive the benefits extended to the employees of Illinova who elect early retirement. Compensation and Nominating Committee Report on Officer Compensation The six-member Compensation and Nominating Committee of the Board of Directors (the "Committee") is composed entirely of Outside Directors. The Committee's role includes a review of the performance of the elected officers and the establishment of specific officer salaries subject to Board approval. The Committee establishes performance goals for the officers under the Compensation Plan, approves payments made pursuant to the Compensation Plan and recommends grants under the Long-Term Incentive Compensation Plan approved by the shareholders in 1992. The Committee also reviews other forms of compensation and benefits making recommendations to the Board on changes whenever appropriate. The Committee carries out these responsibilities with assistance from an executive compensation consulting firm and with input from the Chief Executive Officer and management as it deems appropriate. Officer Compensation Philosophy Illinova's compensation philosophy reflects a commitment to compensate officers competitively with other companies in the electric and gas utility industry while rewarding executives for achieving levels of operational excellence and financial returns consistent with continuous improvement in customer satisfaction and shareholder value. Illinova's compensation policy is to provide a total compensation opportunity targeted to all utilities in the Edison Electric Institute (EEI) database. Eighty-four percent of the companies in the S&P Utilities Index are also in the EEI database. The S&P Utilities Index is used to relate Illinova's shareholder value in the following performance graphs. The S&P index covers the utility 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 Illinova's shareholders. The compensation program is structured so that, depending on the salary level, between 25 and 45 percent of an officer's total compensation target is composed of incentive compensation. Base Salary Plan The Committee determines base salary ranges for executive officers based on competitive pay practices of a peer group of utilities. Officer salaries correspond to approximately the average of the companies in the compensation peer group. Individual increases are based on several factors including the officer's performance during the year and the relationship of the officer's salary to the market salary level for the position. Annual Incentive Compensation Plan Annual incentive awards are earned based on the achievement of specific annual financial and operational goals by the elected officer group as a whole and consideration of the officer's individual contribution. If payment is earned under this Plan, one-half of the bonus is payable in cash during the year following the award year and one-half is credited to the participant in the form of Common Stock units, the number of which is determined by dividing half of the earned bonus amount by the closing price of the Common Stock on the last trading day of the award year. The officer's interest in the stock units vests at the end of the three-year period which begins the year after the award year. The officer receives this award in cash equal to (1) the closing stock price on the first trading day of the distribution year times the number of units held plus (2) dividend equivalents that would have been received if the stock had actually been issued. For 1995, 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. Up to 25 percent of the awarded amount is based on an assessment of the individual officer's performance during the year. Awards shown under Bonus in the Summary Compensation Table for performance during 1995 were based on the following results. Earnings per Share, Customer Satisfaction and Cost Management were at or better than the threshold level for the award. Employee Teamwork results were not known at the time of printing. Long-Term Incentive Compensation Plan 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, dividend equivalents or restricted stock grants. The stock options and dividend equivalents granted to the officers for 1995 represent a long-term incentive award based on Illinova and individual performance as evaluated by the Chairman and reviewed by the Committee. The actual number of dividend equivalents earned is determined by Illinova's total shareholder return compared to the companies in the S&P Utility Index. CEO Compensation Larry Haab became Chairman, President, and Chief Executive Officer ("CEO") of Illinois Power on June 12, 1991, and Chairman, President and Chief Executive Officer of Illinova in December 1993. Illinova based Mr. Haab's 1995 compensation on the policies and plans described above. The Committee invokes the active participation of all non-management directors in reviewing Mr. Haab's performance before it makes recommendations regarding his compensation. The Committee is responsible for administering the processes for completing this review. The process starts early in the year when the Board of Directors works with Mr. Haab to establish his personal goals and short- and long-term strategic goals for Illinova. At the conclusion of the year Mr. Haab reviews his performance with the non-management directors. The Committee oversees this review and recomends to the board appropriate adjustments to compensation. In setting the CEO's salary for 1995, the Committee, with the participation of all Outside Directors, determined that important goals were achieved and the results for Illinova for the year were excellent. Mr. Haab's vision of the industry's evolution has led, and is continuing to lead, to appropriate redeployment of Illinova resources. The Committee concluded that in 1995 Mr. Haab's performance continued to advance Illinova toward the accomplishment of its strategic objectives. The 1995 Annual Incentive Compensation Plan award for the Chief Executive Officer 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 2,566 stock units which vest over a three-year period as described above. The 20,000 option shares and dividend equivalents granted to the CEO reflect the Committee's recognition of his work in directing Illinova towards its long-term objectives of outstanding customer satisfaction and sustained growth in shareholder return. Compensation and Nominating Committee Donald S. Perkins, Chairman Robert M. Powers Walter D. Scott Ronald L. Thompson Marilou von Ferstel John D. Zeglis Independent Auditors The Board of Directors of Illinova has selected Price Waterhouse LLP as independent auditors for Illinova for 1996. 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 1995 Summary Annual Report to Shareholders was mailed to shareholders commencing on March 1, 1996. Copies of Illinova's Annual Report on Form 10-K will be available to shareholders, after its filing with the Securities and Exchange Commission on or before March 31, 1996. Requests should be addressed to Investor Relations, G-21, Illinova Corporation, 500 South 27th Street, Decatur, Illinois 62525-1805. Any proposal by a shareholder to be presented at the next Annual Meeting must be received at Illinova's executive offices not later than November 1, 1996. Other Business Management does not know of any matter which will be presented for consideration at the Annual Meeting other than the matters described in the accompanying Notice of Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, General Counsel and Corporate Secretary Decatur, Illinois March 1, 1996 appendix: 1995 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 Illinois Power Company 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. A discussion of the factors having significant impact upon consolidated financial position and consolidated results of operations since January 1, 1993, is below. Illinois Power Company (IP) is a susbsidiary 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 common stock into Illinova common stock. Illinova Generating Company and Illinova Power Marketing, Inc. are wholly owned subsidiaries of Illinova. IP is the primary business and subsidiary of Illinova, and is engaged in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the State of Illinois. Open Access and Wheeling On March 29, 1995, the FERC issued a Notice of Proposed Rulemaking (NOPR) designed to encourage a more fully competitive wholesale electric market through mandated open access to public utility transmission facilities, at rates to be determined, at the outset, by the FERC. Transmission of electricity for a customer who is not an end-user, or for delivery to an end-user who is not a customer of the transmitting utility is called, respectively, wholesale wheeling and retail wheeling. Under the FERC's proposal, all transmission-owning public utilities were required to file nondiscriminatory open-access transmission tariffs, available to all wholesale sellers and buyers of electric energy. On March 20, 1995, IP filed three transmission service tariffs that offer eligible transmission customers the same or comparable transmission service on terms comparable to service IP provides itself. On May 16, 1995, the FERC accepted IP's open-access tariff filings. It's too soon to predict the long- term financial inpact of increasing access and other issues arising from such access. Competition In March 1995, IP was instrumental in developing a legislative proposal, Energy Choice 2000, which is designed to reform Illinois' regulatory laws governing utilities. Energy Choice 2000 establishes the framework for a managed transition for utilities to operate in an increasingly competitive environment. The proposal outlines a time frame for all classes of customers to benefit from competition, beginning in the year 2000. In May 1995, the Illinois General Assembly passed Senate Joint Resolution 21, which established the Joint Committee on Electric Utility Regulatory Reform and directed it to use Energy Choice 2000 "as a key element for developing legislative proposals for reducing regulation, increasing customer choice and promoting and facilitating competition in Illinois' electirc utility industry." The Joint Committee on Electric Utility Regulation Reform is directed to proivde a final legisltaion proposal during the fourth quarter of 1996. On September 11, 1995, IP filed a proposal with the Illinois Commerce Commission (ICC) seeking its approval to conduct an open-energy access experiment beginning in 1996. The experiment would allow approximately 20 industrial customers to purchase electricity and related services from other sources. IP would transmit (wheel) the electricity over its lines. IP will seek FERC approval of the experiment after receipt of ICC approval, anticipated in the second quarter of 1996. The maximum total load involved in this experiment represents approximately 1 percent of IP's total load, or about $7.5 million in net annual revenue. IP expects the earnings impact to be immaterial. Any loss of sales would be partially offset by revenues obtained by selling the surplus energy and capacity on the open market and by transmission and ancillary service charges necessary for customers to obtain energy from an alternative supplier, as well as by corresponding reductions in fuel and other variable operating costs. The open-access experiment will allow IP to evaluate the financial, operational and service impacts of transporting power from other suppliers to customers. Additionally, regulators and legislators will benefit from the experiment by observing open-energy access in a "laboratory setting" while they look for ways to bring the benefits of competition to all customers. Finally, it will give customers opportunity to gain experience in arranging their power supplies and transmission requirements and managing their operations under an open-energy access scenario. The issue of competition is one that raises both risks and opportunities. At this time, the ultimate effect of competition on Illinova's consolidated financial position and results of operations is uncertain. See "Note 1-Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" for additional discussion of the effects of regulation. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement and severance programs. During the fourth quarter of 1995, 727 employees accepted enhanced retirement or severance under these programs. At January 1, 1996, Illinova employed 3,596 people, as compared to 4,350 at December 31, 1994. The combined enhanced retirement and severance programs generated a pre-tax charge of $38 million against fourth quarter 1995 earnings and will generate savings of approximately $36 million annually, starting in 1996. Consolidated Results of Operations Overview Net income (loss) applicable to common stock were $156 million for 1995, $162 million for 1994 and $(82) million for 1993. The 1995 results include $22.8 million net-tax for the enhanced retirement and severance program and $3.5 million for the carrying amount under consideration paid for preferred stock redeemed in December 1995. The 1995 earnings also reflect increased electric sales due to unseasonably warm summer weather, partially offset by increased operating and maintenance expenses due to the Clinton Power Station (Clinton) refueling and maintenance outage. The 1994 results include $6.4 million for the carrying amount over consideration paid for preferred stock redeemed in December 1994. 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 ongoing cost management efforts, no Clinton refueling and maintenance outage and lower financing costs. In 1993, earnings were $118 million, excluding the September write-off disallowed Clinton post-construction\ costs of $200 million, net of income taxes. The 1993 earnings before the write-off reflect 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 refinancing efforts. The ICC and FERC determine IP's rates, at the retail and wholesale levels, respectively, for electric service, and the ICC determines IP's rates for gas service. These rates are designed to recover the cost of service and allow shareholders the opportunity to earn a fair rate of return. Future electric and natural gas sales, including interchange sales, will continue to be affected by an increasingly competitive marketplace, changes in the regulatory environment, increased transmission access, weather conditions, competing fuel sources, interchange market conditions, plant availability, fuel cost recoveries, customer conservation efforts and the overall economy. Operating Revenues (Millions of dollars) 1995 $ 1,641.4 1994 1,589.5 1993 1,581.2 1992 1,479.5 1991 1,474.9 Illinois Power - Results of Operations Electric Operations - For the years 1993 through 1995, electric revenues including interchange increased 8.1% and the gross electric margin increased 8.7% as follows: - - --------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - --------------------------------------------------------- Electric revenues $ 1,252.6 $ 1,177.5 $ 1,135.6 Interchange revenues 116.3 110.0 130.8 Fuel cost & power purchased (333.4) (319.2) (313.6) - - --------------------------------------------------------- Electric margin $ 1,035.5 $ 968.3 $ 952.8 ========================================================= The components of annual changes in electric revenues: - - --------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - --------------------------------------------------------- Price $ 13.3 $ (23.2) $ (30.0) Volume and other 42.7 44.1 72.1 Fuel cost recoveries 19.1 21.0 (24.4) - - --------------------------------------------------------- Revenue increase $ 75.1 $ 41.9 $ 17.7 ========================================================= 1995 - The 6.4% increase in electric revenues was primarily due to a 1.9% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher residential sales (4.8%) and higher commercial sales (8.2%) due to an improving economy and warmer summer temperatures compared to 1994. Industrial sales remained essentially unchanged from 1994. Interchange revenues increased $6.3 million (5.8%) as a result of increased sales opportunities. 1994 - The 3.7% increase in electric revenues was primarily due to a 6.3% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher commercial sales (8.3%) and higher industrial sales (7.0%) due to an improving economy. Residential sales remained essentially unchanged from 1993 primarily due to milder temperatures in 1994 as compared to 1993. Interchange sales decreased 19.6% from 1993 levels primarily due to unusually large sales opportunities in 1993. Major Sources of Electric Energy (Millions of megawatt-hours) 1995 1994 1993 Fossil 14.5 13.2 13.1 Nuclear 5.3 6.4 5.1 Purchases 3.2 3.1 5.1 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. The cost of meeting IP's system requirements was reflected in fuel costs for electric plants and power purchased. Changes in these costs are below: - - ---------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - ---------------------------------------------------- Fuel for electric plants Volume and other $ 9.8 $ 13.8 $ 3.5 Price (35.5) (14.3) 7.4 Emission allowances 18.5 --- --- Fuel cost recoveries 14.5 32.0 (24.6) - - ---------------------------------------------------- 7.3 31.5 (13.7) Power purchased 6.9 (25.9) 54.5 - - ---------------------------------------------------- Total increase $ 14.2 $ 5.6 $ 40.8 ==================================================== Weighted average system generating fuel cost ($/MWH)$ 11.41 $ 12.72 $ 13.88 ==================================================== System load requirements, generating unit availability, fuel prices, purchased power prices, resale of energy to other utilities, emission allowance purchases and fuel cost recovery through the Uniform Fuel Adjustment Clause (UFAC) caused changes in these costs. Equivalent Availability-Clinton and Fossil Clinton Fossil 1995 76% 81% 1994 92% 78% 1993 62% 82% 1992 62% 82% 1991 76% 81% Changes in factors affecting the cost of fuel for electric generation are below: - - ------------------------------------------------------ 1995 1994 1993 - - ------------------------------------------------------ Increase in generation 1.9% 8.2% 2.5% Generation mix Coal and other 73% 67% 72% Nuclear 27% 33% 28% ====================================================== 1995 - The cost of fuel increased 2.8% and electric generation increased 1.9%. The increase in fuel cost was attributable to the effects of the UFAC, the increase in higher-cost fossil generation and the cost of emission allowances. Clinton's equivalent availability and generation were lower in 1995 as compared to 1994 due to the scheduled refueling and maintenance outage. Clinton returned to service April 29, 1995, after completing its fifth refueling and maintenance outage, which began March 13, 1995. Power purchased increased $6.9 million. Fuel Cost per Million BTU (Percent of generation) Fuel Cost Percent of Generation Coal $1.34 70.8% Nuclear .81 27.7% Gas 2.08 1.1% Oil 4.44 .1% Tires .88 .3% 1994 - The cost of fuel increased 13.4% and electric generation increased 8.2%. The increase in fuel cost was attributable to the effects of the UFAC, partially offset by a decrease in fossil generation and an increase in lower-cost nuclear generation. Clinton's equivalent availability and generation were higher in 1994 as compared to 1993 due to no refueling and maintenance outage. Power purchased for the period decreased $25.9 million. Unusually large interchange sales opportunities during 1993, which did not recur in 1994, were the primary cause of the decrease in power purchased. 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 UFAC and lower generation at IP's largest fossil plant. The decrease was partially offset by an increase in transportation costs due to flooding in the Midwest and a 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. Gas Operations - For the years 1993 through 1995, gas revenues including transportation decreased 13.4% while the gross margin on gas revenues increased 4.9% as follows: - - --------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - --------------------------------------------------- Gas revenues $ 264.5 $ 293.2 $ 306.8 Gas cost (138.8) (172.4) (187.3) Transportation revenues 8.0 8.8 8.0 - - ---------------------------------------------------- Gas margin $ 133.7 $ 129.6 $ 127.5 ==================================================== (Millions of therms) Therms sold 588 584 597 Therms transported 273 262 229 - - ---------------------------------------------------- Total consumption 861 846 826 ==================================================== Changes in the cost of gas purchased for resale: - - -------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - -------------------------------------------------------- Gas purchased for resale Cost (excluding take-or-pay) $ (43.1) $ (6.4) $ 13.3 Take-or-pay costs (.4) 2.8 5.3 Volume 25.3 (13.6) (3.4) Gas cost recoveries (15.4) 2.3 .2 - - -------------------------------------------------------- Total increase (decrease) $(33.6) $ (14.9) $ 15.4 - - -------------------------------------------------------- Average cost per therm delivered$ .201 $ .261 $ .275 ======================================================== The 1995 decrease in the cost of gas purchased was due to lower gas prices caused by unusually warm winter weather nationwide. The 1994 decrease in the cost of gas purchased was primarily due to lower gas prices, the expanded use of additional gas storage and a decrease in therms purchased. Also contributing to the higher gas margins in 1995 and 1994 was the 6.1% increase in the 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. 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) 1995 1994 1993 - - --------------------------------------------------------- Other operating expenses $(.3) $(9.2) $(2.1) Maintenance 10.4 (11.2) (1.3) Depreciation and amortization 7.2 6.4 6.0 ========================================================== The increase in maintenance expense for 1995 is primarily due to the refueling and maintenance outage at Clinton. The decrease in operating and maintenance expenses for 1994 is due to 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 1995 and 1994 increases in depreciation expense are due primarily to a higher utility plant balance in 1995 and1994 as compared to 1994 and 1993. The 1993 increase in depreciation expense was 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 1994 and 1993 increases in depreciation expense are partially offset by the decrease in deferred Clinton costs as a result of the September 1993 write-off of disallowed Clinton post-construction costs. Operating and Maintenance Expenses (Millions of dollars) 1995 $359.7 1994 349.6 1993 370.0 1992 373.4 1991 340.6 Other Income and Deductions - Total allowance for funds used during construction (AFUDC), a non-cash item of income, decreased in 1995 compared to non-cash item of income, decreased in 1995 compared to 1994 due to decreased eligible capital expenditures. 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 6.5%, 7.0% and 7.5% in 1995, 1994 and 1993, respectively. The 1994 increase was primarily due to a decrease in allocated income taxes. Interest Charges - Total interest charges increased $4.1 million in 1995, and decreased $21.0 million in 1994 and $3.7 million in 1993. The 1995 increase was due to increased short-term borrowings at higher rates. The 1994 and 1993 decreases were primarily due to the refinancing with lower-cost debt and 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, IP issued approximately $1.4 billion of new debt at a weighted average interest rate of 6.97%. Inflation - Inflation, as measured by the Consumer Price Index, was 2.5%, 2.5% and 3.1% in 1995, 1994 and 1993, respectively. IP recovers historical rather than current plant costs in rates. LIQUIDITY AND CAPITAL RESOURCES Regulatory Matters UFAC Suspension - On June 26, 1995, IP filed a petition with the ICC for permission to eliminate its UFAC by adjusting base rates to include projected fuel costs. IP filed its petition under a procedure that allows the ICC to grant or deny the specific proposal, but not to subject it to hearings or require that it be modified. IP believes that continuation of the UFAC creates disincentives to efficient decisions made on a total cost basis; that the UFAC is inconsistent with a competitive environment; and that the significance of fuel costs as a component of total costs has diminished, thereby reducing the need for a UFAC as a risk-reduction mechanism. On August 8, 1995, the ICC voted three to two to deny IP's petition. IP is currently reviewing its alternatives in light of the decision. 