-----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, LVYqjxjqAiRdx6+6+mVBQZh6ML0am/EdHFvZ8ZmQmrsHQyGIw2CiBull65XgBeh9 9yar3g8wDmkFLjXkgg1xIQ== 0000049816-97-000013.txt : 19970326 0000049816-97-000013.hdr.sgml : 19970326 ACCESSION NUMBER: 0000049816-97-000013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970325 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS POWER CO CENTRAL INDEX KEY: 0000049816 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370344645 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-03004 FILM NUMBER: 97562115 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 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 [NO FEE REQUIRED] For the Fiscal Year Ended December 31, 1996 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Registrant, State of Incorporation, Address Commission of Principal Executive I.R.S. Employer File Number Offices and Telephone Number Identification No. - ------------ ----------------------------- ------------------- 1-11327 ILLINOVA CORPORATION 37-1319890 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 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 Mandatorily redeemable preferred securities of subsidiary (Illinois Power Capital, L.P.) 9.45% Series Trust originated preferred securities of subsidiary (Illinois Power Financing 1) 8.00% Series First mortgage bonds 6 1/2% Series due 1999 8 3/4% Series due 2021 7.95% Series due 2004 New mortgage bonds 6 1/8% Series due 2000 6 3/4% Series due 2005 5 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 28, 1997 was approximately $1.9 billion. Illinova Corporation is the sole holder of the common stock of Illinois Power Company. The aggregate market value of the voting preferred stock held by non-affiliates of Illinois Power Company at February 28, 1997, was approximately $75 million. The determination of stock ownership by non- affiliates was made solely for the purpose of responding to this requirement and the registrants are not bound by this determination for any other purpose. The number of shares of Illinova Corporation Common Stock, without par value, outstanding on February 28, 1997 was 75,681,937. The number of shares of Illinois Power Company Common Stock, without par value, outstanding on February 28, 1997 was 72,233,040, all of which is owned by Illinova Corporation. Documents Incorporated by Reference 1. Portions of the 1996 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 1996 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 1996 Proxy Statement. (Part III of Form 10-K) 4. Portions of the Illinois Power 1996 Information Statement. (Part III of Form 10-K) ILLINOVA CORPORATION ILLINOIS POWER COMPANY FORM 10-K For the Fiscal Year Ended December 31, 1996 This combined Form 10-K is separately filed by Illinova Corporation and Illinois Power Company. Information contained herein relating to Illinois Power Company is filed by Illinova Corporation and separately by Illinois Power Company on its own behalf. Illinois Power Company makes no representation as to information relating to Illinova Corporation or its subsidiaries, except as it may relate to Illinois Power Company. TABLE OF CONTENTS Part I Page Item 1. Business 6 General 6 Competition 7 Customer and Revenue Data 9 Electric Business 9 Overview 9 Soyland 10 Fuel Supply 10 Construction Program 13 Clinton Power Station 13 General 13 Decommissioning Costs 14 Accounting Matters 14 Dividends 15 Gas Business 15 Gas Supply 15 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 18 Research and Development 18 Regulation 18 Executive Officers of Illinova Corporation 19 Executive Officers of Illinois Power Company 19 Operating Statistics 20 Item 2. Properties 20 Item 3. Legal Proceedings 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 Item 8. Financial Statements and Supplementary Data 22 TABLE OF CONTENTS (Continued) 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 25-26 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 four principal operating subsidiaries: IP, Illinova Generating Company (IGC), Illinova Energy Partners, Inc. (IEPI), and Illinova Insurance Company (IIC). In May, 1996, the services group of Illinova Power Marketing (IPMI) consolidated with Illinova Energy Services (IES) and the non-regulated marketing activities of Illinova to form a new venture known as IEPI. On February 12, 1997, the Illinova Board of Directors approved a merger of IEPI and IPMI. In the merger, IPMI will be the surviving corporation and will change its name to IEPI. IP, the primary business 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. IP is affected by changes in the electric utility industry driven by regulatory and legislative initiatives to introduce competition and end monopoly franchises in at least the generation side of the business. One aspect of this change is "direct access," meaning giving customers the freedom to purchase electricity from suppliers they choose. In 1995, IP was a participant in the development of Energy Choice 2000, a basis for formal review of utility regulation in Illinois. From this framework, IP continued its efforts to ensure a managed transition to direct access with the introduction of a legislative proposal in November 1996. For a more detailed discussion of these developments, refer to the "Competition" section of this item. IP provides funds to Illinova for operations and investments. Illinova accrues interest due to IP on any borrowed funds at a rate equal to the higher of the rate that Illinova would have to pay if it used a currently outstanding line of credit, or IP's actual cost of the funds provided. At the end of each quarter, if needed, IP effects a common stock repurchase from Illinova by accepting shares equal in market value to the amount of the funds provided to Illinova during the quarter