1994 Gas Rate Order - On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. For customers, the increase is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Concurrent with the gas rate increase, IP's gas utility plant composite depreciation rate decreased to 3.4%. Dividends On December 13, 1995, IP increased the quarterly common stock dividend 12%, declaring the common stock dividend for the first quarter of 1996 payable February 1, 1996, to shareholders of record as of January 10, 1996. On October 12, 1994, IP increased the quarterly common stock dividend 25%, declaring the common stock dividend for the first quarter of 1995. Capital Resources and Requirements IP needs cash for operating expenses, interest and dividend payments, debt and certain IP preferred stock retirements, and construction programs. To meet these needs, IP has used internally generated funds and external financings including the issuance of IP preferred stock, debt and revolving lines of credit. The timing and amount of external financings depend primarily on economic and financial market conditions, cash needs and capitalization ratio objectives. To a significant degree, the availability and cost of external financing depend upon the financial health of the company seeking those funds. Cash flows from operations during 1995 provided sufficient working capital to meet ongoing operating requirements, to service existing common and IP preferred stock dividends and debt requirements, and to meet all of IP's construction requirements. Additionally, IP expects future cash flows will enable it to meet future operating requirements and continue to service its existing debt, preferred and common stock dividends, sinking fund requirements and all of IP's 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 these 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 & 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 "somewhat 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 August 1995, S&P changed the assessment to "low average" and revised its ratings outlook to positive from stable. In February 1996, Moody's also revised its ratings outlook to positive from stable. IP's revised rating assessments reflect prospects for continued financial strengthening driven by gradual debt reduction, rigorous cost controls and moderate sales growth. In 1995, IP repurchased 2,696,086 shares of its common stock from Illinova. Under Illinois law, such shares may be held as treasury stock and treated as authorized but unissued, or may be canceled by resolution of the Board of Directors. IP holds the common stock as treasury stock and deducts it from common equity at the cost of the shares. In February 1995, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock. In May 1995, IP redeemed the remaining $24 million of 8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed $.2 million of 7.56% serial preferred stock and $3 million of 8.24% serial preferred stock. In December 1995, IP redeemed $34.7 million of 8.00% serial preferred stock, $33.6 million of 7.65% serial preferred stock, and $27 million of 8.24% of serial preferred stock. In February 1994, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock and issued $35.6 million of capital First Mortgage Bonds, 5.7% Series due 2024 (Pollution Control Series K). In May 1994, IP retired $35.6 million of First Mortgage Bonds, 11 5/8% Series due 2014 (Pollution Control Series D) with the proceeds of the debt issuance. In August 1994, IP retired $100 million of 8 1/2% debt securities. Illinois Power Financing I (IPFI), is a statutory business trust in which IP serves as sponsor. IPFI issued $100 million of trust originated preferred securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. The TOPrS were issued by IPFI, which invested the proceeds in an equivalent amount of IP subordinated debentures due in 2045. The proceeds were used by IP to repay short-term indebtedness on varying dates on or before March 1, 1996. IP incurred the indebtedness in December 1995, to redeem $95.3 million (principal value) of higher-cost outstanding preferred stock. The carrying amount under consideration paid for redeemed preferred stock amounted to $3.5 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. Illinois Power Capital, L.P., (IP Capital), is a limited partnership in which IP serves as a general partner. IP Capital issued $97 million of tax- advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-tax rate) in October 1994. The proceeds were loaned to IP and were used to redeem $97 million (principal value) of higher-cost outstanding preferred stock of IP. The carrying amount over consideration paid for redeemed preferred stock 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 were used to retire $84.1 million of First Mortgage Bonds, 10 3/4% Series due 2015 (Pollution Control Series E). In August 1995, IP purchased $5 million of 8.75% First Mortgage Bonds on the open market. See "Note 8--Long-Term Debt" of the "Notes to Consolidated Financial Statements" for additional information. For the years 1995, 1994 and 1993, changes in long-term debt and preferred stock outstanding, including normal maturities and elective redemptions, were as follows: (Millions of dollars) 1995 1994 1993 Bonds $ (5) $ (10) $ 35 Other long-term debt - (100) - Preferred stock (135) 6 (51) Total decrease $ (140) $ (104) $ (16) The amounts shown in the preceding table for debt retirements do not include all mortgage sinking fund requirements. IP has generally met these requirements by pledging property additions as permitted under IP's 1943 Mortgage and Deed of Trust. For additional information, see "Note 8--Long- Term Debt" 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, IP executed a new general obligation mortgage (New Mortgage) to replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both mortgages are secured by liens on substantially all of IP's properties. A corresponding issue of First Mortgage bonds, under the First Mortgage, secures bonds issued under the New Mortgage. At December 31, 1995, based on the most restrictive earnings test contained in the First Mortgage, IP could issue approximately $1.2 billion of additional First Mortgage bonds for other than refunding purposes. The amount of available unsecured borrowing capacity totaled $144 million at December 31, 1995. Also at December 31, 1995, the unused portion of IP total bank lines of credit was $354 million. As of December 31, 1995, IP had $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. Capital expenditures for the years 1993 through 1995 were approximately $680.7 million, including $22.5 million of AFUDC. IP estimates that $1.18 billion will be required for construction and capital expenditures during the 1996-2000 period as follows: Five-Year Period - - -------------------------------------------------------------------- (Millions of dollars) 1996 1996-2000 - - -------------------------------------------------------------------- Construction requirements Electric generating facilities $ 45 $ 236 Electric transmission and distribution facilities 68 249 General plant 24 86 Gas facilities 28 110 ____________________________________________________________________ Total construction requirements 165 681 Nuclear fuel 25 135 Debt retirements 62 362 - - ---------------------------------------------------------------------- Total $ 252 $ 1,178 ====================================================================== See "Note 3--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information. Internal cash generation will meet substantially all construction and capital requirements. Environmental Matters See "Note 3--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of the Clean Air Act and manufactured- gas plant sites. Tax Matters See "Note 6--Income Taxes" of the "Notes to Consolidated Financial Statements" for a discussion of effective tax rates and other tax issues. Accounting Matters In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" (FAS 121), effective for fiscal years beginning after December 15, 1995. FAS 121 requires that an entity review long-lived assets for impairment when events indicate that the carrying amount of an asset may not be recoverable. For regulated enterprises, FAS 121 amends FASB Statement No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS71), requiring that an impairment be recognized for regulatory assets no longer meeting the criteria of paragraph 9 of FAS 71. This standard is not currently expected to materially impact the consolidated financial position or results of operations of IP. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), effective for fiscal years beginning after December 15, 1995. FAS 123 establishes a fair- value based method of accounting for employee stock-based compensation plans and encourages companies to adopt that method. However, it also allows companies to continue to apply the intrinsic value-based method currently prescribed under APB Opinion No. 25 and related pronouncements, provided certain fair-value pro forma disclosures are made. IP is continuing to evaluate its alternatives under this standard. The FASB continues to review the accounting for liabilities related to closure and removal of long-lived assets, including decommissioning. See "Note 3--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of decommissioning. responsibility for information The consolidated financial statements and all information in this annual report are the responsibility of management. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. In the opinion of management, the consolidated financial statements fairly reflect Illinois Power's financial position, results of operations and cash flows. Illinois Power believes that its accounting and internal accounting control systems are maintained so that these systems provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing the consolidated financial statements. The consolidated financial statements have been audited by Illinois Power's independent accountants, Price Waterhouse LLP, in accordance with generally accepted auditing standards. Such standards include the evaluation of internal accounting controls to establish a basis for developing the scope of the examination of the consolidated financial statements. In addition to the use of independent accountants, Illinois Power maintains a professional staff of internal auditors who conduct financial, procedural and special audits. To assure their independence, both Price Waterhouse LLP and the internal auditors have direct access to the Audit Committee of the Board of Directors. The Audit Committee is composed of members of the Board of Directors who are not active or retired employees of Illinois Power. The Audit Committee meets with Price Waterhouse LLP and the internal auditors and makes recommendations to the Board of Directors concerning the appointment of the independent accountants and services to be performed. Additionally, the Audit Committee meets with Price Waterhouse LLP to discuss the results of their annual audit, Illinois Power's internal accounting controls and financial reporting matters. The Audit Committee meets with the internal auditors to assess the internal audit work performed, including tests of internal accounting controls. Larry D. Haab Larry F. Altenbaumer Chairman, President Chief Financial Officer, and Chief Executive Officer Treasurer and Controller 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Illinois Power's management; our responsibility is is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP St. Louis, Missouri February 2, 1996 Illinois Power Company consolidated statements of income (Millions of dollars except per share amounts) - - ------------------------------------------------------------------------------ For the Years Ended December 31, 1995 1994 1993 Operating Revenues Electric $ 1,252.6 $ 1,177.5 $ 1,135.6 Electric interchange 116.3 110.0 130.8 Gas 272.5 302.0 314.8 - - ------------------------------------------------------------------------------- Total 1,641.4 1,589.5 1,581.2 - - ------------------------------------------------------------------------------- Operating Expenses and Taxes Fuel for electric plants 273.9 266.6 235.1 Power purchased 59.5 52.6 78.5 Gas purchased for resale 138.8 172.4 187.3 Other operating expenses 259.7 260.0 269.2 Maintenance 100.0 89.6 100.8 Enhanced retirement and severance 37.8 -- -- Depreciation and amortization 186.5 179.3 172.9 General taxes 135.0 130.3 125.6 Income taxes 125.8 118.3 106.5 - - ------------------------------------------------------------------------------- Total 1,317.0 1,269.1 1,275.9 - - ------------------------------------------------------------------------------- Operating income 324.4 320.4 305.3 - - ------------------------------------------------------------------------------- Other Income and Deductions Allowance for equity funds used during construction --- 3.8 2.7 Disallowed Clinton costs --- --- (271.0) Income tax effects of disallowed costs --- --- 70.6 Miscellaneous-net (0.3) (5.5) (3.3) - - -------------------------------------------------------------------------------- Total (0.3) (1.7) (201.0) - - -------------------------------------------------------------------------------- Income before interest charges 324.7 318.7 104.3 - - -------------------------------------------------------------------------------- Interest Charges Interest expense 148.0 143.9 164.9 Allowance for borrowed funds used during construction (6.0) (5.5) (4.5) - - -------------------------------------------------------------------------------- Total 142.0 138.4 160.4 - - -------------------------------------------------------------------------------- Net income (loss) 182.7 180.3 (56.1) Less--Preferred dividend requirements 23.7 24.9 26.1 Plus--Carrying amount over (under) consideration paid for redeemed preferred stock (3.5) 6.4 - - - -------------------------------------------------------------------------------- Net income (loss) applicable to common stock $155.5 $161.8 $(82.2) ================================================================================ See notes to consolidated financial statements which are an integral part of these statements. Illinois Power Company consolidated balance sheets (Millions of dollars) - - -------------------------------------------------------------------------------- December 31, 1995 1994 Assets Utility Plant, At Original Cost Electric (includes construction work in progress of $199.8 million and $202.8 million, respectively) $6,189.0 $6,023.1 Gas (includes construction work in progress of $10.2 million and $16.8 million, respectively) 625.9 606.1 - - ------------------------------------------------------------------------------- 6,814.9 6,629.2 Less -- accumulated depreciation 2,251.7 2,102.7 - - ------------------------------------------------------------------------------- 4,563.2 4,526.5 Nuclear fuel in process 5.7 6.2 Nuclear fuel under capital lease 95.2 111.5 - - ------------------------------------------------------------------------------- 4,664.1 4,644.2 ________________________________________________________________________________ Investments and Other Assets 16.4 15.4 Current Assets Cash and cash equivalents 4.3 47.9 Accounts receivable (less allowance for doubtful accounts of $3 million) Service 129.4 110.4 Other 18.2 52.6 Accrued unbilled revenue 89.1 78.9 Materials and supplies, at average cost Fossil fuel 9.9 18.7 Gas in underground storage 18.5 23.1 Operating materials 82.7 92.1 Prepaid and refundable income taxes 19.6 11.5 Prepayments and other 20.8 23.4 392.5 458.6 Deferred Charges Deferred Clinton costs 107.3 110.8 Recoverable income taxes 128.7 147.3 Other 258.2 219.5 494.2 477.6 $5,567.2 $5,595.8 Capital and Liabilities Capitalization Common stock -- No par value, 200,000,000 shares authorized; 75,643,937 shares outstanding, stated at $1,424.6 $1,424.6 Retained earnings 129.6 51.1 Less -- Capital stock expense 8.8 9.7 Less -- 2,696,086 shares of common stock in treasury, at cost 67.3 - Total common stock equity 1,478.1 1,466.0 Preferred stock 125.6 224.7 Mandatorily redeemable preferred stock of subsidiary 97.0 133.0 Long-term debt of subsidiary 1,739.3 1,946.1 Total capitalization 3,440.0 3,769.8 Current Liabilities Accounts payable 119.9 108.7 Notes payable 359.6 238.8 Long-term debt and lease obligations maturing within one year 95.0 33.5 Dividends declared 23.0 23.4 Taxes accrued 44.8 32.3 Interest accrued 39.0 38.4 Other 66.2 55.8 747.5 530.9 Deferred Credits Accumulated deferred income taxes 1,019.1 981.4 Accumulated deferred investment tax credits 222.8 230.9 Other 137.8 82.8 (Commitments and Contingencies Note 4) 1,379.7 1,295.1 $5,567.2 $5,595.8 See notes to consolidated financial statements which are an integral part of these statements. Illinois Power Company consolidated statements of cash flows (Millions of dollars) For the Years Ended December 31, 1995 1994 1993 Cash Flows From Operating Activities Net income (loss) $ 182.7 $ 180.3 $ (56.1) Items not requiring (providing) cash-- Disallowed Clinton costs, net of income taxes - - 200.4 Depreciation and amortization 190.0 182.3 176.6 Allowance for funds used during construction (6.0) (9.3) (7.2) Deferred income taxes 42.0 38.9 67.9 Enhanced retirement and severance 37.8 - - Changes in assets and liabilities -- Accounts and notes receivable 38.7 (40.2) (21.3) Accrued unbilled revenue (10.2) (29.9) 42.9 Materials and supplies 22.8 (2.3) 6.2 Accounts payable (14.0) (19.7) 13.8 Interest accrued and other, net (10.1) (19.9) (26.6) Net cash provided by operating activities 473.7 280.2 396.6 Cash Flows From Investing Activities Construction expenditures (209.3) (193.7) (277.7) Allowance for funds used during construction 6.0 9.3 7.2 Other investing activities (7.5) (2.4) (2.1) Net cash used in investing activities (210.8) (186.8) (272.6) Cash Flows From Financing Activities Dividends on common stock (100.5) (86.6) (88.0) Redemptions -- Short-term debt (213.6) (258.2) (254.5) Long-term debt (5.2) (230.0) (832.0) Preferred stock (134.5) (91.0) (94.4) Common Stock (67.3) - - Issuances -- Short-term debt 209.5 404.7 279.7 Long-term debt - 119.8 866.8 Preferred stock - 97.0 43.5 Premium paid on redemption of long-term debt - (2.8) (25.8) Other financing activities 5.1 (7.7) (18.7) Net cash used in financing activities (306.5) (54.8) (123.4) Net change in cash and cash equivalents (43.6) 38.6 0.6 Cash and cash equivalents at beginning of year 47.9 9.3 8.7 Cash and cash equivalents at end of year $ 4.3 $ 47.9 $ 9.3 Illinois Power Company consolidated statements of retained earnings (deficit) (Millions of dollars) For the Years Ended December 31, 1995 1994 1993 Balance (deficit) at beginning of year $ 51.1 $ (71.0)$ 41.0 Net income (loss) before dividends 182.7 180.3 (56.1) 233.8 109.3 (15.1) Less -- Dividends -- Preferred stock 23.6 11.1 20.1 Common stock 77.1 53.5 35.8 Plus -- Carrying amount over (under) consideration paid for redeemed preferred stock (3.5) 6.4 - (104.2) (58.2) (55.9) Balance (deficit) at end of year $ 129.6 $ 51.1 $ (71.0) 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 holidng company. Illinova was officially formed on May 27, 1994, with the filing of documents with the Illinois Secretary of State. Illinova became the parent of IP through a merger pursuant to a share-for-share conversion of IP common stock into Illinova common stock. On June 8, 1994, Illinova Generating Company (formerly IP Group, Inc.), originally a subsidiary of IP, was transferred to Illinova, establishing Illinova Generating Company as a wholly owned subsidiary of Illinova. The transfer of Illinova Generating Company and other equity to Illinova is reflected in the 1994 and 1993 Consolidated Statements of Retained Earnings (Deficit) as a component of common stock dividends. IP is the primary business and susidiary 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" of the "Notes to Consolidated Financial Statements" for additional information. All siginificant 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, 1995 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 requires that the effects of the ratemaking process be recorded. Such effects primarily concern the time at which various items enter into the determination of net income in order to follow the principles of matching cost 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 non-cash charge to income would be recorded in order to remove the effects of the actions of regulators from the consolidated financial position and results of operations. Illinova'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 Significant regulatory assets include deferred Clinton Power Station (Clinton) post-construction costs, unamortized losses on reacquired debt, recoverable income taxes 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 1995, 1994 and 1993, the pre-tax rate used for all construction projects was 6.5%, 7.0% 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 1995, 1994 and 1993, provisions for depreciation were 2.8% of the average depreciable cost for Clinton. Provisions for depreciation for all other electric plant were 2.6% in 1995 and 2.5% in 1994 and 1993. Provisions for depreciation of gas utility plant, as a percentage of the average depreciable cost, were 3.4% in 1995 and 1994 and 4% in 1993. Amortization of Nuclear Fuel IP leases nuclear fuel from Illinois Power Fuel Company (Fuel Company) under a capital lease. Amortization of nuclear fuel (including related financing costs) is determined on a unit of production basis. See "Note 3--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" 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 began. Although cash is not currently realized from these deferrals, it is realized under the ratemaking process over the service life of Clinton through increased revenues, resulting from a higher rate base and higher amortization expense. Unamortized Debt Discount, Premium and Expense Discount, premium and expense associated with long-term debt are amortized over the lives of the related issues. Costs related to refunded debt are amortized over the lives of the related new debt issues or the remaining life of the old debt if no new debt is issued. Revenue and Energy Cost - IP records revenue for services provided but not yet billed to more closely match revenues with expenses. Unbilled revenues represent the estimated amount customers will be billed for service delivered from the time meters were last read to the end of the accounting period. Operating revenues include related taxes that have been billed to customers in the years 1995, 1994 and 1993 in the amount of $66 million, $66 million and $65 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 gas adjustment clauses. Accordingly, allowable energy costs that are to be passed on to customers in a subsequent accounting period are deferred. The recovery of costs deferred under these clauses is subject to review and approval by the ICC. On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. The increase to customers is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Income Taxes Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), deferred tax assets and liabilities are recognized for the tax consequences of transactions that have been treated differently for financial reporting and tax return purposes, measured on the basis of the statutory tax rates. In accordance with FAS 71, a regulatory asset (recoverable income taxes) has been recorded representing the probable recovery from customers of additional deferred income taxes established under 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. Illinova and its subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss. See "Note 6--Income Taxes" of the "Notes to Consolidated Financial Statements" for additional discussion. Preferred Dividend Requirements of Subsidiary Preferred dividend requirements of IP reflected in the Consolidated Statements of Income are recorded on the accrual basis 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 flows increased by $19 million, $28 million and $27 million during 1995, 1994 and 1993, respectively. Income taxes and interest paid are as follows: Years ended December 31, (Millions of dollars) 1995 1994 1993 Income taxes $ 65.7 $ 72.1 $ 26.0 Interest $ 152.4 $ 165.9 $ 166.4 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 financial position or results of operations. See "Note 6--Income Taxes" of the "Notes to Consolidated Financial Statements" for additional information. Interest Rate Cap - Premiums paid for the purchased interest rate cap agreements are being amortized to interest expense over the terms of the caps. Unamortized premiums are included in Current Assets, "Prepayments and Other," in the Consolidated Balance Sheets. Amounts to be received under the cap agreements are recognized as a reduction in interest expense. Transaction with Illinova - In addition to transfers of capital reflected in the Consolidated Statements of Retained Earnings (Deficit), IP provided approximately $34 million and $20 million in funds to Illinova for operations and investments during 1995 and 1994, respectively. Illinova is paying IP interest on these funds at a rate equal to that which Illinova would have paid had it used a currently outstanding line of credit. In addition, Illinova and IP have recorded an intercompany payable and receivable, respectively, for approximately $18.4 million and $23.5 in 1995 and 1994, respectively, in order to recognize the effect on the Employees' Stock Onwership Plan of the conversion of IP common stock to Illinova common stock concurrent with the formation of Illinova. This was a noncash transaction. See "Note 10 -- Common Stock and Retained Earnings" of the "Notes to Consolidated Financial Statements" for additional information. Note 2--Clinton Power Station IP and Soyland Power Cooperative, Inc. (Soyland) share ownership of Clinton, with IP owning 86.8% and Soyland owning 13.2%. IP'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 51% of IP's total assets at December 31, 1995. IP's 86.8% share of Clinton-related costs represented 34% of its total 1995 other operating, maintenance and depreciation expenses. Clinton's equivalent availability was 76%, 92% and 73% for 1995, 1994 and 1993, respectively. Clinton's equivalent availability was higher in 1994 due to no refueling outage. Ownership of an operating nuclear generating unit exposes IP to significant risks, including increased and changing regulatory, safety and environmental requirements and the uncertain future cost of closing and dismantling the unit. IP expects to be allowed to continue to operate Clinton; however, if any unforeseen or unexpected developments prevent IP from doing so, IP would be materially adversely affected. See "Note 3--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" 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 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 on 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. Note 3--Commitments and Contingencies Commitments Estimated construction requirements in 1996 are $190 million, which includes $113 million for electric facilities, $28 million for gas facilities, $25 million for nuclear fuel and $24 million for general plant. The estimated five-year construction program for 1996 through 2000 is $816 million. These expenditures do not include capital expenditures for full compliance with the Clean Air Act, as discussed below. In addition, IP has substantial commitments for the purchase of coal under long-term contracts. Estimated coal contract commitments for 1996 through 2000 are $664 million (excluding price escalation provisions). Total coal purchases for 1995, 1994 and 1993 were $168 million, $191 million and $184 million, respectively. IP has contracts with various natural gas suppliers and interstate pipelines to provide natural gas supply, transportation and leased storage. Estimated committed natural gas, transportation and leased storage costs (including pipeline transition costs) for 1996 through 2000 total $39 million. Total natural gas purchased for 1995, 1994 and 1993 was $150 million, $168 million and $188 million, respectively. IP's share of estimated nuclear fuel commitments for Clinton is approximately $26 million for uranium concentrates through 1998, $7 million for conversion through 2002, $47 million for enrichment through 1999 and $213 million for fabrication through 2017. IP is committed to purchase approximately $74 million of emission allowances through 1999. IP anticipates that all of these costs will be recoverable under IP's electric fuel and purchased gas adjustment clauses, 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 on 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 station site in accordance with the 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 will cover 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 would materially exceed the limits of current or available insurance coverage. IP also covers 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 coverage, involving Clinton or other stations insured by the industry-owned mutual insurance company would result in retrospective premium assessments of up to approximately $13 million. IP would allocate this assessment between IP and Soyland based on their respective ownership interest in Clinton. All United States nuclear power station operators are subject to the Price- Anderson Act. This act currently limits public liability for a nuclear incident to $8.9 billion. Private insurance covers the first $200 million. Retrospective premium assessments against each licensed nuclear reactor in the United States provide excess coverage. Currently, the liability to these reactor operators/owners for such an assessment would be up to $79.3 million per incident, not including premium taxes which may be applicable, payable in annual installments of not more than $10 million. A Master Worker Policy covers worker tort claims alleging bodily injury, sickness or disease as a result of initial radiation exposure occurring on or after January 1, 1988. The policy has an aggregate limit of $200 million that applies to the commercial nuclear industry as a whole. If the policy pays, then a provision for automatic reinstatement of policy limits up to an additional $200 million takes effect. 