plus the accrued interest for the quarter. During 1996, IP provided approximately $81 million in funds to Illinova. IP also provides funds to Illinova in the form of cash dividends payable on the Common Stock of IP. In 1996, approximately $85 million in such dividends was declared and paid. Since Illinova's inception in 1994, IP has provided approximately $135 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. IGC is an equity partner with Tenaska, Inc. in four natural gas- fired generation plants, of which three plants totaling approximately 700 megawatts (MW) are in operation and one 240 MW plant has had construction suspended. Tenaska, Inc. is an Omaha, Nebraska-based developer of independent power projects throughout the United States. IGC also owns 50 percent of the North American Energy Services Company (NAES). NAES supplies a broad range of operations, maintenance and support services to the world-wide independent power generation industry and operates the Tenaska generation plants in which IGC has an equity interest. IGC is an equity partner in the Indeck North American Power Fund (Fund). The Fund has generation projects in Long Beach, California, and Pepperell, Massachusetts. In addition to these ventures, IGC is involved in generation projects in Teesside, England; Puerto Cortez, Honduras; Zhejiang Province, People's Republic of China; Aguaytia, Peru; Old Harbour, Jamaica; Barranquilla, Columbia; and Balochistan, Pakistan. In August, 1996, Illinova's interest in the 1000 MW coal-fired plant in Joppa, Illinois was transferred to IGC. IEPI is Illinova's wholly-owned subsidiary that engages in the brokering and marketing of electric power and gas and the development and sales of energy related services. In May 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. In May 1996, IPMI expanded operations to include the midwestern United States. In July 1996, IP received FERC approval to sell electricity to IPMI without prior transaction approval from FERC. IIC was licensed in August 1996 by the State of Vermont as a captive insurance company. The primary business of IIC is to insure the risks of the subsidiaries of Illinova and risks related to or associated with their business enterprises. 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. Competition arises not only from co-generation or independent power production, but also from municipalities seeking to extend their service boundaries to include customers being served by utilities. The right of municipalities to have power wheeled to them by utilities was established in 1973. IP has been obligated to wheel power for municipalities and cooperatives in its territory since 1976. 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 at the state level 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 an 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. On November 21, 1996, IP and its partners in the Illinois Coalition for Responsible Electricity Choice announced a legislative proposal which would begin transformation of the Illinois electric industry from a highly regulated monopoly to a competitive, customer-choice environment. The proposal, which was introduced in the Illinois House of Representatives on January 29, 1997, would allow for a managed transition to direct access for all consumers by the year 2005. The plan balances the need to ensure the financial stability of current utility providers with the timing of customer choice. Other parties have introduced plans that allow for full competition by as early as 1998. On February 18, 1997, the Citizen's Utility Board (CUB) outlined its regulatory reform proposal which would require utilities to separate their generation assets, shop for the cheapest available power in the wholesale market, and sell that power to consumers, by January 1999. In addition, CUB's plan calls for direct access for all customers by April 2000. On March 11, 1997, a new restructuring bill was introduced in the Illinois House. This bill, supported by a broad-based alliance representing residential, commercial and industrial consumers, would allow all customers served by investor-owned utilities to have equal access to a competitive electric market by May 1, 1998. The plan also calls for a 10 percent rate reduction in the first year, with further reductions possible in the second and third years. Utilities needing additional revenues to ensure financial viability and reliability would be able to participate in a trust fund by charging a surcharge to all consumers on their system. A Joint Committee on Electric Utility Regulatory Reform of the Illinois General Assembly deliberated the issue of regulatory reform for 18 months. Their report, issued December 4, 1996, stated that the Committee was unable to reach consensus on a legislative proposal. It is reasonable to assume that significant change will be made to the state laws governing IP's electric operations, but impossible at this time to predict what these changes will be. If there is significant change in the laws governing electric utility operations, IP may be required to discontinue reporting under Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). According to disclosures made by utilities in states that have enacted such legislation, the Securities and Exchange Commission (SEC) is raising the issue of continued qualification to report under FAS 71, even where the legislation provides for a transition to full competition and for stranded cost recovery. Reporting under FAS 71 allows companies whose service obligations and prices are regulated, to maintain assets on their balance sheets representing costs they reasonably expect to recover from customers in the future, through inclusion of such costs in their rates. If IP ceased to qualify for reporting under FAS 71, it could be required