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. IP and Soyland would allocate, based on their respective ownership in Clinton, any retrospective premium assessments pertaining to the Master Worker Policy or the Price- Anderson Act. 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 may have a substantial adverse effect on IP's 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 electric rates based on an ICC-approved formula that allows IP to adjust rates annually for changes in decommissioning cost estimates. Based on NRC regulations that establish a minimum funding level, IP estimates its 86.8% share of Clinton decommissioning costs to be approximately $376 million (1995 dollars) or $692 million (2026 dollars, assuming a 2% inflation factor). The NRC bases the minimum only on the cost of removing radioactive plant structures. IP is concluding a site-specific study to estimate the costs of dismantlement, removal and disposal of Clinton. This study is expected to result in projected decommissioning costs higher than the NRC- specified funding level. External decommissioning trusts, as prescribed under Illinois law and authorized by the ICC, accumulate funds based on the expected service life of the plant for the future decommissioning of Clinton. For the years 1995, 1994 and 1993, IP contributed $5.0 million, $5.5 million and $3.9 million, respectively, to its external nuclear decommissioning trust funds. The balances in these nuclear decommissioning funds at December 31, 1995, and 1994, were $32.7 million and $22.4 million, respectively. IP recognizes earnings and expenses from the trust fund as changes in its assets and liabilities relating to these funds. In November 1994, the ICC granted IP permission to invest up to 60% of the nuclear decommissioning trust assets in selected equity securities. The FASB is reviewing the accounting for removal costs of nuclear generating stations, including decommissioning. Changing current electric utility industry accounting practices for such decommissioning may result in: 1) increasing annual provisions for decommissioning through increases in depreciation; 2) recording the estimated total cost for decommissioning as a liability with a gross-up to plant balances; and 3) reporting trust fund income from the external decommissioning trusts as investment income rather than as a reduction to decommissioning expense. Changes to current electric utility industry accounting practices for decommissioning will likely be effective in 1997. IP believes that, based on current information, these changes will not have an adverse effect on results of operations due to existing and anticipated future ability to recover decommissioning costs through rates. In 1992, the ICC entered an order in which it expressed concern that IP take all reasonable action to ensure that Soyland contributes its ownership share of the current or any revised estimate of decommissioning costs. The order also states that if IP becomes liable for decommissioning expenses attributable to Soyland, the ICC will then decide whether that expense should be the responsibility of IP stockholders or its customers. If Soyland were to fail to meet these or other obligations related to its ownership of Clinton, then IP could become liable for such payments. Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel. The DOE currently charges one mill ($.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. At December 31, 1995, approximately $24 million in costs for the suspended Baldwin scrubber program continue to be recorded by Illinois Power as plant held for future use. After suspending scrubber construction, IP reconsidered its alternatives for complying with Phase I of the 1990 Clean Air Act Amendments. To comply with the sulfur dioxide (SO2) emission reduction requirements of Phase I (1995-1999) of the 1990 Clean Air Act Amendments, IP continues to purchase emission allowances. An emission allowance is the authorization by the United States Environmental Protection Agency (U.S.EPA) to emit one ton of SO2. The ICC approved IP's Phase I Clean Air Act compliance plan in September 1993, and IP is continuing to implement that plan. IP has acquired sufficient emission allowances to meet most of its anticipated needs for 1996 and will purchase the remainder on the spot market. In 1993, the Illinois General Assembly passed and the governor signed legislation authoirzing, but not requiring, the ICC to permit expenditures from emission allowance purchases and sales to be included in rates charged to customers as a cost of fuel. In December 1994, the ICC approved the recovery of emission allownace costs through the Uniform Fuel Adjustment Clause. IP's compliance plan will defer, until at 2000, any need for scrubbers or other capital projects associated with SO2 emission reductions. Phase II (2000 and beyond) SO2 emission requirements of the Clean Air Act will require additional actions and may result in capital expenditures. To comply with the Phase I nitrogen oxide (NOx) emission reduction requirements of the acid rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin Unit 3 and Vermilion Unit 2. On November 29, 1994, the U.S. Appellate Court remanded the Phase I NOx rules back to the U.S.EPA. On April 13, 1995, the U.S.EPA reinstated, with some modifications, the Phase I NOx rules effective January 1, 1996. IP was positioned to comply with these revised rules without additional modifications to any of its generating plants. The U.S. EPA will issue Phase II NOx emission limits by January 1, 1997. IP anticipates additional capital expenditures prior to 2000 to comply with the Phase II NOx requirements, as well as potential requirements to further reduce NOx emissions from IP plants to help achieve compliance with air quality standards in the St. Louis and 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. IP is monitoring the developments of several emerging clean air compliance issues which could have a significant impact on its fossil-fueled generating plants. These issues include global climate change (theorized to result from emissions of "greenhouse gasses" such as carbon dioxide), controls on "hazardous air pollutants," and standards for fine particulates. Compliance with potential new regulations in these areas may require significant expenditures prior to 2000. Manufactured-Gas Plant (mgp) In September 1995, IP increased its liability for MGP site remediation by $41 million to a total of $76 million. This amount represents IP's current best estimate of its cost to remediate MGP sites for which it is responsible. This estimate reflects the results of a site-by-site survey utilizing current site information and remediation techniques. The estimate, determined by IP with assistance from several external environmental consultants, is in accordance with Electric Power Research Institute guidelines. Because of the unknown and unique characteristics of each site and uncertain regulatory requirements, IP is not able to determine its ultimate liability for remediation of the 24 sites. The previously recorded liability of $35 million was an estimate of the minimum cost based on ongoing remediation efforts at eight sites and ongoing investigations of the remaining 16 sites. IP is currently recovering MGP site cleanup costs from its customers through tariff riders approved by the ICC in April 1993. On April 20, 1995, the Illinois Supreme Court issued a ruling that upheld the ICC authorization of cost recovery and reversed the ICC's disallowance of carrying costs, mandating the ICC to reissue an order providing for recovery of prudently incurred MGP site cleanup costs, including carrying costs. On November 20, 1995, the ICC issued an order on remand allowing full recovery of all such MGP site cleanup costs. Accordingly IP has recorded a regulatory asset in the amount of $76 million, reflecting management's expectation that remediation costs will be recovered from customers. IP has begun settlement discussions with its insurance carriers regarding the recovery of estimated MGP site remediation costs. A settlement has been reached with one carrier and an agreement in principle has been reached with two other carriers. On October 17, 1995, IP filed a lawsuit in the Circuit Court of Macon County seeking a declaratory judgment and damages regarding insurance coverage for four MGP sites. Any insurance recoveries received will be credited to IP's customers through the tariff rider mechanisms. Electric and Magnetic Fields (EMF) The possibility that exposure to EMF emanating from power lines, household appliances and other electric sources may result in adverse health effects continues to be the subject of litigation and governmental, medical and media attention. Litigants have also claimed that EMF concerns justify recovery from utilities for the loss in value of real property exposed to power lines, substations and other such sources of EMF. 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. Other Legal Proceedings - IP is involved in legal or administrative proceedings before various courts and agencies with respect to matters occurring in the ordinary course of business, some of which involve substantial amounts of money. Management believes that the final disposition of these proceedings will not have a material adverse effect on the consolidated financial position or the results of operations. Accounts Receivable - IP sells electric energy and natural gas to residential, commercial and industrial customers throughout Illinois. At December 31, 1995, 67%, 17% and 16% of Accounts receivable--Service were from residential, commercial and industrial customers, respectively. IP maintains reserves for potential credit losses and such losses have been within management's expectations. Note 4--Lines of Credit and Short-Term Loans IP has total lines of credit represented by bank commitments amounting to $354 million, all of which were unused at December 31, 1995. These lines of credit are renewable in May 1996, August 1996 and May 2000. 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 .175% per annum on $350 million of the total lines of credit, regardless of usage. The interest rate on borrowings under these agreements is, at IP's option, based upon the lending banks' reference rate, their Certificate of Deposit rate, the borrowing rate of key banks in the London interbank market or competitive bid. IP has letters of credit totaling $204 million and pays fees up to .45% per annum on the unused amount of credit. In addition, IP Fuel Company has a short-term financing option to obtain funds not to exceed $30 million. IP Fuel Company pays no fees for this uncommitted facility and funding is subject to availability upon request. For the years 1995, 1994 and 1993, 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) 1995 1994 1993 - - ----------------------------------------------------------------- Short-term borrowings at December 31, $ 359.6 $ 238.8 $ 92.3 Weighted average interest rate at December 31, 6.0% 6.2% 3.5 % Maximum amount outstanding at any month end $ 359.6 $ 238.8 $ 123.7 Average daily borrowings outstanding during the year $ 306.5 $ 165.4 $ 85.0 Weighted average interest rate during the year 6.2% 4.6% 3.5 % - - ------------------------------------------------------------------ IP has derivative financial instruments, but does not use them for trading purposes. They are used to manage well defined interest rate risks arising from core activities without the use of leverage. Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate debt. IP has two variable rate interest rate cap agreements covering up to $189 million of commercial paper. These agreements entitle IP to receive from a counterparty on a monthly basis the amount, if any, by which IP's interest payments on a nominal amount of commercial paper exceed the interest rate set by the cap. On December 31, 1995, the cap rates were set at 6.25% and 7.0% while the current market rate available to IP was 5.9%. 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 is required to provide Soyland with 12.0% (436 megawatts) of the electrical capacity from its fossil-fueled generating plants until the agreement expires or is terminated. This is in addition to the capacity Soyland receives as an owner of Clinton. IP is compensated with capacity charges and for energy costs and variable operating expenses. IP transmits energy for Soyland through IP's transmission and subtrasmission systems. Under provisions of the PCA, Soyland has the option of participating financial 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" of the "Notes to Consolidated Financial Statements" for discussion of the Clean Air Act. At any time after December 31, 2004, either IP or Soyland may terminate the PCA by giving not less than seven years' prior written notice to the other party. The party to whom termination notice has been given may designate an earlier effective date of termination which shall be not less than 12 months after receiving notice. Note 6--income taxes Deferred tax assets and liabilities were comprised of the following: Balances as of December 31, - - ---------------------------------------------------------------------------- (Millions of dollars) 1995 1994 - - ---------------------------------------------------------------------------- Deferred Tax Assets: - - ---------------------------------------------------------------------------- Current: Misc. book/tax recognition differences $ 26.1 $ 19.7 - - ---------------------------------------------------------------------------- Noncurrent: Depreciation and other property related 45.5 52.6 Alternative minimum tax 184.1 187.0 Tax credit and net operating loss carryforward 32.4 27.6 Unamortized investment tax credit 126.1 122.0 Misc. book/tax recognition differences 59.4 53.2 - - ---------------------------------------------------------------------------- 447.5 442.4 - - ---------------------------------------------------------------------------- Total deferred tax assets $ 473.6 $ 462.1 ============================================================================ Deferred Tax Liabilities: - - ---------------------------------------------------------------------------- Current: Misc. book/tax recognition differences $ 6.5 $ 8.2 - - ---------------------------------------------------------------------------- Noncurrent: Depreciation and other property related 1,303.5 1,252.0 Deferred Clinton costs 60.1 62.1 Misc. book/tax recognition differences 103.0 109.7 - - ---------------------------------------------------------------------------- 1,466.6 1,423.8 - - ---------------------------------------------------------------------------- Total deferred tax liabilities $ 1,473.1 $ 1,432.0 ============================================================================ Income taxes included in the Consolidated Statements of Income consist of the following components: Years Ended December 31, - - ---------------------------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - ---------------------------------------------------------------------------- Current taxes-- Included in operating expenses and taxes $ 98.6 $ 58.3 $ 25.3 Included in other income and deductions (20.3) -- -- - - ---------------------------------------------------------------------------- Total current taxes 78.3 58.3 25.3 - - ---------------------------------------------------------------------------- Deferred taxes-- Included in operating expenses and taxes Property-related differences 62.2 60.0 72.3 Alternative minimum tax 2.9 (50.4) (31.8) Gain/loss on reacquired debt (1.9) -- 16.5 Net operating loss carryforward (.2) 62.0 22.8 Enhanced retirement and severance (15.0) -- -- Misc. book/tax recognition differences (13.9) (7.8) 4.1 Internal Revenue Service interest on tax issues -- 7.5 (1.9) Included in other income and deductions Property-related differences 9.7 10.0 6.0 Net operating loss carryforward -- (17.4) (15.4) Misc. book/tax recognition differences 2.2 1.9 (2.3) Disallowed Clinton costs -- -- (62.2) - - ----------------------------------------------------------------------------- Total deferred taxes 46.0 65.8 8.1 - - ----------------------------------------------------------------------------- Deferred investment tax credit--net Included in operating expense and taxes (6.9) (11.3) (.8) Included in other income and deductions -- (.3) (.7) Disallowed investment tax credit --- -- (8.4) - - ---------------------------------------------------------------------------- Total investment tax credit (6.9) (11.6) (9.9) - - ---------------------------------------------------------------------------- Total income taxes $ 117.4 $ 112.5 $ 23.5 ============================================================================= The reconciliations of income tax expense to amounts computed by applying the statutory tax rate to reported pretax results for the period are set below: Years Ended December 31, - - ---------------------------------------------------------------------------- (Millions of dollars) 1995 1994 1993 - - ---------------------------------------------------------------------------- Income tax expense at the federal statutory tax rate $ 105.0 $ 102.5 $(11.4) Increases/(decreases) in taxes resulting from-- State taxes, net of federal effect 14.0 13.8 5.8 Investment tax credit amortization (6.9) (7.8) (8.8) Depreciation not normalized 7.4 4.3 7.1 Disallowed Clinton costs (including ITC) -- -- 27.4 Other--net (2.1) (.3) 3.4 - - ----------------------------------------------------------------------------- Total income taxes $ 117.4 $112.5 $23.5 ============================================================================= Combined federal and state effective income tax rates were 39.1%, 38.4% and (72.4%) for the years 1995, 1994 and 1993, 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 is 39.5%. IP is subject to the provisions of the Alternative Minimum Tax System (AMT). As a result, IP has an AMT credit carryforward at December 31, 1995, of approximately $184.1 million. This credit can be carried forward indefinitely to offset future regular income tax liabilities in excess of the tentative minimum tax. In 1994, the Internal Revenue Service (IRS) completed its audit of IP's federal income tax returns for the years 1989 through 1990. IP and the IRS reached an agreement on all audit issues. The results of the agreement did not have a material effect on Illinova's or IP's consolidated financial positions 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 1995, 1994 and 1993 were $41 million, $52 million and $45 million, respectively, including financing costs of $7 million, $7 million and $6 million, respectively. IP is obligated to make subordinated loans to the Fuel Company at any time the obligations of the Fuel Company that are due and payable exceed the funds available to the Fuel Company. IP has an obligation for nuclear fuel disposal costs of leased nuclear fuel. See "Note 3--Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of decommissioning and nuclear fuel disposal costs. Nuclear fuel lease payments are included with Fuel for electric plants on IP's Consolidated Statements of Income. At December 31, 1995 and 1994, current obligations under capital lease for nuclear fuel were $33.3 million. Over the next five years, estimated payments under capital leases are as follows: - - --------------------------------------------------------------------------- (Millions of dollars) - - --------------------------------------------------------------------------- 1996 $ 37.9 1997 31.1 1998 17.3 1999 12.4 2000 4.5 Thereafter 1.9 - - --------------------------------------------------------------------------- 105.1 Less: Interest 10.0 - - --------------------------------------------------------------------------- Total $ 95.1 =========================================================================== Note 8--Long-Term Debt (Millions of dollars) _____________________________________________________________________________ December 31, 1995 1994 First mortgage bonds-- 5.85% series due 1996 $ 40.0 $ 40.0 61/2 % series due 1999 72.0 72.0 6.60% series due 2004 (Pollution Control Series A) 6.8 7.0 7.95% series due 2004 72.0 72.0 6% series due 2007 (Pollution Control Series B) 18.7 18.7 75/8% series due 2016 (Pollution Control Series F, G and H) 150.0 150.0 8.30% series due 2017 (Pollution Control Series I) 33.8 33.8 73/8% series due 2021 (Pollution Control Series J) 84.7 84.7 83/4% series due 2021 120.0 125.0 5.70% series due 2024 (Pollution Control Series K) 35.6 35.6 7.40% series due 2024 (Pollution Control Series L) 84.1 84.1 _____________________________________________________________________________ Total first mortgage bonds 717.7 722.9 _____________________________________________________________________________ New mortgage bonds-- 61/8% series due 2000 40.0 40.0 5.625% series due 2000 110.0 110.0 61/2% series due 2003 100.0 100.0 63/4% series due 2005 70.0 70.0 8% series due 2023 235.0 235.0 71/2% 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 1,584.5 1,589.7 _____________________________________________________________________________ Short-term debt to be refinanced as long-term debt - 125.0 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 175.0 300.0 _____________________________________________________________________________ 1,759.5 1,889.7 Unamortized discount on debt (20.3) (21.6) _____________________________________________________________________________ Total long-term debt excluding capital lease obligations 1,739.2 1,868.1 Obligation under capital leases 95.1 111.5 _____________________________________________________________________________ 1,834.3 1,979.6 Long-term debt and lease obligations maturing within one year (95.0) (33.5) _____________________________________________________________________________ Total long-term debt $ 1,739.3 $ 1,946.1 _____________________________________________________________________________ In August 1995, $5.0 million of 8 3/4% First Mortgage Bonds due 2021 were purchased on the open market. Short-term debt to be refinanced as long-term debt consisted of commercial paper that would be renewed regularly on a long-term basis. In September 1995, IP reclassified the $125 million to short-term debt in accordance with Statement of Financial Accounting Standards No. 6, "Classification of Short- Term Obligations Expected to be Refinanced." In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At December 31, 1995, 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 5.3% to 5.5% at December 31, 1995. For the years 1996, 1997, 1998, 1999 and 2000, IP has long-term debt maturities and cash sinking fund requirements in the aggregate of (in millions) $61.7, $10.8, $68.8, $72.8 and $150.8, respectively. These amounts exclude capital lease requirements. See "Note 7--Capital Leases" of the "Notes to Consolidated Financial Statements." Certain supplemental indentures to the First Mortgage require that IP make annual deposits, as a sinking and property fund, in amounts not to exceed $1.8 million in each of the years 1997 through 2000. These amounts are subject to reduction and historically have been met by pledging property additions, as permitted by the First Mortgage. At December 31, 1995, the aggregate total of unamortized debt expense and unamortized loss on reacquired debt was approximately $105.8 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, 1995, was approximately $1.4 billion. Note 9--Preferred Stock (Millions of dollars) December 31, 1995 1994 Serial Preferred Stock cumulative, $50 par value-- Authorized 5,000,000 shares; 1,356,800 and 3,325,815 shares outstanding, respectively series shares redemption prices 4.08% 300,000 $ 51.50 $ 15.0 $ 15.0 4.26% 150,000 51.50 7.5 7.5 4.70% 200,000 51.50 10.0 10.0 4.42% 150,000 51.50 7.5 7.5 4.20% 180,000 52.00 9.0 9.0 8.24% - - - 30.0 7.56% - - - 33.8 8.00% - - - 34.7 7.75% 376,800 50.00 after July 1, 2003 18.8 18.8 Net premium on preferred stock .2 .8 ______________________________________________________________________________ Total Preferred Stock $50 par value $ 68.0 $ 167.1 ______________________________________________________________________________ Serial Preferred Stock, cumulative, without par value-- Authorized 5,000,000 shares; 1,152,550 and 1,512,550 shares outstanding, respectively (including 0 and 360,000 shares, respectively, of redeemable preferred stock) series shares redemption prices A 742,300 $50.00 $ 37.1 $ 37.1 B 410,250 50.00 20.5 20.5 ______________________________________________________________________________ Total Preferred Stock without par value $ 57.6 $ 57.6 ______________________________________________________________________________ Preference Stock, cumulative, without par value-- Authorized 5,000,000 shares; none outstanding - - ______________________________________________________________________________ Total Serial Preferred Stock, Preference Stock and Preferred Securities $ 125.6 $ 224.7 ______________________________________________________________________________ Company Obligated Mandatorily Redeemable preferred Securities of Illinois Power Capital, L.P. Monthly Income Preferred Securities, cumulative, $25 liquidation preference-- 3,880,000 shares authorized and outstanding $ 97.0 $ 97.0 Mandatorily Redeemable Serial Preferred Stock, cumulative -- series shares par value 8.00% - - - 36.0 ______________________________________________________________________________ Total Mandatorily Redeemable Preferred Stock $ 97.0 $ 133.0 ______________________________________________________________________________ Serial Preferred Stock ($50 par value) is redeemable at the option of IP in whole or in part at any time with not less than 30 days and not more than 60 days notice by publication. Quarterly dividend rates for Serial Preferred Stock, Series A, are determined based on market interest rates of certain U.S. Treasury securities. Dividends paid in 1995 and 1994 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 1995 and 1994 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. In October 1994, Illinois Power Capital issued $97 million of tax-advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after-tax rate) with a liquidation preference of $25 per share. The proceeds were loaned to IP and were used to redeem $97 million (principal value) of higher-cost outstanding preferred stock of IP. The 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 1995 and 1994, IP redeemed $12.0 million of the 8.00% mandatorily redeemable serial preferred stock. In May 1995, IP redeemed the remaining $24.0 million of the 8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed $.2 million of the 7.56% serial preferred stock and $3.0 million of the 8.24% serial preferred stock. In December 1995, IP redeemed $34.7 million of its 8.00% serial preferred stock, $33.6 million of its 7.56% serial preferred stock and $27.0 million of its 8.24% serial preferred stock. The carrying amount under consideration paid for redeemed preferred stock amounted to $3.5 million, which was recorded in equity and included in net income applicable to common stock. Note 10--Common Stock and Retained Earnings On May 31, 1994, common shares of IP began trading as common shares of Illinova. Illinova is the sole shareholder of IP common stock. In 1995, IP repurchased 2,696,086 shares of its common stock from Illinova. Under Illinois law, such shares may be held as treasury stock and treated as authorized but unissued, or may be canceled by resolution of the Board of Directors. IP holds the common stock as treasury stock and deducts it from common equity at the cost of the shares. IP 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, 1995. IP employees participate in an Employees' Stock Ownership Plan (ESOP) that includes an incentive compensation feature which is tied to achievement of specified corporate performance goals. This arrangement began in 1991 when IP loaned $35 million to the Trustee of the Plans, which used the loan proceeds to purchase 2,031,445 shares of IP's common stock on the open market. The loan and common shares were converted to Illinova instruments with the formation of Illinova in May 1994. These shares are held in a suspense account under the Plans and are being distributed to the accounts of participating employees as the loan is repaid by the Trustee with funds contributed by IP, together with dividends on the shares acquired with the loan proceeds. IP financed the loan with funds borrowed under its bank credit agreements. For the year ended December 31, 1995, 75,729 shares were allocated to salaried employees and 70,830 shares to employees covered under the Collective Bargaining Agreement through the matching contribution feature of the ESOP arrangement. Under the incentive compensation feature, 109,662 shares were allocated to employees for the year ended December 31, 1995. During 1995, IP contributed $6.0 million to the ESOP and using the shares allocated method, recognized $4.4 million of expense. Interest paid on the ESOP debt was approximately $2.1 million in 1995 and dividends used for debt service were approximately $2.0 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 $ 233/8 1996 1993 73,500 $ 241/4 1997 1994 82,650 $ 207/8 1997 1995 69,300 $ 247/8 1998 _____________________________________________________________________________ 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, 1995. 