to write off its regulatory assets, and this could have a material, adverse impact on IP and its operations. IP received approval from the ICC on March 13, 1996, and from FERC on April 24, 1996, to conduct an open access experiment beginning in 1996 and ending on December 31, 1999. The experiment allows certain industrial customers to purchase electricity and related services from other sources. On April 25, 1996, the first of the 21 eligible customers began buying a portion of their electricity from a supplier other than IP. Currently, 16 customers are participating in the experiment. The experiment has demonstrated immediate advantages competition brings to customers, such as lower prices and innovative service offerings. It has also provided evidence of challenges the industry faces as it moves toward customer choice. Challenges include dispatching small amounts of electricity such as one or two megawatt hours (MWHs), and the absence of requisite technology to dispatch fractional MWHs. In 1996, the experiment cost IP approximately $3.2 million in lost revenue net of avoided fuel cost and variable operating expenses. This loss was partially offset by selling the surplus energy and capacity on the open market and by $.9 million in transmission service charges. The issue of competition is one that raises both risks and opportunities. At this time, the ultimate effect of competition on Illinova's consolidated financial position and results of operations is uncertain. Customer and Revenue Data - ------------------------- Approximately 79 percent and 21 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 28, 1997, IP served 577,862 active electric customers and 404,838 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 1996 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 1996 Annual Report to Shareholders of Illinova Corporation and the 1996 Annual Report to Shareholders of Illinois Power Company, reference will be made herein only to the 1996 Annual Report to Shareholders of Illinova Corporation, and such reference will be deemed to include a reference to the 1996 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 "Soyland" hereunder for additional information. In 1996, IP provided interchange power to 44 entities, including 27 power marketers. IP's highest system peak hourly demand (native load) in 1996 was 3,444,651 kilowatts on July 18, 1996. IP's record for peak load is 3,666,738 kilowatts, set on July 13, 1995. IP owns and operates generating facilities with a total net summer capability of 4,571,250 kilowatts. The generating capability comes from six major steam generating plants and three peaking service combustion turbine plants. See Item 2 "Properties" for further information. IP is a participant, together with 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. 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 a member of the Mid-America Interconnected Network, one of ten regional reliability councils established to coordinate plans and operations of member companies regionally and nationally. In August 1996, IP transferred through a dividend its 20% ownership of the capital stock of Electric Energy, Inc. (EEI) to Illinova. EEI was organized to own and operate a steam electric generating station and related transmission facilities near Joppa, Illinois to supply electric energy to the U.S. Department of Energy (DOE) for its project near Paducah, Kentucky. Soyland - ------- IP has entered into an agreement with Soyland which will, subject to receipt of regulatory approvals, terminate the IP/Soyland Clinton Ownership Participation Agreement (OPA) and amend the IP/Soyland Power Coordination Agreement (PCA). Under terms of the agreement, IP will acquire Soyland's 13.2% ownership share of Clinton with no capital outlay. On March 13, 1997, approval to transfer Soyland's license to IP was granted from the Nuclear Regulatory Commission (NRC). Soyland's nuclear decommissioning trust also will be transferred to IP, which will assume all of Soyland's ownership obligations, including those related to decommissioning. As part of the agreement, IP will be responsible for providing Soyland's capacity and energy needs for a period of at least ten and potentially twenty years charging fixed fees designed to compensate IP for Clinton costs currently recovered from Soyland under the OPA. This agreement, and the amended PCA, are subject to approval by FERC, and petitions seeking such approvals have been filed. For more information on the PCA, see "Note 6 - Facilities Agreements" on page A-23 of the 1996 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 approximately 76% of the electricity produced by IP during 1996, with nuclear contributing 22% and other fuels accounting for 2%. Based on current forecasts, the percentages of generation attributable to nuclear fuel is projected to increase to as much as 32% while projected generation from coal will decline to about 68% 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 1996 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. Negotiations are under way to address the contracts expiring at the end of 1997. 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 1996 represented 2.3% 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, 1996 represented a 22-day supply based on IP's average daily burn projections for 1997. 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) became operational in the spring of 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, 1996, the Fuel Company had an invest ment in nuclear fuel of approximately $96 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, 1996, IP had no outstanding loans to the Fuel Company. At December 31, 1996, IP's net investment in nuclear fuel consisted of $42 million of Uranium 308. This inventory represents fuel used in connection with the sixth reload of Clinton which began in October 1996. At December 31, 1996, the unamortized investment of the nuclear fuel assemblies in the reactor was $55 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. The final delivery under this settlement will be made in May 1997. Conversion services for the period 1991-2001 are contracted with Sequoyah Fuels. Sequoyah Fuels closed its Oklahoma conversion plant in 1992 and joined with Allied Chemical Company to form a marketing company named CoverDyn. All conversion services will be performed at Allied's Metropolis, Illinois facility, but Sequoyah Fuels retains the contract with IP. IP has a utility Services contract for uranium enrichment requirements with the Department of Energy (DOE) which provides 70% of the enrichment requirements of Clinton through September 1999. The remaining 30% has been contracted with the DOE through an amendment to its incentive pricing plan through 1999. This amendment allows IP to either purchase the enrichment services at the DOE's incentive price or provide electricity at DOE's Paducah, Kentucky enrichment plant at an agreed exchange rate. Legislation was passed in October 1992 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 19 reloads, or through 2016. Beyond the stated commitments, IP may enter into additional contracts for uranium concentrates, conversion to uranium hexafluoride, enrichment and fabrication. Currently, commercial reprocessing of spent nuclear fuel is not allowed in the U.S. The Nuclear Waste Policy Act of 1982 (NWPA) was enacted to establish a government policy with respect to disposal of spent nuclear fuel and high-level radioactive waste. On July 6, 1984, 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 NWPA. The utilities asked the Court to confirm the DOE's commitment and to order the DOE to develop a compliance program with appropriate deadlines. The utilities also asked for relief from the ongoing funding requirements or to have an escrow account established for future funds paid to DOE. A three-judge panel ruled in July 1996 that the DOE's obligation to take spent fuel by the 1998 date specified in the NWPA is binding. The DOE notified utilities in December 1996 that it may not be able to meet the 1998 deadline, and solicited utility suggestions on how to accommodate the potential delay. In January 1997, petitions were filed in the D.C. Circuit Court of Appeals by several utilities and state utility commissions, seeking further enforcement of DOE's obligation, and seeking authority to make further Nuclear Waste Fund payments into escrow. 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 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 is currently an equity partner with 10 other utilities in an effort to develop a private temporary repository. Attempts to reach agreement with the Mescalaro Apache Tribe of New Mexico ended in early 1996; however, the group signed a lease in December 1996 with the Goshute Tribe to use land on its Utah reservation. A spent fuel storage application is expected to be submitted to the NRC in 1997. 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 is assessed an annual fee for a period of fifteen years based on quantities purchased from the DOE facilities prior to passage of the Act. At December 31, 1996, IP has a remaining liability of $5.0 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 0.6% of the electricity produced in 1996. 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 - -------------------- 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 1996 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 pages A-22 and A-23 of the 1996 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 1996 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- 17 of the 1996 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-21 of the 1996 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 1996 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 13.2%. On February 21, 1997, IP filed with FERC for approval to transfer Soyland's ownership of Clinton to IP. IP has entered into an agreement with Soyland which will, subject to receipt of regulatory approvals, terminate the IP/Soyland Clinton Ownership Participation Agreement (OPA) and amend the IP/Soyland PCA. Under terms of the agreement, IP will acquire Soyland's 13.2% ownership share of IP's Clinton Power Station with no capital outlay. On March 13, 1997, approval to transfer Soyland's license to IP was granted from the NRC. Soyland's nuclear decommissioning trust also will be transferred to IP, which is assuming all of Soyland's ownership obligations, including those related to decommissioning. Clinton was placed in service in 1987 and represents approximately 20% of IP's installed generation capacity. For more information on the Clinton Power Station, see "Note 3 - Clinton Power Station" on page A-18 of the 1996 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. On September 6, 1996, leakage at a recirculation pump seal caused IP operations personnel to shut down Clinton. IP decided not to restart Clinton prior to the start of the scheduled refueling outage on October 13, 1996. During the current refueling outage, Clinton has attempted to modify the first of three divisions of its electrical power system. Because of deficiencies in the implementation of the new transformer design, the decision was made to return to the old transformers until the newer design is modified and fully tested. This unanticipated delay, along with necessary NRC approval of the action, will delay start up of Clinton. It is anticipated that Clinton will return to service before the summer cooling season, when demand is greatest. For more information on the shutdown and results of the NRC findings, see "Management's Discussion and Analysis - Regulatory Matters" on page A-3 of the 1996 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-19 of the 1996 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; IPMI, a wholly-owned subsidiary that markets energy and energy-related services; IEPI, a wholly- owned subsidiary that develops and markets energy-related services to the unregulated energy market; and IIC, a wholly- owned subsidiary whose primary business is to insure certain risks of Illinova and its subsidiaries. 