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 1995, 1994 and 1993, include the following components: Years Ended December 31, ______________________________________________________________________________ (Millions of dollars) 1995 1994 1993 ______________________________________________________________________________ Service cost on benefits earned during the year $ 10.4 $ 11.9 $ 11.3 Interest cost on projected benefit obligation 23.6 21.8 20.8 Return on plan assets (58.3) (7.9) (28.1) Net amortization and deferral 29.6 (19.2) 1.9 Effect of enhanced retirement program 15.7 - - _____________________________________________________________________________ Net periodic pension cost $ 21.0 $ 6.6 $ 5.9 _____________________________________________________________________________ The estimated funded status of the plans at December 31, 1995 and 1994, using discount rates of 7.75% and 8.75%, respectively, and future compensation increases of 4.5% was as follows: Balances as of December 31, _____________________________________________________________________________ (Millions of dollars) 1995 1994 _____________________________________________________________________________ Actuarial present value of: Vested benefit obligation $ (276.8) $ (209.6) _____________________________________________________________________________ Accumulated benefit obligation $ (297.5) $ (220.8) _____________________________________________________________________________ Projected benefit obligation $ (343.6) $ (267.3) Plan assets at fair value 331.5 284.0 _____________________________________________________________________________ Funded status (12.1) 16.7 Unrecognized net (gain)/loss (5.1) (38.8) Unrecognized net asset at transition (34.6) (15.0) Unrecognized prior service cost 21.2 24.5 _____________________________________________________________________________ Accrued pension cost included in accounts payable $ (30.6) $ (12.6) _____________________________________________________________________________ The plan's 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, 1995 and 1994, were $258 million and $230 million, respectively, including vested benefits of $239 million and $213 million, respectively. The pension cost for 1995, 1994 and 1993 was calculated using: a discount rate of 8.75%, 7.75% and 8.25%, respectively; future compensation increases of 4.5% for 1995, 4.5% for 1994 and 5.5% for 1993; and a return on assets of 9% for 1995, 1994 and 1993. The unrecognized net asset at transition and unrecognized prior service cost are amortized on a straight-line basis over the average remaining service period of employees who are expected to receive benefits under the plan. IP did not make any cash contributions during 1993 for the pension plans due to its overfunded status. IP made cash contributions of $2 million in 1995 and $10 million in 1994. 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 1995 and 1994 included the following components: Years Ended December 31, - - ----------------------------------------------------------------------------- (Millions of dollars) 1995 1994 - - ----------------------------------------------------------------------------- Service cost on benefits earned during the year $ 2.1 $ 3.3 Interest cost on projected benefit obligation 5.5 6.2 Return on plan assets (4.7) .2 Amortization of unrecognized transition obligation 6.3 2.1 Effect of enhanced retirement program 9.5 -- - - ----------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 18.7 $ 11.8 - - ----------------------------------------------------------------------------- The net periodic postretirement benefit cost in the preceeding table includes amortization of the previously unrecognized accumulated postretirement benefit obligation, which was $52.3 million and $55.2 million as of January 1, 1995 and 1994, respectively, over 20 years on a straight-line basis. IP has established two separate trusts for those retirees who were subject to a collectively bargained agreement and all other retirees to fund retiree health care and life insurance benefits. IP's funding policy is to contribute annually an amount at least equal to the revenues collected for the amount of postretirement benefit costs allowed in rates. The plan assets consist of common stocks and fixed income securities at December 31, 1995 and 1994. The estimated funded status of the plans at December 31, Balances as of December 31, - - ------------------------------------------------------------------------------ (Millions of dollars) 1995 1994 - - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation Retirees $ (54.5) $ (26.7) Other fully eligible participants (3.0) (11.6) Other active plan participants (27.5) (27.3) - - ------------------------------------------------------------------------------ Total benefit obligation (85.0) (65.6) Plan assets at fair value 25.6 15.2 - - ------------------------------------------------------------------------------ Funded status (59.4) (50.4) Unrecognized transition obligation 44.2 52.3 Unrecognized net (gain)/loss -- (7.8) - - ------------------------------------------------------------------------------ Accrued postretirement benefit cost included in accounts payable $ ( 15.2) $ ( 5.9) - - ------------------------------------------------------------------------------ The pre-65 health-care-cost trend rate decreases from 7.6% to 5.5% over nine years and the post-65 health-care-cost trend rate is level at 1.5%. A 1 percent increase in each future year's assumed health-care-cost trend rates increases the service and interest cost from $7.6 million to $8.5 million and the accumulated postretirement benefit obligation from $85.0 million to $93.0 million. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement programs. During the fourth quarter of 1995, enhanced retirement and severance reduced the number of employees by 492 and 235, respectively. At January 1, 1996, Illinova employed 3,596 people, as compared to 4,350 at December 31, 1994. The enhanced retirement and severance programs generated pre-tax charges of approximately $26 and $12 million, respectively, against fourth quarter 1995 earnings and will generate savings of approximately $36 million annually, starting in 1996. Note 12--Segments of Business (Millions of dollars) - - ---------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 Total Total Total Electric Gas Corporation Electric Gas Corporation Electric Gas Corporation - - ---------------------------------------------------------------------------------------------------------------------- Operation information -- Operating revenues $1,368.9 $272.5 $1,641.4 $1,287.5 $302.0 $1,589.5 $1,266.4 $314.8 $1,581.2 Operating expenses, excluding provision for income taxes and deferred Clinton costs 942.7 245.0 1,187.7 872.6 274.7 1,147.3 873.9 286.2 1,160.1 Deferred Clinton costs 3.5 - 3.5 3.5 - 3.5 9.3 - 9.3 - - ----------------------------------------------------------------------------------------------------------------------- Pre-tax operating income 422.7 27.5 450.2 411.4 27.3 438.7 383.2 28.6 411.8 Allowance for funds used during construction (AFUDC) 5.5 .5 6.0 8.9 .4 9.3 6.2 1.0 7.2 Disallowed Clinton costs (net of taxes) - - - - - - (200.4) - (200.4) - - ------------------------------------------------------------------------------------------------------------------------ Pre-tax operating income, including AFUDC and disallowed Clinton costs $428.2 $28.0 $456.2 $420.3 $27.7 $448.0 $189.0 $29.6 $218.6 - - -------------------------------------------------------------- ----------------- ----------------- Other deductions, net 8.1 11.3 15.6 Interest charges 148.0 143.9 164.9 Provision for income taxes 117.4 112.5 94.2 - - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) 182.7 180.3 (56.1) Carrying value over (under) consideration paid for redeemed preferred stock (3.5) 6.4 - - - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $155.5 $161.8 $(82.2) =========================================================================================================================== Other information -- Depreciation $161.4 $21.6 $183.0 $156.1 $21.1 $177.2 $148.2 $21.0 $169.2 - - --------------------------------------------------------------------------------------------------------------------------- Capital expenditures $185.7 $23.6 $209.3 $173.1 $20.6 $193.7 $221.3 $56.4 $277.7 - - ---------------------------------------------------------------------------------------------------------------------------- Investment information -- Identifiable assets* $4,580.4 $446.3 $5,026.7 $4,589.0 $442.6 $5,031.6 $4,526.8 $406.4 $4,933.2 - - --------------------------------------------------------------- ------------------ ---------------- Nonutility plant and other investments 16.2 15.2 15.2 Assets utilized for overall operations 524.3 549.0 496.7 - - ----------------------------------------------------------------------------------------------------------------------------- Total assets $5,567.2 $5,595.8 $5,445.1 ==============================================================================================================================
*Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs and prepaid and deferred energy costs. Note 13--Fair Value of Financial Instruments 1995 1994 - - ---------------------------------------------------------------------------- (Millions of dollars) Carrying Fair Carrying Fair Value Value Value Value - - ----------------------------------------------------------------------------- Nuclear decommissioning trust funds $ 32.7 $ 32.7 $ 22.4 $ 22.4 Cash and cash equivalents 4.3 4.3 47.9 47.9 Mandatorily redeemable preferred stock 97.0 108.2 133.0 133.0 Long-term debt 1,739.2 1,855.8 1,868.1 1,750.7 Notes payable 359.6 359.6 238.8 238.8 - - ------------------------------------------------------------------------------ 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 except per common share amounts) - - --------------------------------------------------------------------------------------------------- First Quarter Second Quarter Third Quarter Fourth Quarter 1995 1995 1995 1995 - - -------------------------------------------------------------------------------------------------- Operating revenues $425.5 $344.3 $486.1 $385.5 Operating income 78.3 67.1 137.2 41.8 Net income 41.7 34.5 98.2 8.3 Net income (loss) applicable to common stock 35.3 35.1 95.9 (10.8) Cash dividends declared on common stock 18.9 18.9 18.9 21.2 Cash dividends on paid on common stock 18.9 18.6 18.9 18.9 First Quarter Second Quarter Third Quarter Fourth 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
The 1995 fourth quarter earnings include $23 million, net of tax, for the enhanced retirement and severance program and $3.5 million, for the carrying amount under consideration paid for redeemed preferred stock. The 1994 fourth quarter earnings include $6.4 million for the carrying amount over consideration paid for redeemed preferred stock. On May 31, 1994, common shares of Illinois Power Company began trading as common shares of Illinova Corporation. Illinova is the sole shareholder of Illinois Power Company common stock. Illinois Power Company __________________________________________________________________________________________________________ selected consolidated financial data* (Millions of dollars) 1995 1994 1993 1992 1991 1985 __________________________________________________________________________________________________________ Operating revenues Electric $ 1,252.6 $ 1,177.5 $ 1,135.6 $ 1,117.9 $ 1,101.2 $ 766.5 Electric interchange 116.3 110.0 130.8 73.0 85.5 36.0 Gas 272.5 302.0 314.8 288.6 288.2 400.9 ___________________________________________________________________________________________________________ Total operating revenues $ 1,641.4 $ 1,589.5 $ 1,581.2 $ 1,479.5 $ 1,474.9 $ 1,203.4 ___________________________________________________________________________________________________________ Net income (loss) $ 182.7 180.3 (56.1) 122.1 109.3 240.0 Effective income tax rate 39.1% 38.4% (72.4)% 39.4% 40.4% 26.2% ____________________________________________________________________________________________________________ Net income (loss) appli- cable to common stock $ 155.5 161.8 (82.2) 93.2 78.4 207.2 Cash dividends declared on common stock $ 77.9 49.1 30.2 105.9 30.2 158.7 Cash dividends paid on common stock 75.3 60.5 60.5 60.5 15.1 155.2 - - ------------------------------------------------------------------------------------------------------------ Total assets** $ 5,567.2 5,595.8 5,445.1 5,331.7 5,271.8 4,894.6 ______________________________________________________________________________________________________________ Capitalization Common stock equity $ 1,478.1 1,466.0 1,342.8 1,454.0 1,488.8 1,539.3 Preferred stock 125.6 224.7 303.7 303.1 303.1 315.2 Mandatorily redeemable preferred stock 97.0 133.0 48.0 100.0 110.0 86.0 Long-term debt* 1,739.3 1,946.1 1,926.3 2,017.4 2,153.1 1,997.5 ___________________________________________________________________________________________________________ Total capitalization* $ 3,440.0 $ 3,769.8 $ 3,620.8 $ 3,874.5 $ 4,055.0 $ 3,938.0 ___________________________________________________________________________________________________________ Embedded cost of long-term debt 7.9% 7.6% 7.5% 8.3% 8.7% 10.0% ____________________________________________________________________________________________________________ Retained earnings (deficit) $ 129.6 $ 51.1 $ (71.0) $ 41.0 $ 75.8 $ 398.8 _____________________________________________________________________________________________________________ Capital expenditures $ 209.3 $ 193.7 $ 277.7 $ 244.4 $ 141.2 $ 870.7 Cash flows from operations $ 473.7 280.2 396.6 374.5 313.1 242.7 AFUDC as a percent of earnings applicable to common stock 3.9% 5.7% N/A 5.6% 3.7% 78.2% Ratio of earnings to fixed charges 2.77 2.73 .80 2.02 1.85 2.66 ===========================================================================================================
* Restated for the effect of capitalized nuclear fuel lease. Illinois Power Company selected illinois power company statistics 1995 1994 1993 1992 1991 1985 - - ------------------------------------------------------------------------------------------------------------ Electric Sales In KWH (millions) Residential 4,754 4,537 4,546 4,138 4,620 3,927 Commercial 3,804 3,517 3,246 3,055 3,111 2,706 Industrial 8,670 8,685 8,120 8,083 7,642 6,933 Other 367 536 337 466 699 861 ____________________________________________________________________________________________________________ Sales to ultimate consumers 17,595 17,275 16,249 15,742 16,072 14,427 Interchange 4,444 4,837 6,015 2,807 3,360 1,692 Wheeling 642 622 569 402 292 - ____________________________________________________________________________________________________________ Total electric sales 22,681 22,734 22,833 18,951 19,724 16,119 ____________________________________________________________________________________________________________ Electric Revenues (millions) Residential $ 500 $ 471 $ 463 $ 435 $ 447 $ 276 Commercial 321 295 269 263 251 179 Industrial 392 378 360 381 355 277 Other 37 30 40 38 47 34 ____________________________________________________________________________________________________________ Revenues from ultimate consumers 1,250 1,174 1,132 1,117 1,100 766 Interchange 116 110 131 73 86 36 Wheeling 3 3 3 1 1 - _____________________________________________________________________________________________________________ Total electric revenues $ 1,369 $ 1,287 $ 1,266 $1,191 $ 1,187 $ 802 _____________________________________________________________________________________________________________ Gas Sales In Therms (millions) Residential 356 359 371 339 339 365 Commercial 144 144 148 138 133 166 Industrial 88 81 78 136 98 136 ______________________________________________________________________________________________________________ Sales to ultimate consumers 588 584 597 613 570 667 Transportation of customer-owned gas 273 262 229 204 253 - _______________________________________________________________________________________________________________ Total gas sold and transported 861 846 826 817 823 667 Interdepartmental sales 21 5 7 12 8 1 _______________________________________________________________________________________________________________ Total gas delivered 882 851 833 829 831 668 _______________________________________________________________________________________________________________ Gas Revenues (millions) Residential $ 173 $ 192 $ 200 $ 181 $ 84 $ 228 Commercial 60 66 68 61 61 89 Industrial 24 31 34 37 31 68 _______________________________________________________________________________________________________________ Revenues from ultimate consumers 257 289 302 279 276 385 Transportation of customer-owned gas 8 9 8 7 9 - Miscellaneous 7 4 5 3 3 16 ________________________________________________________________________________________________________________ Total gas revenues $ 272 $ 302 $ 315 $ 289 $ 288 $ 401 ________________________________________________________________________________________________________________ System peak demand (native load) in kw (thousands) 3,667 3,395 3,415 3,109 3,272 2,929 Firm peak demand (native load) in kw (thousands) 3,576 3,232 3,254 2,925 3,108 2,771 Net generating capability in kw (thousands) 3,862 4,121 4,045 4,052 3,909 3,770 ________________________________________________________________________________________________________________ Electric customers (end of year) 529,966 553,869 554,270 549,391 565,421 537,047 Gas customers (end of year) 374,299 388,170 394,379 386,261 401,763 382,442 Employees (end of year) 3,559 4,350 4,540 4,624 4,514 4,550 _________________________________________________________________________________________________________________
EX-21 9 ILLINOVA SUBSIDIARIES Exhibit 21(a) Subsidiaries of Illinova Corporation and Illinois Power Company State or Jurisdiction Name of Incorporation - - ---- ------------------- Illinova Corporation Illinois Illinois Power Company Illinois IP Gas Supply Company Illinois Illinois Power Fuel Company (1) Illinois Electric Energy, Inc. (2) Illinois Illinois Power Capital, L.P. (3) Delaware Illinois Power Financing I Delaware Illinova Generating Company Illinois IPG Canfield Co. Illinois IPG Dominguez Co. Illinois IPG Eastern, Inc. Illinois IPG Ferndale, Inc. Illinois IPG Frederickson, Inc. Illinois IGC Solutions, Inc. (formerly IPG LAP Cogen, Inc.) Illinois IPG Panorama Co. Illinois IPG Paris, Inc. Illinois IPG Western, Inc. Illinois IGC Acquisition Co. (formerly IPG Aztec Co.) Illinois IGC Brazos, Inc. Illinois IGC Development Company Illinois IGC International, Inc. Cayman Islands IGC Sub Co., Inc. Illinois ICG White Oak Energy Investors, Inc. Illinois ECI Energy, Ltd. (4) Delaware North American Energy Services Co. (5) Washington IGC ELCO Partnership, LLC (6) Cayman Islands IGC Aguaytia Partners, LLC (7) Cayman Islands IGC Jamaica Partnership, LLC (8) Cayman Islands IGC International II, Inc. Cayman Islands IGC Flores Partnership, LLC (9) Cayman Islands IGC Flores Partnership II, LLC (10) Cayman Islands FIG Leasing International, LLC (11) Cayman Islands Simms International, Ltd. (12) New York Illinova Power Marketing, Inc. Delaware Tenaska Marketing Ventures (13) Nebraska (1) Illinois Power Company owns 50% of the common stock of Illinois Power Fuel Company. (2) Illinois Power Company owns 20% of the common stock of EEI. (3) Illinois Power Company is the general partner in Illinois Power Capital, L.P., with a 3% equity ownership share. Illinois Power Capital is consolidated in the accounts of Illinois Power Company. (4) Illinova Generating Company owns 47.5% of the voting common stock of ECI Energy, Ltd.. (5) Illinova Generating Company owns 50% of the common stock of North American Energy Services Company. (6) Illinova Generating Company owns 1% and IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% of ELCO Partnership LLC. (7) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 1% of IGC Aguaytia Partners, LLC. (8) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 1% of IGC Jamaica Partnership, LLC. (9) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 1% of IGC Flores Partnership, LLC. (10) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 1% of IGC Flores Partnership II, LLC. (11) IGC Flores Partnership, LLC (a subsidiary of IGC International,Inc. and IGC International II, Inc.) owns 50% and IGC Flores Partnership II, LLC (a subsidiary of IGC International Inc. and IGC International II, Inc.) owns 50% of FIG Leasing International, LLC. (12) IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 100% of Simms International, Ltd.. (13) Illinova Power Marketing, Inc. owns 50% of the equity of Tenaska Marketing Ventures. EX-23.1 10 PW CONSENT FOR ILLINOVA March 26,1996 EXHIBIT 23(a) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-22068), the Registration Statement on Form S-8 (No. 33-60278), the Registration Statement on Form S-8 (No. 33-66124), the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-25699), the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-50173), the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-52048), and the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-62506) of our report dated February 2, 1996, appearing on page A-10 of the Annual Report to Shareholders in the appendix to the Illinova Corporation Proxy Statement which is incorporated in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP March 27, 1996 EX-23.2 11 PW CONSENT FOR IP EXHIBIT 23(b) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-50173), the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-52048), and the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-62506) of our report dated February 2, 1996, appearing on page A-10 of the Annual Report to Shareholders in the appendix to the Illinois Power Company Information Statement which is incorporated in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP March 27, 1996 EX-4.1 12 INDENTURE-WILLMINGTON TRUST ILLINOIS POWER COMPANY, Issuer AND WILMINGTON TRUST COMPANY, Trustee INDENTURE Dated as of January 1, 1996 Subordinated Debt Securities TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Definitions of Terms. 1 ARTICLE II ISSUE, DESCRIPTION, TERMS, EXECUTION, REGISTRATION AND EXCHANGE OF DEBT SECURITIES SECTION 2.01. Designation and Terms of Debt Securities. 6 SECTION 2.02. Form of Debt Securities and Trustee's Certificate. 8 SECTION 2.03. Denominations; Provisions for Payment. 9 SECTION 2.04. Execution and Authentication. 10 SECTION 2.05. Registration of Transfer and Exchange. 11 SECTION 2.06. Temporary Securities. 13 SECTION 2.07. Mutilated, Destroyed, Lost or Stolen Debt Securities. 13 SECTION 2.08. Cancellation. 