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. The IP consolidated financial statements include the accounts of Illinois Power Capital, L.P., a limited partnership in which IP serves as the general partner and Illinois Power Financing I, a statutory business trust in which IP serves as sponsor. IP currently prepares its financial statements in accordance with FAS 71. Accordingly, IP records various regulatory assets and liabilities to reflect the actions of regulators. It is reasonable to assume that significant changes will be made to state laws governing IP's electric operations, but impossible to predict what those changes will be. Management believes that IP currently meets the criteria for continued application of FAS 71 but will continue to evaluate significant changes in the regulatory and competitive environment to assess IP's overall compliance with such criteria. These criteria include: 1) whether rates set by regulators are designed to 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, or significant portions of its business, no longer meet 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 11, 1996, Illinova increased the quarterly common stock dividend 11%, to $.31 per share from $.28 per share, effective with the common stock dividend for the first quarter of 1997. Gas Business ------------ IP supplies retail natural gas service to an estimated aggregate population of 920,000 in 257 incorporated municipali ties, 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 1996 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 10.2 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 20,000 MMBtu for peak- shaving purposes. Gas properties include approximately 8,000 miles of mains. IP experienced its 1996 peak-day send out of 758,927 MMBtu of natural gas on February 2, 1996. This compares with IP's record peak-day send out of 857,324 MMBtu of natural gas on January 10, 1982. Gas Supply - ---------- IP has contracts with six interstate pipeline companies for firm transportation and storage services. These contracts have varying expiration dates ranging from 1998 to 2002. IP also enters into contracts for the acquisition of natural gas supply. Those contracts range in duration from one month to five months. 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 beginning in 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 pages A-20 and A-21 of the 1996 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-21 of the 1996 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 Clinton permit was reissued in the third quarter of 1995. The Havana Power Station permit was reissued in the first quarter of 1996. The Hennepin Power Station permit application for reissuance was submitted in the fourth quarter of 1996 and is not expected until late 1997. The Vermilion Power Station permit was reissued in the fourth quarter of 1996. The Wood River Power Station permit was reissued in the first quarter of 1996. The Baldwin power station permit will expire in the fourth quarter of 1997. An application to renew the permit will be submitted in the second quarter of 1997. On May 2, 1996, the Illinois Pollution Control Board granted IP's request for an Adjusted Water Quality Standard for boron, which satisfies the compliance requirement in the permit. The adjusted standard will be incorporated into the reissued permit. 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 clean up 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 the first and second years of ground water monitoring data, 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-21 of the 1996 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. Environmental Expenditures - -------------------------- Operating expenses for environmentally-related activities were $45 million and $46 million in 1995 and 1996, respectively (including the incremental costs of alternative fuels to meet environmental requirements). IP's capital expenditures (including AFUDC) for environmental protection programs were approximately $1 million in 1996. Accumulated capital expenditures since 1969 have reached approximately $800 million. Research and Development ------------------------ Illinova's research and development expenditures, consisting entirely of IP's research and development expenditures, during 1996, 1995 and 1994 were approximately $5.4 million, $5.5 million and $5.5 million, respectively. 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, interaction with affiliates, 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. 