14 SECTION 2.09. Benefits of Indenture. 14 SECTION 2.10. Authenticating Agent. 15 SECTION 2.11. Global Securities. 15 ARTICLE III REDEMPTION OF DEBT SECURITIES AND SINKING FUND PROVISIONS SECTION 3.01. Redemption. 17 SECTION 3.02. Notice of Redemption. 17 SECTION 3.03. Payment Upon Redemption. 18 SECTION 3.04. Sinking Fund. 19 SECTION 3.05. Satisfaction of Sinking Fund Payments with Debt Securities. 19 SECTION 3.06. Redemption of Debt Securities for Sinking Fund. 20 ARTICLE IV COVENANTS OF THE COMPANY SECTION 4.01. Payment of Principal, Premium and Interest. 20 SECTION 4.02. Maintenance of Office or Agency. 20 SECTION 4.03. Paying Agents. 21 SECTION 4.04. Appointment to Fill Vacancy in Office of Trustee. 22 SECTION 4.05. Compliance with Consolidation Provisions. 22 SECTION 4.06. Limitation on Dividends. 22 SECTION 4.07. Covenants as to Illinois Power Trusts. 23 SECTION 4.08. Corporate Existence. 23 ARTICLE V SECURITY HOLDERS, LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 5.01. Company to Furnish Trustee Names and Addresses of Securityholders. 23 SECTION 5.02. Preservation Of Information; Communications With Securityholders. 24 SECTION 5.03. Reports By the Company. 24 SECTION 5.04. Reports by the Trustee. 25 ARTICLE VI REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 6.01. Events of Default. 25 SECTION 6.02. Collection of Indebtedness and Suits for Enforcement by Trustee. 27 SECTION 6.03. Application of Moneys Collected. 29 SECTION 6.04. Limitation on Suits. 30 SECTION 6.05. Rights and Remedies Cumulative; Delay or Omission Not Waiver. 31 SECTION 6.06. Control by Securityholders. 31 SECTION 6.07. Undertaking to Pay Costs. 32 ARTICLE VII CONCERNING THE TRUSTEE SECTION 7.01. Certain Duties and Responsibilities of Trustee. 32 SECTION 7.02. Certain Rights of Trustee. 34 SECTION 7.03. Trustee Not Responsible for Recitals or Issuance of Debt Securities. 35 SECTION 7.04. May Hold Debt Securities. 36 SECTION 7.05. Moneys Held in Trust. 36 SECTION 7.06. Compensation and Reimbursement. 36 SECTION 7.07. Reliance on Officers' Certificate. 37 SECTION 7.08. Qualification; Conflicting Interests. 37 SECTION 7.09. Corporate Trustee Required; Eligibility. 37 SECTION 7.10. Resignation and Removal; Appointment of Successor. 37 SECTION 7.11. Acceptance of Appointment By Successor. 39 SECTION 7.12. Merger, Conversion, Consolidation or Succession to Business. 39 SECTION 7.13. Preferential Collection of Claims Against the Company. 41 ARTICLE VIII CONCERNING THE SECURITYHOLDERS SECTION 8.01. Evidence of Action by Securityholders. 41 SECTION 8.02. Proof of Execution by Securityholders. 42 SECTION 8.03. Who May be Deemed Owners. 42 SECTION 8.04. Certain Debt Securities Owned by Company Disregarded. 42 SECTION 8.05. Actions Binding on Future Securityholders. 43 ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures Without the Consent of Securityholders. 43 SECTION 9.02. Supplemental Indentures With Consent of Securityholders. 44 SECTION 9.03. Effect of Supplemental Indentures. 45 SECTION 9.04. Debt Securities Affected by Supplemental Indentures. 45 SECTION 9.05. Execution of Supplemental Indentures. 45 ARTICLE X SUCCESSOR CORPORATION SECTION 10.01. Company May Consolidate, Etc. 46 SECTION 10.02. Successor Corporation Substituted. 46 SECTION 10.03. Evidence of Consolidation, Etc. to Trustee. 47 ARTICLE XI SATISFACTION AND DISCHARGE SECTION 11.01. Satisfaction and Discharge of Indenture. 47 SECTION 11.02. Discharge of Obligations. 48 SECTION 11.03. Deposited Moneys to be Held in Trust. 49 SECTION 11.04. Payment of Moneys Held by Paying Agents. 49 SECTION 11.05. Repayment to Company. 49 ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. No Recourse. 50 ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Effect on Successors and Assigns. 50 SECTION 13.02. Actions by Successor. 50 SECTION 13.03. Surrender of Company Powers. 50 SECTION 13.04. Notices. 51 SECTION 13.05. Governing Law. 51 SECTION 13.06. Treatment of the Debt Securities as Debt. 51 SECTION 13.07. Compliance Certificates and Opinions. 51 SECTION 13.08. Payments on Business Days. 52 SECTION 13.09. Conflict with Trust Indenture Act. 52 SECTION 13.10. Counterparts. 52 SECTION 13.11. Separability. 52 SECTION 13.12. Assignment. 52 SECTION 13.13. Acknowledgment of Rights. 53 ARTICLE XIV SUBORDINATION OF DEBT SECURITIES SECTION 14.01. Subordination Terms. 53 Section of Trust Indenture Act Section of of 1939, as amended Indenture 310(a) 7.09 310(b) 7.08 7.10 310(c) Inapplicable 311(a) 7.13(a) 311(b) 7.13(b) 311(c) Inapplicable 312(a) 5.01 5.02(a) 312(b) 5.02(b) 312(c) 5.02(c) 313(a) 5.04(a) 313(b) 5.04(b) 313(c) 5.04(a) 5.04(b) 313(d) 5.04(c) 314(a) 5.03 314(b) Inapplicable 314(c) 13.06 314(d) Inapplicable 314(e) 13.06 314(f) Inapplicable 315(a) 7.01(a) 7.02 315(b) 6.07 315(c) 7.01 315(d) 7.01(b) 7.01(c) 315(e) 6.07 316(a) 6.06 8.04 316(b) 6.04 316(c) 8.01 317(a) 6.02 317(b) 4.03 318(a) 13.08 Note: This Cross-Reference Table shall not, for any purpose, be deemed to be part of the Indenture and shall not have any bearing on the interpretation of its terms or provisions. THIS INDENTURE, dated as of January 1, 1996, between ILLINOIS POWER COMPANY, an Illinois corporation (the "Company"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation, not in its individual capacity but solely as trustee (the "Trustee"): RECITALS OF THE COMPANY The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (the "Securities"), to be issued in one or more series as in this Indenture provided. This Indenture is subject to the provisions of the Trust Indenture Act of 1939, as amended, that are required to be part of this Indenture and shall, to the extent applicable, be governed by such provisions. All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities or of any series thereof, as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions of Terms. The terms defined in this Section (except as in this Indenture otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section and shall include the plural as well as the singular. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939, as amended, or that are by reference in such Trust Indenture Act defined in the Securities Act of 1933, as amended (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this instrument. "Affiliate" means, with respect to a specified Person, (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities or other ownership interests of the specified Person, (b) any Person 10% or more of whose outstanding voting securities or other ownership interests are directly or indirectly owned, controlled or held with power to vote by the specified Person, (c) any Person directly or indirectly controlling, controlled by or under common control with the specified Person, (d) a partnership in which the specified Person is a general partner, (e) any officer or director of the specified Person and (f) if the specified Person is an individual, any entity of which the specified Person is an officer, director or general partner. "Authenticating Agent" means an authenticating agent with respect to all or any of the series of Debt Securities appointed with respect to all or such series of the Debt Securities by the Trustee pursuant to Section 2.10. "Bankruptcy Law" means Title 11, United States Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors of the Company, or any duly authorized committee of such board or any officer of the Company duly authorized by the board of directors of the Company or a duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" means, with respect to any series of Debt Securities, any day other than a day on which banking institutions in New York are authorized or required by law to close. "Certificate" means a certificate signed by the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company. The Certificate need not comply with the provisions of Section 13.07. "Common Securities" means undivided beneficial interests in the assets of an Illinois Power Trust which rank pari passu with Preferred Securities issued by such trust; provided, however, that upon the occurrence of an Event of Default, the rights of holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and maturity are subordinated to the rights of holders of Preferred Securities. "Common Securities Guarantee" means any guarantee that the Company may enter into with an Illinois Power Trust or other Persons that operate directly or indirectly for the benefit of holders of Common Securities of such trust. "Company" means Illinois Power Company, a corporation duly organized and existing under the laws of the State of Illinois, and, subject to the provisions of Article X, shall also include its successors and assigns. "Corporate Trust Office" means the office of the Trustee at which, at any particular time, its corporate trust business shall be principally administered, which office at the date hereof is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Department. "Custodian" means any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Declaration" means, in respect of an Illinois Power Trust, the amended and restated declaration of trust of such Illinois Power Trust or any other governing instrument of such Trust. "Debt Securities" means the Debt Securities authenticated and delivered under this Indenture. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning specified in Section 2.03. "Depositary" means, with respect to Debt Securities of any series for which the Company shall determine that such Debt Securities will be issued as a Global Security, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Exchange Act or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to either Section 2.01 or 2.11. "Event of Default" means, with respect to Debt Securities of a particular series, any event specified in Section 6.01, continued for the period of time, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Global Security" means, with respect to any series of Securities, a Debt Security executed by the Company and delivered by the Trustee to the Depositary or pursuant to the Depositary's instruction, all in accordance with this Indenture, which shall be registered in the name of this Depositary or its nominee. "Governmental Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America that, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such Governmental Obligation or a specific payment of principal of or interest on any such Governmental Obligation held by such custodian for the account of the holder of such depositary receipt; provided, however, that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Governmental Obligation or the specific payment of principal of or interest on the Governmental Obligation evidenced by such depositary receipt. "Herein", "hereof" and "hereunder", and other words of similar import, refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Illinois Power Trust" means a Delaware business trust formed by the Company for the purpose of purchasing Debt Securities of the Company. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into in accordance with the terms hereof. "Interest Payment Date", when used with respect to any installment of interest on a Debt Security of a particular series, means the date specified in such Debt Security or in a Board Resolution, in an Officers' Certificate or in an indenture supplemental hereto with respect to such series as the fixed date on which an installment of interest with respect to Debt Securities of that series is due and payable. "Officers' Certificate" means a certificate signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Controller or an Assistant Controller or the Secretary or an Assistant Secretary of the Company that is delivered to the Trustee in accordance with the terms hereof. Each such certificate shall include the statements provided for in Section 13.07, if and to the extent required by the provisions thereof. "Opinion of Counsel" means an opinion in writing of legal counsel, who may be an employee of or counsel for the Company, that is delivered to the Trustee in accordance with the terms hereof. Each such opinion shall include the statements provided for in Section 13.07, if and to the extent required by the provisions thereof. "Outstanding", when used with reference to Debt Securities of any series, means, subject to the provisions of Section 8.04, as of any particular time, all Debt Securities of that series theretofore authenticated and delivered by the Trustee under this Indenture, except (a) Debt Securities theretofore canceled by the Trustee or any paying agent, or delivered to the Trustee or any paying agent for cancellation or that have previously been canceled; (b) Debt Securities or portions thereof for the payment or redemption of which moneys or Governmental Obligations in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that if such Debt Securities or portions of such Debt Securities are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Section 3.02, or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Debt Securities in lieu of or in substitution for which other Debt Securities shall have been authenticated and delivered pursuant to the terms of Section 2.07; and (d) Debt Securities, except to the extent provided in Sections 11.01 and 11.02, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article XI. "Person" means any individual, corporation, partnership, limited liability company, joint venture, joint-stock company, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt and guarantee as that evidenced by such particular Debt Security; and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 2.07 in lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security. "Preferred Securities" means undivided beneficial interests in the assets of an Illinois Power Trust which rank pari passu with Common Securities issued by such trust; provided, however, that upon the occurrence of an Event of Default, the rights of holders of Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of Preferred Securities. "Preferred Securities Guarantee" means any guarantee that the Company may enter into with an Illinois Power Trust or other Persons that operates directly or indirectly for the benefit of holders of Preferred Securities of such trust. "Property Trustee" means the entity performing the functions of the Property Trustee of an Illinois Power Trust under the applicable Declaration of such Illinois Power Trust. "Responsible Officer," when used with respect to the Trustee, means the Chairman or any Vice Chairman of the Board of Directors, the President, any Vice President, the Secretary, the Treasurer, any trust officer, any corporate trust officer or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the Persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Securities Act" means the Securities Act of 1933, as amended from time to time or any successor legislation. "Securityholder", "Holder of Debt Securities", "Registered Holder", or other similar term, means the Person or Persons in whose name or names a particular Debt Security shall be registered on the books of the Company kept for that purpose in accordance with the terms of this Indenture. "Security Register" and "Security Registrar" have the respective meanings set forth in Section 2.05. "Subsidiary" means, with respect to any Person, (i) any corporation at least a majority of whose outstanding Voting Stock shall at the time be owned, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of whose outstanding partnership or similar interests shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. "Trustee" means Wilmington Trust Company, not in its individual capacity, and, subject to the provisions of Article VII, shall also include its successors and assigns, and, if at any time there is more than one Person acting in such capacity hereunder, "Trustee" shall mean each such Person. The term "Trustee," as used with respect to a particular series of Debt Securities, shall mean the trustee with respect to that series. "Trust Indenture Act" means the Trust Indenture Act of 1939, subject to the provisions of Sections 9.01, 9.02 and 10.01, as in effect at the date of execution of this instrument. "Trust Securities" means Common Securities and Preferred Securities. "Voting Stock", as applied to stock of any Person, means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. ARTICLE II ISSUE, DESCRIPTION, TERMS, EXECUTION, REGISTRATION AND EXCHANGE OF DEBT SECURITIES SECTION 2.01. Designation and Terms of Debt Securities. The aggregate principal amount of Debt Securities that may be authenticated and delivered under this Indenture is unlimited. The Debt Securities may be issued in one or more series up to the aggregate principal amount of Debt Securities of that series from time to time authorized by or pursuant to a Board Resolution of the Company, or pursuant to one or more indentures supplemental hereto. Prior to the initial issuance of Debt Securities of any series, there shall be established in or pursuant to a Board Resolution of the Company, and set forth in an Officers' Certificates, or established in one or more indentures supplemental hereto: (1) the title of the series of Debt Security (which shall distinguish the Debt Securities of that series from all other series of Debt Securities); (2) any limit upon the aggregate principal amount of the Debt Securities of that series that may be authenticated and delivered under this Indenture (except for Debt Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Debt Securities of that series); (3) the date or dates on which the principal of the Debt Securities of that series is payable; (4) the rate or rates at which the Debt Securities of that series shall bear interest or the manner of calculation of such rate or rates, if any; (5) the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest will be payable or the manner of determination of such Interest Payment Dates and the record date for the determination of holders to whom interest is payable on any such Interest Payment Dates; (6) the right, if any, to defer the interest payment periods and the duration of such extension; (7) the period or periods within which, the price or prices at which, and the terms and conditions upon which, Debt Securities of that series may be redeemed, in whole or in part, at the option of the Company; (8) the obligation, if any, of the Company to redeem or purchase Debt Securities of that series pursuant to any sinking fund or analogous provisions (including payments made in cash in participation of future sinking fund obligations) or at the option of a holder thereof and the period or periods within which, the price or prices at which, and the terms and conditions upon which, Debt Securities of that series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (9) the security or subordination terms of the Debt Securities of that series; (10) the form of the Debt Securities of that series, including the form of the Certificate of Authentication for such series; (11) if other than denominations of twenty-five U.S. dollars ($25) or any integral multiple thereof, the denominations in which the Debt Securities of that series shall be issuable; (12) whether and under what circumstances the Company will pay additional amounts on the Debt Securities of the series to any holder who is not a United States person (including any modification to the definition of such term) in respect of any tax, assessment or governmental charge and, if so, whether the Company will have the option to redeem such Debt Securities rather than pay such additional amounts (and the terms of any such option); (13) whether the Debt Securities are issuable as a Global Security and, in such case, the identity of the Depositary for such series.; and (14) any and all other terms with respect to such series (which terms shall not be inconsistent with the terms of this Indenture), including any terms which may be required by or advisable under United States laws or regulations or advisable in connection with the marketing of Debt Securities of that series. All Debt Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to any such Board Resolution or in any indentures supplemental hereto. If any of the terms of a series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of such series. SECTION 2.02. Form of Debt Securities and Trustee's Certificate. The Debt Securities of any series and the Trustee's certificate of authentication to be borne by such Debt Securities shall be substantially of the tenor and purport as set forth in one or more indentures supplemental hereto or as provided in a Board Resolution and as set forth in an Officers' Certificate, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which Debt Securities of that series may be listed, or to conform to usage. SECTION 2.03. Denominations; Provisions for Payment. The Debt Securities shall be issuable as registered Debt Securities and in the denominations of twenty-five U.S. dollars ($25) or any integral multiple thereof, subject to Section 2.01(11). The Debt Securities of a particular series shall bear interest payable on the dates and at the rate specified with respect to that series. The principal of and the interest on the Debt Securities of any series, as well as any premium thereon in case of redemption thereof prior to maturity, shall be payable in the coin or currency of the United States of America that at the time of such payment is legal tender for public and private debt, at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, the City and State of New York. Each Debt Security shall be dated the date of its authentication. Interest on the Debt Securities shall be computed on the basis of a 360-day year composed of twelve 30-day months. Unless otherwise contemplated by Section 2.01 with respect to any series of Debt Securities, the interest installment on any Debt Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debt Securities of that series shall be paid to the Person in whose name said Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on the regular record date for such interest installment. In the event that any Debt Security of a particular series or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debt Security will be paid upon presentation and surrender of such Debt Security as provided in Section 3.03. Any interest on any Debt Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date for Debt Securities of that series (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (1) or clause (2) below: (1) The Company may make payment of any Defaulted Interest on Debt Securities to the Persons in whose names such Debt Securities (or their respective Predecessor Debt Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register (as hereinafter defined), not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debt Securities (or their respective Predecessor Debt Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest on any Debt Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Debt Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustees of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Unless otherwise provided in a Board Resolution, in an Officers' Certificate or in one or more indentures supplemental hereto establishing the terms of any series of Debt Securities pursuant to Section 2.01 hereof, the term "regular record date" as used in this Section with respect to a series of Debt Securities with respect to any Interest Payment Date for such series shall mean the fifteenth day of the month in which an Interest Payment Date established for such series pursuant to Section 2.01 hereof shall occur, whether or not such date is a Business Day. Subject to the foregoing provisions of this Section, each Debt Security of a series delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Debt Security of such series shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debt Security. SECTION 2.04. Execution and Authentication. The Debt Securities shall be signed on behalf of the Company by its Chairman, President or one of its Vice Presidents, under its corporate seal attested by its Secretary or one of its Assistant Secretaries. Signatures may be in the form of a manual or facsimile signature. The Company may use the facsimile signature of any Person who shall have been a President or Vice President thereof, or of any Person who shall have been a Secretary or Assistant Secretary thereof, notwithstanding the fact that at the time the Debt Securities shall be authenticated and delivered or disposed of such Person shall have ceased to be the President or a Vice President, or the Secretary or an Assistant Secretary, of the Company. The seal of the Company may be in the form of a facsimile of such seal and may be impressed, affixed, imprinted or otherwise reproduced on the Debt Securities. The Debt Securities may contain such notations, legends or endorsements required by law, stock exchange rule or usage. Each Debt Security shall be dated the date of its authentication by the Trustee. A Debt Security shall not be valid until authenticated manually by an authorized signatory of the Trustee, or by an Authenticating Agent. Such signature shall be conclusive evidence that the Debt Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Debt Securities of any series executed by the Company to the Trustee for authentication, together with a written order of the Company for the authentication and delivery of such Debt Securities, signed by its President or any Vice President and its Treasurer or any Assistant Treasurer, and the Trustee in accordance with such written order shall authenticate and deliver such Debt Securities. In authenticating such Debt Securities and accepting the additional responsibilities under this Indenture in relation to such Debt Securities, the Trustee shall be entitled to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the form and terms thereof have been established in conformity with the provisions of this Indenture. The Trustee shall not be required to authenticate such Debt Securities if the issue of such Debt Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Debt Securities and this Indenture or otherwise in a manner that is not reasonably acceptable to the Trustee. SECTION 2.05. Registration of Transfer and Exchange. (a) Debt Securities of any series may be exchanged upon presentation thereof at the Corporate Trust Office or such other location designated by the Company pursuant to Section 4.02 for other Debt Securities of such series of authorized denominations, and for a like aggregate principal amount, upon payment of a sum sufficient to cover any tax or other governmental charge in relation thereto, all as provided in this Section. In respect of any Debt Securities so surrendered for exchange, the Company shall execute, the Trustee shall authenticate and such office or agency shall deliver in exchange therefor the Debt Security or Debt Securities of the same series that the Securityholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. (b) The Company shall keep, or cause to be kept, at the Corporate Trust Office or such other location designated by the Company pursuant to Section 4.02 a register or registers (herein referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall register the Debt Securities and the transfers of Debt Securities as in this Article provided and which at all reasonable times shall be open for inspection by the Trustee. The registrar for the purpose of registering Securities and transfer of Securities as herein provided shall be appointed as authorized by Board Resolution (the "Security Registrar"). Upon surrender for transfer of any Debt Security at the Corporate Trust Office or such other location designated by the Company pursuant to Section 4.02, the Company shall execute, the Trustee shall authenticate and such office or agency shall deliver in the name of the transferee or transferees a new Debt Security or Debt Securities of the same series as the Debt Security presented for a like aggregate principal amount. All Debt Securities presented or surrendered for exchange or registration of transfer, as provided in this Section, shall be accompanied (if so required by the Company or the Security Registrar) by a written instrument or instruments of transfer, in form satisfactory to the Company or the Security Registrar, duly executed by the registered holder or by such holder's duly authorized attorney in writing. (c) No service charge shall be made for any exchange or registration of transfer of Debt Securities, or issue of new Debt Securities in case of partial redemption of any series, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge in relation thereto, other than exchanges pursuant to Section 2.06, Section 3.03(b) and Section 9.04 not involving any transfer. (d) The Company shall not be required (i) to issue, exchange or register the transfer of any Debt Securities during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of less than all the Outstanding Debt Securities of the same series and ending at the close of business on the day of such mailing, nor (ii) to register the transfer of or exchange any Debt Securities of any series or portions thereof called for redemption. The provisions of this Section 2.05 are, with respect to any Global Security, subject to Section 2.11 hereof. SECTION 2.06. Temporary Securities. Pending the preparation of definitive Debt Securities of any series, the Company may execute, and the Trustee shall authenticate and deliver, temporary Debt Securities (printed, lithographed or typewritten) of any authorized denomination. Such temporary Debt Securities shall be substantially in the form of the definitive Debt Securities in lieu of which they are issued, but with such omissions, insertions and variations as may be appropriate for temporary Debt Securities, all as may be determined by the Company. Every temporary Debt Security of any series shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Debt Securities of such series. Without unnecessary delay the Company will execute and furnish definitive Debt Securities of such series and thereupon any or all temporary Debt Securities of such series may be surrendered in exchange therefor (without charge to the holders), at the Corporate Trust Office or such location designated by the Company pursuant to Section 4.02 and such Corporate Trust Office or location shall deliver in exchange for such temporary Debt Securities an equal aggregate principal amount of definitive Debt Securities of such series, unless the Company advises the Trustee to the effect that definitive Debt Securities need not be executed and furnished until further notice from the Company. Until so exchanged, the temporary Debt Securities of such series shall be entitled to the same benefits under this Indenture as definitive Debt Securities of such series authenticated and delivered hereunder. SECTION 2.07. Mutilated, Destroyed, Lost or Stolen Debt Securities. In case any temporary or definitive Debt Security shall become mutilated or be destroyed, lost or stolen, the Company (subject to the next succeeding sentence) shall execute, and upon the Company's request, the Trustee (subject as aforesaid) shall authenticate and deliver, a new Debt Security of the same series, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debt Security, or in lieu of and in substitution for the Debt Security so destroyed, lost or stolen. In every case the applicant for a substituted Debt Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of the applicant's Debt Security and of the ownership thereof. The Trustee may authenticate any such substituted Debt Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debt Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Debt Security that has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debt Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debt Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as they may require to save them harmless, and, in case of destruction, loss or theft, evidence to the satisfaction of the Company and the Trustee of the destruction, loss or theft of such Debt Security and of the ownership thereof. Every replacement Debt Security issued pursuant to the provisions of this Section shall constitute an additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Debt Security shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities of the same series duly issued hereunder. All Debt Securities shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities, and shall preclude (to the extent lawful) any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.08. Cancellation. All Debt Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer shall, if surrendered to the Company or any paying agent, be delivered to the Trustee for cancellation, or, if surrendered to the Trustee, shall be cancelled by it, and no Debt Securities shall be issued in lieu thereof except as expressly required or permitted by any of the provisions of this Indenture. On request of the Company at the time of such surrender, the Trustee shall deliver to the Company canceled Debt Securities held by the Trustee. In the absence of such request the Trustee may dispose of canceled Debt Securities in accordance with its standard procedures and deliver a certificate of disposition to the Company. If the Company shall otherwise acquire any of the Debt Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debt Securities unless and until the same are delivered to the Trustee for cancellation. SECTION 2.09. Benefits of Indenture. Nothing in this Indenture or in the Debt Securities, express or implied, shall give or be construed to give to any Person, other than the parties hereto and the holders of the Debt Securities (and, with respect to the provisions of Article XIV, the holders of Senior Indebtedness) any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all such covenants, conditions and provisions being for the sole benefit of the parties hereto and of the holders of the Debt Securities (and, with respect to the provisions of Article XIV, the holders of Senior Indebtedness). SECTION 2.10. Authenticating Agent. So long as any of the Debt Securities of any series remain Outstanding, there may be an Authenticating Agent for any or all such series of Debt Securities which the Trustee shall have the right to appoint. Said Authenticating Agent shall be authorized to act on behalf of the Trustee to authenticate Debt Securities of such series issued upon exchange, transfer or partial redemption thereof, and Debt Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. All references in this Indenture to the authentication of Debt Securities by the Trustee shall be deemed to include authentication by an Authenticating Agent for such series. Each Authenticating Agent shall be acceptable to the Company and shall be a corporation that has a combined capital and surplus, as most recently reported or determined by it, sufficient under the laws of any jurisdiction under which it is organized or in which it is doing business to conduct a trust business, and that is otherwise authorized under such laws to conduct such business and is subject to supervision or examination by federal or state authorities. If at any time any Authenticating Agent shall cease to be eligible in accordance with these provisions, it shall resign immediately. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time (and upon request by the Company shall) terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon resignation, termination or cessation of eligibility of any Authenticating Agent, the Trustee may appoint an eligible successor Authenticating Agent acceptable to the Company. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all the rights, powers and duties of its predecessor hereunder as if originally named as an Authenticating Agent pursuant hereto. SECTION 2.11. Global Securities. (a) If the Company shall establish pursuant to Section 2.01 that the Debt Securities of a particular series are to be issued as a Global Security or Securities, then the Company shall execute and the Trustee shall, in accordance with Section 2.04, authenticate and deliver, a Global Security that (i) shall represent, and shall be denominated in an amount equal to the aggregate principal amount of, all of the Outstanding Debt Securities of such series, (ii) shall be registered in the name of the Depositary or its nominee, (iii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instruction and (iv) shall bear a legend substantially to the following effect: "Except as otherwise provided in Section 2.11 of the Indenture, this Debt Security may be transferred, in whole but not in part, only to another nominee of the Depositary or to a successor Depositary or to a nominee of such successor Depositary." (b) Except as provided in clause (c), notwithstanding the provisions of Section 2.05, the Global Security or Securities of a series may be transferred, in whole but not in part and in the manner provided in Section 2.05, only to another nominee of the Depositary for such series, or to a successor Depositary for such series selected or approved by the Company or to a nominee of such successor Depositary. (c) If at any time the Depositary for a series of the Debt Securities notifies the Company that it is unwilling or unable to continue as Depositary for such series or if at any time the Depositary for such series shall no longer be registered or in good standing under the Exchange Act, or other applicable statute or regulation, at a time when the Depositary is required to be so registered to act as such Depositary and a successor Depositary for such series is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, this Section 2.11 shall no longer be applicable to the Debt Securities of such series and the Company will execute, and subject to Section 2.05, the Trustee will authenticate and deliver the Debt Securities of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security or Securities of such series in exchange for such Global Security or Securities. In addition, the Company may at any time determine that the Debt Securities of any series shall no longer be represented by a Global Security or Securities and that the provisions of this Section 2.11 shall no longer apply to the Debt Securities of such series. In such event, the Company will execute and, subject to Section 2.05, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and deliver the Debt Securities of such series in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Security or Securities of such series in exchange for such Global Security or Securities. Upon the exchange of the Global Security or Securities for such Debt Securities in definitive registered form without coupons, in authorized denominations, the Global Security or Securities shall be canceled by the Trustee. Such Debt Securities in definitive registered form issued in exchange for the Global Security or Securities pursuant to this Section 2.11(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Debt Securities to the Depositary for delivery to the Persons in whose names such Debt Securities are so registered. ARTICLE III REDEMPTION OF DEBT SECURITIES AND SINKING FUND PROVISIONS SECTION 3.01. Redemption. The Company may redeem the Debt Securities of any series issued hereunder on and after the dates and in accordance with the terms established for such series pursuant to Section 2.01. SECTION 3.02. Notice of Redemption. (a) In case the Company shall desire to exercise such right to redeem all or, as the case may be, a portion of the Debt Securities of any series in accordance with the right reserved so to do, the Company shall, or shall cause the Trustee to, give notice of such redemption to holders of the Debt Securities of such series to be redeemed by mailing, first class postage prepaid, a notice of such redemption not less than 30 days and not more than 90 days before the date fixed for redemption of that series to such holders at their last addresses as they shall appear upon the Security Register unless a shorter period is specified in the Debt Securities to be redeemed. Any notice that is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the registered holder receives the notice. In any case, failure duly to give such notice to the holder of any Debt Security of any series designated for redemption in whole or in part, or any defect in the notice, shall not affect the validity of the proceedings for the redemption of any other Debt Securities of such series or any other series. In the case of any redemption of Debt Securities prior to the expiration of any restriction on such redemption provided in the terms of such Debt Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with any such restriction. Each such notice of redemption shall specify the date fixed for redemption and the redemption price at which Debt Securities of that series are to be redeemed, and shall state that payment of the redemption price of such Debt Securities to be redeemed will be made at the Corporate Trust Office, upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, that from and after said date interest will cease to accrue and that the redemption is for a sinking fund, if such is the case. If less than all the Debt Securities of a series are to be redeemed, the notice to the holders of Debt Securities of that series to be redeemed in whole or in part shall specify the particular Debt Securities to be so redeemed. In case any Debt Security is to be redeemed in part only, the notice that relates to such Debt Security shall state the portion of the principal amount thereof to be redeemed, and shall state that on and after the redemption date, upon surrender of such Debt Security, a new Debt Security or Debt Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. (b) If less than all the Debt Securities of a series are to be redeemed, the Company shall give the Trustee at least 45 days' notice in advance of the date fixed for redemption as to the aggregate principal amount of Debt Securities of the series to be redeemed, and thereupon the Trustee shall select, by lot or in such other manner as it shall deem appropriate and fair in its discretion and that may provide for the selection of a portion or portions (equal to twenty-five U.S. dollars ($25) or any integral multiple thereof) of the principal amount of such Debt Securities of a denomination larger than $25, the Debt Securities to be redeemed and shall thereafter promptly notify the Company in writing of the numbers of the Debt Securities to be redeemed, in whole or in part. The Company may, if and whenever it shall so elect, by delivery of instructions signed on its behalf by its President or any Vice President, instruct the Trustee or any paying agent to call all or any part of the Debt Securities of a particular series for redemption and to give notice of redemption in the manner set forth in this Section, such notice to be in the name of the Company or its own name as the Trustee or such paying agent may deem advisable. In any case in which notice of redemption is to be given by the Trustee or any such paying agent, the Company shall deliver or cause to be delivered to, or permit to remain with, the Trustee or such paying agent, as the case may be, such Security Register, transfer books or other records, or suitable copies or extracts therefrom, sufficient to enable the Trustee or such paying agent to give any notice by mail that may be required under the provisions of this Section. SECTION 3.03. Payment Upon Redemption. (a) If the giving of notice of redemption shall have been completed as above provided, the Debt Securities or portions of Debt Securities of the series to be redeemed specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and interest on such Debt Securities or portions of Debt Securities shall cease to accrue on and after the date fixed for redemption, unless the Company shall default in the payment of such redemption price and accrued interest with respect to any such Debt Security or portion thereof. On presentation and surrender of such Debt Securities on or after the date fixed for redemption at the place of payment specified in the notice, said Debt Securities shall be paid and redeemed at the applicable redemption price for such series, together with interest accrued thereon to the date fixed for redemption (but if the date fixed for redemption is an Interest Payment Date, the interest installment payable on such date shall be payable to the registered holder at the close of business on the applicable record date pursuant to Section 2.03). (b) Upon presentation of any Debt Security of such series that is to be redeemed in part only, the Company shall execute and the Trustee shall authenticate and the office or agency where the Debt Security is presented shall deliver to the holder thereof, at the expense of the Company, a new Debt Security or Debt Securities of the same series, of authorized denominations in principal amount equal to the unredeemed portion of the Debt Security so presented. SECTION 3.04. Sinking Fund. The provisions of Sections 3.04, 3.05 and 3.06 shall be applicable to any sinking fund for the retirement of Debt Securities of a series, except as otherwise specified as contemplated by Section 2.01 for Debt Securities of such series. The minimum amount of any sinking fund payment provided for by the terms of Debt Securities of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of Debt Securities of any series is herein referred to as an "optional sinking fund payment." If provided for by the terms of Debt Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 3.05. Each sinking fund payment shall be applied to the redemption of Debt Securities of any series as provided for by the terms of Debt Securities of such series. SECTION 3.05. Satisfaction of Sinking Fund Payments with Debt Securities. The Company (i) may deliver Outstanding Debt Securities of a series (other than any Debt Securities previously called for redemption) and (ii) may apply as a credit Debt Securities of a series that have been redeemed either at the election of the Company pursuant to the terms of such Debt Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Debt Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Debt Securities of such series required to be made pursuant to the terms of such Debt Securities as provided for by the terms of such series, provided that such Debt Securities have not been previously so credited. Such Debt Securities shall be received and credited for such purpose by the Trustee at the redemption price specified in such Debt Securities for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. SECTION 3.06. Redemption of Debt Securities for Sinking Fund. Not less than 45 days prior to each sinking fund payment date for any series of Debt Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of the series, the portion thereof, if any, that is to be satisfied by delivering and crediting Debt Securities of that series pursuant to Section 3.05 and the basis for such credit and will, together with such Officers' Certificate, deliver to the Trustee any Debt Securities to be so delivered. Not less than 30 days before each such sinking fund payment date, the Trustee shall select the Debt Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 3.02 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 3.02. Such notice having been duly given, the redemption of such Debt Securities shall be made upon the terms and in the manner stated in Section 3.03. ARTICLE IV COVENANTS OF THE COMPANY SECTION 4.01. Payment of Principal, Premium and Interest. The Company will duly and punctually pay or cause to be paid the principal of (and premium, if any) and interest on the Debt Securities of that series at the time and place and in the manner provided herein and established with respect to such Debt Securities. SECTION 4.02. Maintenance of Office or Agency. So long as any series of the Debt Securities remain Outstanding, the Company agrees to maintain an office or agency with respect to each such series and at such other location or locations as may be designated as provided in this Section 4.02, where (i) Debt Securities of that series may be presented for payment, (ii) Debt Securities of that series may be presented as hereinabove authorized for registration of transfer and exchange, and (iii) notices and demands to or upon the Company in respect of the Debt Securities of that series and this Indenture may be given or served, such designation to continue with respect to such office or agency until the Company shall, by written notice signed by its President or a Vice President and delivered to the trustee, designate some other office or agency for such purposes or any of them. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, notices and demands. SECTION 4.03. Paying Agents. (a) If the Company shall appoint one or more paying agents for all or any series of the Debt Securities, other than the Trustee, the Company will cause each such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section: (1) that it will hold all sums held by it as such agent for the payment of the principal of (and premium, if any) or interest on the Debt Securities of that series (whether such sums have been paid to it by the Company or by any other obligor of such Debt Securities) in trust for the benefit of the Persons entitled thereto; (2) that it will give the Trustee notice of any failure by the Company to make any payment of the principal of (and premium, if any) or interest on the Debt Securities of that series when the same shall be due and payable; (3) that it will, at any time during the continuance of any failure referred to in the preceding paragraph (a)(2) above, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent; and (4) that it will perform all other duties of paying agent as set forth in this Indenture. (b) If the Company shall act as its own paying agent with respect to any series of the Debt Securities, it will on or before each due date of the principal of (and premium, if any) or interest on Debt Securities of that series, set aside, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay such principal (and premium, if any) or interest so becoming due on Debt Securities of that series until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of such action, or any failure by it to take such action. Whenever the Company shall have one or more paying agents for any series of Debt Securities, it will, prior to each due date of the principal of (and premium, if any) or interest on any Debt Securities of that series, deposit with the paying agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of this action or failure so to act. Notwithstanding anything in this Section to the contrary, (i) the agreement to hold sums in trust as provided in this Section is subject to the provisions of Section 11.05, and (ii) the Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or direct any paying agent to pay, to the Trustee all sums held in trust by the Company or such paying agent, such sums to be held by the Trustee upon the same terms and conditions as those upon which such sums were held by the Company or such paying agent; and, upon such payment by any paying agent to the Trustee, such paying agent shall be released from all further liability with respect to such money. SECTION 4.04. Appointment to Fill Vacancy in Office of Trustee. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 7.