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. Executive Officers of Illinova Corporation ------------------------------------------ Name of Officer Age Position - --------------- --- -------- Larry D. Haab 59 Chairman, President and Chief Executive Officer Larry F. Altenbaumer 48 Chief Financial Officer, Treasurer and Controller Leah Manning Stetzner 48 General Counsel and Corporate Secretary Mr. Haab was elected Chairman, President and Chief Executive Officer in December 1993. Mr. Altenbaumer was elected Chief Financial Officer, Treasurer and Controller in June 1994. Ms. Stetzner was elected General Counsel and Corporate Secretary in June 1994. The executive officers are elected annually by the Board of Directors at the first meeting of the Board held after the annual meeting of shareholders, and hold office until their successors are duly elected or until their death, resignation or removal by the Board. Executive Officers of Illinois Power Company -------------------------------------------- Name of Officer Age Position - --------------- --- -------- Larry D. Haab 59 Chairman, President and Chief Executive Officer Larry F. Altenbaumer 48 Senior Vice President and Chief Financial Officer David W. Butts 42 Senior Vice President John G. Cook 49 Senior Vice President Paul L. Lang 56 Senior Vice President Wilfred Connell 59 Vice President Richard W. Eimer, Jr. 48 Vice President Robert D. Reynolds 40 Vice President Leah Manning Stetzner 48 Vice President, General Counsel and Corporate Secretary Cynthia G. Steward 39 Controller Eric B. Weekes 45 Treasurer Each of the IP executive officers, except for Mr. Weekes, 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, 1992. 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. Mr. Reynolds was elected Vice President in May 1996. Prior to his election to Vice President, Mr. Reynolds served as Director of Pricing and Manager of Electric Supply. Ms. Stetzner was elected Vice President, General Counsel and Corporate Secretary in February 1993. She joined IP as General Counsel and Corporate Secretary in October 1989. Ms. Steward was elected Controller in September 1995. She previously held the positions of Manager of Employee Services and Director of Accounting. Mr. Weekes joined IP as Treasurer in January 1997. He previously served as Director of Financial Analysis, Budgets and Controls with Kraft Foods. The present term of office of each of the above executive officers extends to the first meeting of Illinova's and IP's Board of Directors after the Annual Election of Directors. There are no family relationships among any of the executive officers and directors of Illinova and IP. Operating Statistics --------------------- For Illinova the information under the caption "Selected Illinois Power Company Statistics" on page A-33 of the 1996 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 1996 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 4,424,250 kilowatts. In addition, IP owns nine quick start combustion turbine peaking units at three locations with a combined net summer capacity of 147,000 kilowatts. All of IP's generating stations are in the State of Illinois, including IP's only nuclear generating station, Clinton. IP owns 50% of three combustion turbine units, located in Bloomington, Illinois, with combined net capacity of 5,250 kilowatts. State Farm Insurance Company owns the other 50% of these units. The total IP available net summer capability is 4,571,250 kilowatts. The major coal fired units at Baldwin, Havana, Hennepin and Wood River make up 2,936,000 kilowatts of summer capacity. Units comprising 377,000 kilowatts of summer 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. On December 18, 1996, the control and computer rooms for Wood River units 4 and 5 were damaged by an in-plant fire. The extent of the damage is currently being evaluated and repairs have been started to return these two units to service as soon as possible. Preliminary expectations are to return Unit 4 to service in the second quarter of 1997, and Unit 5 later in the year. During 1995, natural gas firing capability was added to the Vermilion station. Vermilion now has the capability for either coal or natural gas firing to achieve its summer capacity of 176,000 kilowatts. Vermilion 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 37,400 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. IP anticipates that during 1997 the 1943 mortgage will be amended to be consistent with the 1992 mortgage. 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 1996 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement which is incorporated herein by reference. See "Environmental Matters" reported under Item 1 of this report for information regarding legal proceedings concerning environmental matters. 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, 1996. 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 1996 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 1996 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 1996 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 1996 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 1996 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 1996 Annual Report to Shareholders in the appendix to the IP Information Statement is incorporated herein by reference. In March 1995, the ICC approved a program whereby IP will reacquire shares of its common stock from Illinova, from time to time, at prices determined to be equivalent to current market value. The reacquired stock will be retained as treasury stock or canceled. The ICC did not set a limit on the number of shares of common stock that can be repurchased, subject to meeting certain financial tests. During 1996, IP repurchased 714,811 shares for a total of $18.9 million, averaging about $26 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 1996 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 1996 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 1996 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 1996 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 1996 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 1996 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 1997 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 1997 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 1997 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 1997 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 1997 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 1997 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 