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 4.05. Compliance with Consolidation Provisions. The Company will not, while any of the Debt Securities remain Outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other company unless the provisions of Article X are complied with. SECTION 4.06. Limitation on Dividends. (a) If Debt Securities are issued to an Illinois Power Trust or a trustee of such trust in connection with the issuance of Trust Securities by such Illinois Power Trust and (i) there shall have occurred any event that would constitute an Event of Default or (ii) the Company shall be in default with respect to its payment or any obligations under the Preferred Securities Guarantee or Common Securities Guarantee relating to such Trust Securities, then (x) the Company shall not declare or pay any dividend on, make any distributions with respect to, or redeem, purchase or make a liquidation payment with respect to, any of its capital stock, provided, however, the Company may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (y) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities (including guarantees) issued by the Company which rank pari passu with or junior to such Debt Securities and (z) the Company shall not make guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee). (b) If Debt Securities are issued to an Illinois Power Trust or a trustee of such trust in connection with the issuance of Trust Securities by such Illinois Power Trust and the Company shall have given notice of its election to defer payments of interest on such Debt Securities by extending the interest payment period as provided in any indenture supplemental hereto and such period, or any extension thereof, shall be continuing, then (i) the Company shall not declare or pay any dividend, or make any distributions with respect to, or redeem, purchase or make a liquidation payment with respect to, any of its capital stock, provided, however, the Company may declare and pay a stock dividend where the dividend stock is the same stock as that on which the dividend is being paid, (ii) the Company shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities (including guarantees) issued by the Company which rank pari passu with or junior to such Debt Securities and (iii) the Company shall not make any guarantee payments with respect to the foregoing (other than pursuant to the Preferred Securities Guarantee). SECTION 4.07. Covenants as to Illinois Power Trusts. In the event Debt Securities are issued to an Illinois Power Trust in connection with the issuance of Trust Securities by such trust, for so long as such Trust Securities remain outstanding, the Company will (i) maintain 100% direct or indirect ownership of the Common Securities of such trust; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company's ownership of the Common Securities, (ii) not cause, as sponsor of such trust, or permit, as holder of Common Securities of such trust, the dissolution, winding-up or termination of such trust, except in connection with a distribution of Debt Securities as provided in the Declaration and in connection with certain mergers, consolidations or amalgamations permitted by the Declaration and (iii) use its reasonable efforts to cause such trust (a) to remain a business trust, except in connection with a distribution of Debt Securities, the redemption of all of the Trust Securities of such Illinois Power Trust or certain mergers, consolidations or amalgamations, each as permitted by the Declaration of such Illinois Power Trust, and (b) to otherwise continue to be classified for United States federal income tax purposes as a grantor trust. SECTION 4.08. Corporate Existence. The Company will, subject to the provisions of Article X, at all times maintain its corporate existence and right to carry on business and will duly procure all renewals and extensions thereof, and, to the extent necessary or desirable in the operation of its business, will use its best efforts to maintain, preserve and renew all of its rights, powers, privileges and franchises. ARTICLE V SECURITYHOLDERS, LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 5.01. Company to Furnish Trustee Names and Addresses of Securityholders. The Company will furnish or cause to be furnished to the Trustee (a) on a quarterly basis on each regular record date (as defined in Section 2.03) a list, in such form as the Trustee may reasonably require, of the names and addresses of the holders of each series of Debt Securities as of such regular record date, provided that the Company shall not be obligated to furnish or cause to furnish such list at any time that the list shall not differ in any respect from the most recent list furnished to the Trustee by the Company and (b) at such other times as the Trustee may request in writing within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that in either case, no such list need be furnished for any series for which the Trustee shall be the Security Registrar. SECTION 5.02. Preservation Of Information; Communications With Securityholders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debt Securities contained in the most recent list furnished to it as provided in Section 5.01 and as to the names and addresses of holders of Debt Securities received by the Trustee in its capacity as Security Registrar (if acting in such capacity). (b) The Trustee may destroy any list furnished to it as provided in Section 5.01 upon receipt of a new list so furnished. (c) Securityholders may communicate as provided in Section 312(b) of the Trust Indenture Act with other Securityholders with respect to their rights under this Indenture or under the Debt Securities. SECTION 5.03. Reports By the Company. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) that the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports that may be required pursuant to Section 13 of the Exchange Act, in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail, first class postage prepaid, or reputable overnight delivery service that provides for evidence of receipt, to the Securityholders, as their names and addresses appear upon the Security Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. SECTION 5.04. Reports by the Trustee. (a) On or before July 15 in each year in which any of the Debt Securities are Outstanding, the Trustee shall transmit by mail, first class postage prepaid, to the Securityholders, as their names and addresses appear upon the Security Register, a brief report dated as of the preceding May 15, if and to the extent required under Section 313(a) of the Trust Indenture Act. (b) The Trustee shall comply with Sections 313(b) and 313(c) of the Trust Indenture Act. (c) A copy of each such report shall, at the time of such transmission to Securityholders, be filed by the Trustee with the Company, with each stock exchange upon which any Debt Securities are listed (if so listed) and also with the Commission. The Company agrees to notify the Trustee when any Debt Securities become listed on any stock exchange. ARTICLE VI REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 6.01. Events of Default. (a) Whenever used herein with respect to Debt Securities of a particular series, "Event of Default" means any one or more of the following events that has occurred and is continuing: (1) the Company defaults in the payment of any installment of interest upon any of the Debt Securities of that series, as and when the same shall become due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms of the Debt Securities of that series shall not constitute a default in the payment of interest for this purpose; (2) the Company defaults in the payment of the principal of (or premium, if any, on) any of the Debt Securities of that series as and when the same shall become due and payable whether at maturity, upon redemption, by declaration or otherwise, or in any payment required by any sinking or analogous fund established with respect to that series; (3) the Company fails to observe or perform any other of its covenants or agreements with respect to that series contained in this Indenture or otherwise established with respect to that series of Debt Securities pursuant to Section 2.01 for a period of 90 days after the date on which written notice of such failure, requiring the same to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Company by the Trustee, by registered or certified mail, or to the Company and the Trustee by the holders of at least 25% in principal amount of the Debt Securities of that series at the time Outstanding; (4) the Company, pursuant to or within the meaning of any Bankruptcy Law, (i) commences a voluntary case, (ii) consents to the entry of an order for relief against it in an involuntary case, (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property or (iv) makes a general assignment for the benefit of its creditors; (5) a court of competent jurisdiction enters an order under any Bankruptcy Law that (i) is for relief against the Company in an involuntary case, (ii) appoints a Custodian of the Company for all or substantially all of its property, or (iii) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 90 days; or (6) in the event Debt Securities are issued to an Illinois Power Trust or other trust of the Company in connection with the issuance of Trust Securities by such trust, such trust shall have voluntarily or involuntarily dissolved, wound-up its business or otherwise terminated its existence, except in connection with (i) the distribution of Debt Securities to holders of Trust Securities in liquidation of their interests in such trust, (ii) the redemption of all outstanding Trust Securities of such trust, and (iii) mergers, consolidations or amalgamations, each as permitted by the Declaration of such trust. (b) If an Event of Default described in clauses 1, 2, 3 or 6 of this Section 6.01 with respect to Debt Securities of any series at the time outstanding occurs and is continuing, unless the principal of all the Debt Securities of that series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities of that series then Outstanding hereunder, by notice in writing to the Company (and to the Trustee, if given by such Securityholders), may declare the principal of all the Debt Securities of that series to be due and payable immediately, and upon any such declaration the same shall become and be immediately due and payable, notwithstanding anything contained in this Indenture or in the Debt Securities of that series or established with respect to that series pursuant to Section 2.01 to the contrary. If an Event of Default specified in clause (4) or (5) of Section 6.01(a) occurs or is continuing, then the principal amount of all the Debt Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Securityholder. At any time after the principal of the Debt Securities of that series shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the holders of 66% in aggregate principal amount of the Debt Securities of that series then Outstanding hereunder, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (i) the Company has paid or deposited with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debt Securities of that series and the principal of (and premium, if any, on) any and all Debt Securities of that series that shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that such payment is enforceable under applicable law, upon overdue installments of interest, at the rate per annum expressed in the Debt Securities of that series to the date of such payment or deposit) and the amount payable to the Trustee under Section 7.06, and (ii) any and all Events of Default with respect to such series, other than the nonpayment of principal on Debt Securities of that series that shall not have become due by their terms, shall have been remedied or waived as provided in Section 6.06. No such rescission and annulment shall extend to or shall affect any subsequent default or impair any right consequent thereon. (c) In case the Trustee shall have proceeded to enforce any right with respect to Debt Securities of that series under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceedings had been taken. SECTION 6.02. Collection of Indebtedness and Suits for Enforcement by Trustee. (a) The Company covenants that (1) in case it shall default in the payment of any installment of interest on any of the Debt Securities of a series, or any payment required by any sinking or analogous fund established with respect to that series as and when the same shall have become due and payable, and such default shall have continued for a period of 90 days, or (2) in case it shall default in the payment of the principal of (or premium, if any, on) any of the Debt Securities of a series when the same shall have become due and payable, whether upon maturity of the Debt Securities of a series or upon redemption or upon declaration or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debt Securities of that series, the whole amount that then shall have become due and payable on all such Debt Securities for principal (and premium, if any) or interest, or both, as the case may be, with interest upon the overdue principal (and premium, if any) and (to the extent that payment of such interest is enforceable under applicable law and, if the Debt Securities are held by an Illinois Power Trust, without duplication of any other amounts paid by such trust in respect thereof) upon overdue installments of interest at the rate per annum expressed in the Debt Securities of that series; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection and the amount payable to the Trustee under Section 7.06. (b) If the Company shall fail to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or other obligor upon the Debt Securities of that series and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or other obligor upon the Debt Securities of that series, wherever situated. (c) In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, readjustment, arrangement, composition or judicial proceedings affecting the Company or its creditors or property, the Trustee shall have power to intervene in such proceedings and take any action therein that may be permitted by the court and shall (except as may be otherwise provided by law) be entitled to file such proofs of claim and other papers and documents as may be necessary or advisable in order to have the claims of the Trustee and of the holders of Debt Securities of such series allowed for the entire amount due and payable by the Company under this Indenture at the date of institution of such proceedings and for any additional amount that may become due and payable by the Company after such date, and to collect and receive any moneys or other property payable or deliverable on any such claim, and to distribute the same after the deduction of the amount payable to the Trustee under Section 7.06; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the holders of Debt Securities of such series to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to such Securityholders, to pay to the Trustee any amount due it under Section 7.06. (d) All rights of action and of asserting claims under this Indenture, or under any of the terms established with respect to Debt Securities of that series, may be enforced by the Trustee without the possession of any of such Debt Securities, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for payment to the Trustee of any amounts due under Section 7.06, be for the ratable benefit of the holders of the Debt Securities of such series. In case of an Event of Default, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debt Securities of that series or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. SECTION 6.03. Application of Moneys Collected. Any moneys collected by the Trustee pursuant to this Article with respect to a particular series of Debt Securities shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal (or premium, if any) or interest, upon presentation of the Debt Securities of that series, and notation thereon of the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection and of all amounts payable to the Trustee under Section 7.06; SECOND: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XIV; and THIRD: To the payment of the amounts then due and unpaid upon Debt Debt Securities of such series for principal (and premium, if any) and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Debt Securities for principal (and premium, if any) and interest, respectively. SECTION 6.04. Limitation on Suits. No holder of any Security of any series shall have any right by virtue or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (i) such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to the Debt Securities of such series specifying such Event of Default, as hereinbefore provided; (ii) the holders of not less than 25% in aggregate principal amount of the Debt Securities of such series then Outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as trustee hereunder; (iii) such holder or holders shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby; (iv) the Trustee, for 60 days after its receipt of such notice, request and offer of indemnity, shall have failed to institute any such action, suit or proceeding; and (v) during such 60 day period, the holders of not less than 66% in principal amount of the Debt Securities of that series do not give the Trustee a direction inconsistent with the request. Notwithstanding anything contained herein to the contrary, any other provisions of this Indenture, the right of any holder of any Debt Security to receive payment of the principal of (and premium, if any) and interest on such Debt Security, as therein provided, on or after the respective due dates expressed in such Debt Security (or in the case of redemption, on the redemption date), or to institute suit for the enforcement of any such payment on or after such respective dates or redemption date, shall not be impaired or affected without the consent of such holder, and by accepting a Debt Security hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debt Security of such series with every other such taker and holder and the Trustee, that no one or more holders of Debt Securities of such series shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other of such Debt Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debt Securities of such series. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 6.05. Rights and Remedies Cumulative; Delay or Omission Not Waiver. (a) Except as otherwise provided in Section 2.07, all powers and remedies given by this Article to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debt Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such Debt Securities. (b) No delay or omission of the Trustee or of any holder of any of the Debt Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 6.04, every power and remedy given by this Article or by law to the Trustee or the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders. SECTION 6.06. Control by Securityholders. The holders of a majority in aggregate principal amount of the Debt Securities of any series at the time Outstanding, determined in accordance with Section 8.04, shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such series; provided, however, that such direction shall not be in conflict with any rule of law or with this Indenture or be unduly prejudicial to the rights of holders of Debt Securities of any other series at the time Outstanding determined in accordance with Section 8.04. Subject to the provisions of Section 7.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability. The holders of a majority in aggregate principal amount of the Debt Securities of any series at the time Outstanding affected thereby, determined in accordance with Section 8.04, may on behalf of the holders of all of the Debt Securities of such series waive any past default in the performance of any of the covenants contained herein or established pursuant to Section 2.01 with respect to such series and its consequences, except (i) a default in the payment of the principal of, or premium, if any, or interest on, any of the Debt Securities of that series as and when the same shall become due by the terms of such Debt Securities otherwise than by acceleration (unless such default has been cured and a sum sufficient to pay all matured installments of interest and principal and any premium has been deposited with the Trustee (in accordance with Section 6.01(c)) or (ii) a default in the covenants contained in Section 4.06(b). Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debt Securities of such series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. If the Property Trustee fails to enforce its rights under this Indenture, any holder of Preferred Securities or Common Securities (as defined in the Declaration) may institute a legal proceeding directly against the Company to enforce the Property Trustee's rights under this Indenture without first instituting a legal proceeding against the Property Trustee or any other Person. In addition, if the Company fails to make interest or other payments on Debt Securities of any series at the time Outstanding when due, any holder of Preferred Securities or Common Securities may enforce the Property Trustee's Rights directly against the Company. SECTION 6.07. Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debt Securities by such holder's acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding more than 10% in aggregate principal amount of the Outstanding Debt Securities of any series, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debt Security of such series, on or after the respective due dates expressed in such Debt Security or established pursuant to this Indenture. ARTICLE VII CONCERNING THE TRUSTEE SECTION 7.01. Certain Duties and Responsibilities of Trustee. (a) The Trustee, prior to the occurrence of an Event of Default with respect to the Debt Securities of a series and after the curing of all Events of Default with respect to the Debt Securities of that series that may have occurred, shall undertake to perform with respect to the Debt Securities of such series such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Debt Securities of a series has occurred (that has not been cured or waived), the Trustee shall exercise with respect to Debt Securities of that series such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) no provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) prior to the occurrence of an Event of Default with respect to the Debt Securities of a series and after the curing or waiving of all such Events of Default with respect to that series that may have occurred: (A) the duties and obligations of the Trustee shall, with respect to the Debt Securities of such series, be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable with respect to the Debt Securities of such series except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (B) in the absence of bad faith on the part of the Trustee, the Trustee may with respect to the Debt Securities of such series conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirement of this Indenture; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee, was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Debt Securities of any series at the time Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture with respect to the Debt Securities of that series; and (4) None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. SECTION 7.02. Certain Rights of Trustee. Except as otherwise provided in Section 7.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by a Board Resolution or an Officers' Certificate (unless other evidence in respect thereof is specifically prescribed herein); (c) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted hereunder in good faith and in reliance thereon; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby; nothing contained herein shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to a series of the Debt Securities (that has not been cured or waived) to exercise with respect to Debt Securities of that series such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (e) the Trustee shall not be liable for any action taken or omitted to be taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security, or other papers or documents, unless requested in writing so to do by the holders of not less than a majority in principal amount of the Outstanding Debt Securities of the particular series affected thereby (determined as provided in Section 8.04); provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such costs, expenses or liabilities as a condition to so proceeding. The reasonable expense of every such examination shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; and (i) the Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 7.03. Trustee Not Responsible for Recitals or Issuance of Debt Securities. (a) The recitals contained herein and in the Debt Securities shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. (b) The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debt Securities. (c) The Trustee shall not be accountable for the use or application by the Company of any of the Debt Securities or of the proceeds of such Debt Securities, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture or established pursuant to Section 2.01, or for the use or application of any moneys received by any paying agent other than the Trustee. SECTION 7.04. May Hold Debt Securities. The Trustee or any paying agent or Security Registrar, in its individual or any other capacity, may become the owner or pledgee of Debt Securities with the same rights it would have if it were not Trustee, paying agent or Security Registrar. SECTION 7.05. Moneys Held in Trust. Subject to the provisions of Section 11.05, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. SECTION 7.06. Compensation and Reimbursement. (a) The Company covenants and agrees to pay to the Trustee, and the Trustee shall be entitled to, such reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), as the Company and the Trustee may from time to time agree in writing, for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and, except as otherwise expressly provided herein, the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. (b) The obligations of the Company under this Section to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. Such additional indebtedness shall be secured by a lien prior to that of the Debt Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debt Securities. SECTION 7.07. Reliance on Officers' Certificate. Except as otherwise provided in Section 7.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting to take any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted to be taken by it under the provisions of this Indenture upon the faith thereof. SECTION 7.08. Qualification; Conflicting Interests. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the Company shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 7.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee with respect to the Debt Securities issued hereunder which shall at all times be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or other Person permitted to act as trustee by the Commission, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000), and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 7.10. SECTION 7.10. Resignation and Removal; Appointment of Successor. (a) The Trustee or any successor hereafter appointed, may at any time resign with respect to the Debt Securities of one or more series by giving written notice thereof to the Company and by transmitting notice of resignation by mail, first class postage prepaid, to the Securityholders of such series, as their names and addresses appear upon the Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee with respect to Debt Securities of such series by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee with respect to Debt Securities of such series, or any Securityholder of that series who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, subject to the provisions of Section 6.08, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any one of the following shall occur: (1) the Trustee shall fail to comply with the provisions of subsection (a) of Section 7.