1996 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, 1996 A-11 Consolidated Balance Sheets at December 31, 1996 and 1995 A-12 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 A-13 Consolidated Statements of Retained Earnings for the three years ended December 31, 1996 A-13 Notes to Consolidated Financial Statements A-14 - A-31 * Incorporated by reference from the indicated pages of the 1996 Annual Report to Shareholders in the appendix to the Illinova Proxy Statement. (1b) Financial Statements: Page in 1996 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, 1996 A-11 Consolidated Balance Sheets at December 31, 1996 and 1995 A-12 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 A-13 Consolidated Statements of Retained Earnings for the three years ended December 31, 1996 A-13 Notes to Consolidated Financial Statements A-14 - A-31 ** Incorporated by reference from the indicated pages of the 1996 Annual Report to Shareholders in the appendix to the IP Information Statement (See page 22 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, 1996: Report filed on Form 8-K on January 29, 1997 Other Events: NRC informed IP via letter that it viewed Clinton as having a declining safety performance trend, but did not place Clinton on its semiannual "watch list". Report filed on Form 8-K on March 6, 1997 Other Events: Communication to the Financial Community regarding the status of Clinton outage. EX-99.1 2 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 25, 1997 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 - ------------------------- Executive Officer and Director Larry D. Haab (Principal Executive Officer) Larry F. Altenbaumer Senior Vice President and - --------------------------- Chief Financial Officer Larry F. Altenbaumer (Principal Financial Officer) Cynthia G. Steward Controller - ---------------------------- Cynthia G. Steward (Principal Accounting Officer) Richard R. Berry - ----------------------------- Richard R. Berry C. Steven McMillan - ----------------------------- C. Steven McMillan -March 25, 1997 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 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ILLINOVA CORPORATION (REGISTRANT) By Larry D. Haab -------------------------------------- Larry D. Haab, Chairman, President and Chief Executive Officer Date: March 25, 1997 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 - ------------------------ Executive Officer and Director Larry D. Haab (Principal Executive Officer) Larry F. Altenbaumer Chief Financial Officer, - ------------------------- Treasurer and Controller Larry F. Altenbaumer (Principal Financial and Accounting Officer) Richard R. Berry - --------------------------- Richard R. Berry C. Steven McMillan - --------------------------- C. Steven McMillan Donald S. Perkins - --------------------------- March 25, 1997 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 EX-99.2 3 Exhibit Index (Continued) Exhibit Description Page Number - ------- ----------- ----------- 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 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 December 14, 1994. Filed as Exhibit 3(b)(1) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1994 (File No. 1-3004). * (4) Instruments Defining Rights of Security Holders, Including Indentures Illinova Corporation (a)(1) See (4)(b) below for instruments defining the rights of holders of long-term debt of Illinois Power Company (a)(2) Indenture dated February 1, 1997, between Illinova Corporation and The First National Bank of Chicago, as trustee. 37 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. Filed as Exhibit 4(b)(36) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1995 (File No. 1-3004). * (b)(37) First Supplemental Indenture dated January 1, 1996, between Illinois Power Company and Wilmington Trust Company. Filed as Exhibit 4(b)(37) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1995 (File No. 1-3004). * (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. Filed as Exhibit 10 (a)(6) to the Annual Report on Form 10-K under the Securities Exchange Act of 1934 for the year ended December 31, 1995 (File No. 1-3004).~ * (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. 107 (b) Computation of ratio of earnings to fixed charges for Illinois Power Company. 108 (13) Annual Reports to Shareholders (a) Illinova Corporation Proxy Statement and 1996 Annual Report to Shareholders. 109 (b) Illinois Power Company Information Statement and 1996 Annual Report to Shareholders. 157 (21) Subsidiaries of Registrants (a) Subsidiaries of Illinova Corporation and Illinois Power Company. 205 (23) Consents of Experts Consent of Independent Accountants for Illinova Corporation. 207 (27) Financial Data Schedules (a) Illinova Corporation (b) Illinois Power Company ______________________________________ * Incorporated herein by reference. ~ Management contract and compensatory plans or arrangements. EX-4 4 INDENTURE ILLINOVA CORPORATION AND THE FIRST NATIONAL BANK OF CHICAGO, AS TRUSTEE Dated as of February 1, 1997 __________ ILLINOVA CORPORATION Reconciliation and Tie between Trust Indenture Act of 1939 and Indenture, dated as of February 1, 1997 Trust Indenture Act Section Indenture Section - ---------------- ----------------- 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . 5.8 (a)(2) . . . . . . . . . . . . . . . . . . . . . . 5.8 (a)(3) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (a)(4) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . 5.9; 5.12 311(a) . . . . . . . . . . . . . . . . . . . . . 5.13 (b) . . . . . . . . . . . . . . . . . . . . . 5.13 (c) . . . . . . . . . . . . . . . . . . . . . Not Applicable 312(a) . . . . . . . . . . . . . . . . . . . . . 3.8(a) (b) . . . . . . . . . . . . . . . . . . . . . 3.8(b) (c) . . . . . . . . . . . . . . . . . . . . . 