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months; or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.09 and shall fail to resign after written request therefor by the Company or by any such Securityholder; or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or commence a voluntary bankruptcy proceeding, or a receiver of the Trustee or of its property shall be appointed or consented to, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee with respect to all Debt Securities and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 6.08, unless the Trustee's duty to resign is stayed as provided herein, any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months may, on behalf of that holder and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Debt Securities of any series at the time Outstanding may at any time remove the Trustee with respect to such series by so notifying the Trustee and the Company and may appoint a successor Trustee for such series with the consent of the Company. (d) Any resignation or removal of the Trustee and appointment of a successor trustee with respect to the Debt Securities of a series pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.11. (e) Any successor trustee appointed pursuant to this Section may be appointed with respect to the Debt Securities of one or more series or all of such series, and at any time there shall be only one Trustee with respect to the Debt Securities of any particular series. SECTION 7.11. Acceptance of Appointment By Successor. (a) In case of the appointment hereunder of a successor trustee with respect to all Debt Securities, every such successor trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor trustee all the rights, powers, and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring Trustee hereunder. (b) In case of the appointment hereunder of a successor trustee with respect to the Debt Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor trustee with respect to the Debt Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities of that or those series to which the appointment of such successor trustee relates, (2) shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust, that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee and that no Trustee shall be responsible for any act or failure to act on the part of any other Trustee hereunder; and upon the execution and delivery of such supplemental indenture, the resignation or removal of the retiring Trustee shall become effective to the extent provided therein, such retiring Trustee shall with respect to the Debt Securities of that or those series to which the appointment of such successor trustee relates have no further responsibility for the exercise of rights and powers or for the performance of the duties and obligations vested in the Trustee under this Indenture, and each such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities of that or those series to which the appointment of such successor trustee relates; but, on request of the Company or any successor trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor trustee, to the extent contemplated by such supplemental indenture, the property and money held by such retiring Trustee hereunder with respect to the Debt Securities of that or those series to which the appointment of such successor trustee relates. (c) Upon request of any such successor trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be. (d) No successor trustee shall accept its appointment unless at the time of such acceptance such successor trustee shall be qualified and eligible under this Article. (e) Upon acceptance of appointment by a successor trustee as provided in this Section, the Company shall transmit notice of the succession of such trustee hereunder by mail, first class postage prepaid, to the Securityholders, as their names and addresses appear upon the Security Register. If the Company fails to transmit such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be transmitted at the expense of the Company. SECTION 7.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be qualified under the provisions of Section 7.08 and eligible under the provisions of Section 7.09, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case any Debt Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debt Securities so authenticated with the same effect as if such successor trustee had itself authenticated such Debt Securities. SECTION 7.13. Preferential Collection of Claims Against the Company. The Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. ARTICLE VIII CONCERNING THE SECURITYHOLDERS SECTION 8.01. Evidence of Action by Securityholders. Whenever in this Indenture it is provided that the holders of a majority or specified percentage in aggregate principal amount of the Debt Securities of a particular series may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such majority or specified percentage of that series have joined therein may be evidenced by any instrument or any number of instruments of similar tenor executed by such holders of Debt Securities of that series in Person or by agent or proxy appointed in writing. If the Company shall solicit from the Securityholders of any series any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such series for the determination of Securityholders (entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action) may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of Outstanding Debt Securities of that series have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the Outstanding Debt Securities of that series shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 8.02. Proof of Execution by Securityholders. Subject to the provisions of Section 7.01, proof of the execution of any instrument by a Securityholder (such proof will not require notarization) or his agent or proxy and proof of the holding by any Person of any of the Debt Securities shall be sufficient if made in the following manner: (a) The fact and date of the execution by any such Person of any instrument may be proved in any reasonable manner acceptable to the Trustee. (b) The ownership of Debt Securities shall be proved by the Debt Security Register of such Debt Securities or by a certificate of the Debt Security Registrar thereof. (c) The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. SECTION 8.03. Who May be Deemed Owners. Prior to the due presentment for registration of transfer of any Debt Security, the Company, the Trustee, any paying agent and any Debt Security Registrar may deem and treat the Person in whose name such Debt Security shall be registered upon the books of the Company as the absolute owner of such Debt Security (whether or not such Debt Security shall be overdue and notwithstanding any notice of ownership or writing thereon made by anyone other than the Debt Security Registrar) for the purpose of receiving payment of or on account of the principal of, premium, if any, and (subject to Section 2.03) interest on such Debt Security and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any Debt Security Registrar shall be affected by any notice to the contrary. SECTION 8.04. Certain Debt Securities Owned by Company Disregarded. In determining whether the holders of the requisite aggregate principal amount of Debt Securities of a particular series have concurred in any direction, consent waiver under this Indenture, the Debt Securities of that series that are owned by the Company or any other obligor on the Debt Securities of that series or by any Person directly or indirectly controlling or controlled by or under common control with the Company or any other obligor on the Debt Securities of that series (except Illinois Power Trust) shall be disregarded and deemed not to be Outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debt Securities of such series that the Trustee actually knows are so owned shall be so disregarded. The Debt Securities so owned that have been pledged in good faith may be regarded as Outstanding for the purposes of this Section, if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debt Securities and that the pledgee is not a Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 8.05. Actions Binding on Future Securityholders. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any action by the holders of a majority or specified percentage in aggregate principal amount of the Debt Securities of a particular series in connection with such action, any holder of a Debt Security of that series that is shown by the evidence to be included in the Debt Securities the holders of which have consented to such action may, by filing written notice with the Trustee, and upon proof of holding as provided in Section 8.02, revoke such action so far as concerns such Debt Security. Except as aforesaid, any such action taken by the holder of any Debt Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Debt Security, and of any Debt Security issued in exchange therefor, on registration of transfer thereof or in place thereof, irrespective of whether or not any notation in regard thereto is made upon such Debt Security. Any action taken by the holders of a majority or specified percentage in aggregate principal amount of the Debt Securities of a particular series in connection with such action shall be conclusively binding upon the Company, the Trustee and the holders of all the Debt Securities of that series. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01. Supplemental Indentures Without the Consent of Securityholders. In addition to any supplemental indenture otherwise authorized by this Indenture, the Company and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Securityholders, for one or more of the following purposes: (1) to cure any ambiguity, defect or inconsistency herein or in the Debt Securities of any series; (2) to comply with Article X; (3) to provide for uncertificated Debt Securities in addition to or in place of certificated Debt Securities; (4) to add to the covenants of the Company for the benefit of the holders of all or any series of Debt Securities (and if such covenants are to be for the benefit of less than all series of Debt Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; (5) to add to, delete from, or revise the conditions, limitations and restrictions on the authorized amount, terms or purposes of issue, authentication and delivery of Debt Securities, as herein set forth; (6) to make any change that does not adversely affect the rights of any Securityholder in any material respect; or (7) to provide for the issuance of and establish the form and terms and conditions of the Debt Securities of any series as provided in Section 2.01, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or any series of Debt Securities, or to add to the rights of the holders of any series of Debt Securities. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture that affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the holders of any of the Debt Securities at the time Outstanding notwithstanding any of the provisions of Section 9.02. SECTION 9.02. Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Section 8.01) of the holders of not less than 66% in aggregate principal amount of the Debt Securities of each series affected by such supplemental indenture or indentures at the time Outstanding, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner not covered by Section 9.01 the rights of the holders of the Debt Securities of such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the holders of each Debt Security then Outstanding and affected thereby, (i) extend the fixed maturity of any Debt Securities of any series, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the holder of each Debt Security so affected or (ii) reduce the aforesaid percentage of Debt Securities, the holders of which are required to consent to any such supplemental indenture. It shall not be necessary for the consent of the Securityholders of any series affected thereby under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture pursuant to the provisions of this Article or of Section 10.01, this Indenture shall, with respect to such series, be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debt Securities of the series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. Debt Securities Affected by Supplemental Indentures. Debt Securities of any series, affected by a supplemental indenture, authenticated and delivered after the execution of such supplemental indenture pursuant to the provisions of this Article or of Section 10.01, may bear a notation in form approved by the Company, provided such form meets the requirements of any securities exchange upon which such series may be listed, as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Debt Securities of that series so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any, such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Debt Securities of that series then Outstanding. SECTION 9.05. Execution of Supplemental Indentures. Upon the request of the Company, accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders required to consent thereto as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee, subject to the provisions of Section 7.01, may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, setting forth in general terms the substance of such supplemental indenture, to the Securityholders of all series affected thereby as their names and addresses appear upon the Debt Security Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. ARTICLE X SUCCESSOR CORPORATION SECTION 10.01. Company May Consolidate, Etc. Nothing contained in this Indenture or in any of the Debt Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other corporation (whether or not affiliated with the Company or its successor or successors) authorized to acquire and operate the same; provided, however, the Company hereby covenants and agrees that, upon any such consolidation, merger, sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of (premium, if any) and interest on all of the Debt Securities of all series in accordance with the terms of each series, according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Indenture with respect to each series or established with respect to such series pursuant to Section 2.01 to be kept or performed by the Company, shall be expressly assumed, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act, as then in effect) satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property. SECTION 10.02. Successor Corporation Substituted. (a) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of, premium, if any, and interest on all of the Debt Securities of all series Outstanding and the due and punctual performance of all of the covenants and conditions of this Indenture or established with respect to each series of the Debt Securities pursuant to Section 2.01 to be performed by the Company, with respect to each series, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named as the Company herein. (b) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition, such changes in phraseology and form (but not in substance) may be made in the Debt Securities thereafter to be issued as may be appropriate. (c) Nothing contained in this Indenture or in any of the Debt Securities shall prevent the Company from merging into itself or acquiring by purchase or otherwise all or any part of the property of any other Person (whether or not affiliated with the Company). SECTION 10.03. Evidence of Consolidation, Etc. to Trustee. The Trustee, subject to the provisions of Section 7.01, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or other disposition, and any such assumption, comply with the provisions of this Article. ARTICLE XI SATISFACTION AND DISCHARGE SECTION 11.01. Satisfaction and Discharge of Indenture. If at any time: (a) the Company shall have delivered to the Trustee for cancellation all Debt Securities of a series theretofore authenticated (other than any Debt Securities that shall have been destroyed, lost or stolen and that shall have been replaced or paid as provided in Section 2.07 and Debt Securities for whose payment money or Governmental Obligations have theretofore been deposited in trust or segregated and held in trust by the Company (and thereupon repaid to the Company or discharged from such trust, as provided in Section 11.05)); or (b) all such Debt Securities of a particular series not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit or cause to be deposited with the Trustee as trust funds the entire amount in moneys or Governmental Obligations or a combination thereof, sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay at maturity or upon redemption all Debt Securities of that series not theretofore delivered to the Trustee for cancellation, including principal (and premium, if any) and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder with respect to such series by the Company; then if the Company has delivered to the Trustee an Opinion of Counsel based on the fact that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable United States federal income tax law, in either case to the effect that, and such opinion shall confirm that, the holders of the Debt Securities of such series will not recognize income, gain or loss for United States federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to United States federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred, this Indenture shall thereupon cease to be of further effect with respect to such series except for the provisions of Sections 2.03, 2.05, 2.07, 4.01, 4.02, 4.03 and 7.10, that shall survive until the date of maturity or redemption date, as the case may be, and Sections 7.06 and 11.05, that shall survive to such date and thereafter, and the Trustee, on demand of the Company and at the cost and expense of the Company shall execute proper instruments acknowledging satisfaction of and discharging this Indenture with respect to such series. SECTION 11.02. Discharge of Obligations. If at any time all Debt Securities of a particular series not heretofore delivered to the Trustee for cancellation or that have not become due and payable as described in Section 11.01 shall have been paid by the Company by depositing irrevocably with the Trustee as trust funds the entire amount in moneys or Governmental Obligations, or a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof, delivered to the Trustee to pay at maturity or upon redemption under arrangements satisfactory to the Trustee for the giving of notice of redemption all such Debt Securities of that series not theretofore delivered to the Trustee for cancellation, including principal (and premium, if any) and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company with respect to such series, then after the date such moneys or Governmental Obligations, as the case may be, are deposited with the Trustee then, if the Company has delivered to the Trustee an Opinion of Counsel based on the fact that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable United States federal income tax law, in either case to the effect that, and such opinion shall confirm that, the holders of the Debt Securities of such series will not recognize income, gain or loss for United States federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to United States federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred, the obligations of the Company, under this Indenture with respect to such series shall cease to be of further effect except for the provisions of Sections 2.03, 2.05, 2.07, 4.01, 4.02, 4.03, 7.06, 7.10 and 11.05 hereof that shall survive until such Debt Securities shall mature and be paid. Thereafter, Sections 7.06 and 11.05 shall survive. SECTION 11.03. Deposited Moneys to be Held in Trust. All moneys or Governmental Obligations deposited with the Trustee pursuant to Sections 11.01 or 11.02 shall be held in trust and shall be available for payment as due, either directly or through any paying agent (including the Company acting as its own paying agent), to the holders of the particular series of Debt Securities for the payment or redemption of which such moneys or Governmental Obligations have been deposited with the Trustee. SECTION 11.04. Payment of Moneys Held by Paying Agents. In connection with the satisfaction and discharge of this Indenture, or the Company's obligation with respect to the Debt Securities of a series, all moneys or Governmental Obligations then held by any paying agent under the provisions of this Indenture shall, upon demand of the Company, be paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys or Governmental Obligations. SECTION 11.05. Repayment to Company. Any moneys or Governmental Obligations deposited with any paying agent or the Trustee, or then held by the Company, in trust for payment of principal of or premium or interest on the Debt Securities of a particular series that are not applied but remain unclaimed by the holders of such Debt Securities for at least two years after the date upon which the principal of (and premium, if any) or interest on such Debt Securities shall have respectively become due and payable, shall be repaid to the Company on May 31 of each year or (if then held by the Company) shall be discharged from such trust; and thereupon the paying agent and the Trustee shall be released from all further liability with respect to such moneys or Governmental Obligations, and the holder of any of the Debt Securities entitled to receive such payment shall thereafter, as an unsecured general creditor, look only to the Company for the payment thereof. ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01. No Recourse. No recourse under or upon any obligation, covenant or agreement of this Indenture, or of any Debt Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, past, present or future as such, of the Company or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors as such, of the Company or of any predecessor or successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debt Securities or implied herefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debt Securities or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Debt Securities. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01. Effect on Successors and Assigns. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company shall bind successors and assigns of the Company, whether so expressed or not. SECTION 13.02. Actions by Successor. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the corresponding board, committee or officer of any corporation that shall at the time be the lawful successor of the Company. SECTION 13.03. Surrender of Company Powers. The Company by instrument in writing executed by authority of 2/3 (two-thirds) of the Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company, and thereupon such power so surrendered shall terminate both as to the Company and as to any successor corporation. SECTION 13.04. Notices. Except as otherwise expressly provided herein, any notice or demand that by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debt Securities to or on the Company may be given or served by being deposited first class postage prepaid in a post-office letterbox addressed (until another address is filed in writing by the Company with the Trustee), as follows: Illinois Power Company, 500 South 27th Street, Decatur, Illinois 62525, Attention: Treasurer. Any notice, election, request or demand by the Company or any Securityholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Corporate Trust Office of the Trustee. SECTION 13.05. Governing Law. This Indenture and each Debt Security shall be deemed to be a contract made under the internal laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State. SECTION 13.06. Treatment of the Debt Securities as Debt. It is intended that the Debt Securities will be treated as indebtedness and not as equity for federal income tax purposes. The provisions of this Indenture shall be interpreted to further this intention. SECTION 13.07. Compliance Certificates and Opinions. (a) Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. (b) Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant in this Indenture shall include (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 13.08. Payments on Business Days. Except as provided pursuant to Section 2.01 pursuant to a Board Resolution, and as set forth in an Officers' Certificate, or established in one or more indentures supplemental to this Indenture, in any case where the date of maturity of interest or principal of any Debt Security or the date of redemption of any Debt Security shall not be a Business Day, then payment of interest or principal (and premium, if any) may be made on the next succeeding Business Day with the same force and effect as if made on the nominal date of maturity or redemption, and no interest shall accrue for the period after such nominal date. SECTION 13.09. Conflict with Trust Indenture Act. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 13.10. Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11. Separability. In case any one or more of the provisions contained in this Indenture or in the Debt Securities of any series shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debt Securities, but this Indenture and such Debt Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 13.12. Assignment. The Company will have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly-owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, the Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 13.13. Acknowledgment of Rights. The Company acknowledges that, with respect to any Debt Securities held by an Illinois Power Trust or a trustee of such trust, if the Property Trustee of such Trust fails to enforce its rights under this Indenture as the holder of the series of Debt Securities held as the assets of such Illinois Power Trust, any holder of Preferred Securities may, after a period of 30 days has elapsed from such holder's written request to such Property Trustee to enforce such rights, institute legal proceedings directly against the Company to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other person or entity. ARTICLE XIV SUBORDINATION OF DEBT SECURITIES SECTION 14.01. Subordination Terms. The payment by the Company of the principal of, premium, if any, and interest on any series of Debt Securities issued hereunder shall be subordinated to the extent set forth in an indenture supplemental hereto or a Board Resolution relating to such Debt Securities. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. ILLINOIS POWER COMPANY By:/s/ Cynthia G. Steward Name: Cynthia G. Steward Title: Controller Attest: By: /s/ Leah Manning Stetzner Name: Leah Manning Stetzner Title: Vice President, General Counsel and Corporate Secretary [Seal] WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Trustee By: /s/ Emmett R. Harmon Name: Emmett R. Harmon Title: Vice President Attest: By: /s/ W. Chris Sponenberg Name: W. Chris Sponenberg Title: Financial Services Officer [Seal] -----END PRIVACY-ENHANCED MESSAGE-----