3.8(c) 313(a) . . . . . . . . . . . . . . . . . . . . . 3.10 (b) . . . . . . . . . . . . . . . . . . . . . 3.10 (c) . . . . . . . . . . . . . . . . . . . . . 3.10 (d) . . . . . . . . . . . . . . . . . . . . . 3.10 314(a) . . . . . . . . . . . . . . . . . . . . . 3.9; 3.11 (b) . . . . . . . . . . . . . . . . . . . . . Not Applicable (c)(1) . . . . . . . . . . . . . . . . . . . . . . 10.5 (c)(2) . . . . . . . . . . . . . . . . . . . . . . 10.5 (c)(3) . . . . . . . . . . . . . . . . . . . . . . 10.5; 9.1 (d) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (e) . . . . . . . . . . . . . . . . . . . . . 10.5 315(a) . . . . . . . . . . . . . . . . . . . . . 5.1 (b) . . . . . . . . . . . . . . . . . . . . . 4.11; 3.10 (c) . . . . . . . . . . . . . . . . . . . . . 5.1 (d) . . . . . . . . . . . . . . . . . . . . . 5.1 (d)(1) . . . . . . . . . . . . . . . . . . . . . . 5.1(a) (d)(2) . . . . . . . . . . . . . . . . . . . . . . 5.1(b) (d)(3) . . . . . . . . . . . . . . . . . . . . . . 5.1(c) (e) . . . . . . . . . . . . . . . . . . . . . 4.12 316(a)(1)(A) . . . . . . . . . . . . . . . . . . . . 4.1; 4.9 (a)(1)(B) . . . . . . . . . . . . . . . . . . . . 4.10 (a)(2) . . . . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . 4.6; 4.7 (c) . . . . . . . . . . . . . . . . . . . . . Not Applicable 317(a)(1) . . . . . . . . . . . . . . . . . . . . . 4.2 (a)(2) . . . . . . . . . . . . . . . . . . . . . 4.2 (b) . . . . . . . . . . . . . . . . . . . . . 5.5 318(a) . . . . . . . . . . . . . . . . . . . . . 10.7 _____________ NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture and shall not have any bearing on the interpretation of its terms or provisions. TABLE OF CONTENTS __________ Page ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined 1 "Assets" 1 "Authenticating Agent" 1 "Authorized Newspaper" 1 "Bearer Security" 2 "Board of Directors" 2 "Board Resolution" 2 "Business Day" 2 "Commission" 2 "Consolidated Capitalization" 2 "Consolidated Indebtedness" 2 "Consolidated Shareholders' Equity" 2 "Consolidated Subsidiary" 2 "Corporate Trust Office" 2 "Coupon" 2 "Covenant Defeasance" 2 "Depositary" 2 "Dollar" 3 "ECU" 3 "Event of Default" 3 "Foreign Currency" 3 "Holder" 3 "Holder of Securities" 3 "Securityholder" 3 "Illinois Power" 3 "Indebtedness" 3 "Indenture" 3 "Interest" 3 "Issuer" 3 "Issuer Order" 3 "Judgment Currency" 3 "Non-Recourse Indebtedness" 3 "Officers' Certificate" 4 "Opinion of Counsel" 4 "Original Issue Date" 4 "Original Issue Discount Security" 4 "Outstanding" 4 "Periodic Offering" 5 "Person" 5 "Principal" 5 "Record Date" 5 "Registered Global Security" 5 "Registered Security" 5 "Required Currency" 5 "Responsible Officer" 5 "Security" 5 "Securities" 5 "Stated Maturity" 5 "Subsidiary" 5 "Trust Indenture Act of 1939" 6 "Trustee" 6 "Unregistered Security" 6 "United States Government Obligations" 6 "Yield to Maturity" 6 ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally 6 SECTION 2.2 Form of Trustee's Certificate of Authentication 6 SECTION 2.3 Amount Unlimited; Issuable in Series 7 SECTION 2.4 Authentication and Delivery of Securities 9 SECTION 2.5 Execution of Securities 11 SECTION 2.6 Certificate of Authentication 11 SECTION 2.7 Denomination and Date of Securities; Payments of Interest 12 SECTION 2.8 Registration, Transfer and Exchange 12 SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities 15 SECTION 2.10 Cancellation of Securities; Disposition Thereof 16 SECTION 2.11 Temporary Securities 16 ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1 Payment of Principal and Interest 17 SECTION 3.2 Offices for Payments, etc. 17 SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee 18 SECTION 3.4 Paying Agents 18 SECTION 3.5 Written Statement to Trustee 19 SECTION 3.6 Limitations upon Liens 19 SECTION 3.7 Luxembourg Publications 21 SECTION 3.8 Securityholders Lists 21 SECTION 3.9 Reports by the Issuer 22 SECTION 3.10 Reports by the Trustee 22 SECTION 3.11 Waiver of Certain Covenants 22 ARTICLE FOUR REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 4.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default 23 SECTION 4.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt 25 SECTION 4.3 Application of Proceeds 27 SECTION 4.4 Suits for Enforcement 28 SECTION 4.5 Restoration of Rights on Abandonment of Proceedings 28 SECTION 4.6 Limitations on Suits by Securityholders 28 SECTION 4.7 Unconditional Right of Securityholders to Institute Certain Suits 29 SECTION 4.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default 29 SECTION 4.9 Control by Holders of Securities 29 SECTION 4.10 Waiver of Past Defaults 29 SECTION 4.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances 30 SECTION 4.12 Right of Court to Require Filing of Undertaking to Pay Costs 30 ARTICLE FIVE CONCERNING THE TRUSTEE SECTION 5.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default 31 SECTION 5.2 Certain Rights of the Trustee 32 SECTION 5.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof 33 SECTION 5.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc. 33 SECTION 5.5 Moneys Held by Trustee 33 SECTION 5.6 Compensation and Indemnification of Trustee and Its Prior Claim 33 SECTION 5.7 Right of Trustee to Rely on Officers' Certificate, etc. 33 SECTION 5.8 Persons Eligible for Appointment as Trustee 34 SECTION 5.9 Resignation and Removal; Appointment of Successor Trustee 34 SECTION 5.10 Acceptance of Appointment by Successor Trustee 35 SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business of Trustee 36 SECTION 5.12 Disqualification; Conflicting Interests 36 SECTION 5.13 Preferential Collection of Claims Against the Issuer 37 SECTION 5.14 Appointment of Authenticating Agent 37 ARTICLE SIX CONCERNING THE SECURITYHOLDERS SECTION 6.1 Evidence of Action Taken by Securityholders 38 SECTION 6.2 Proof of Execution of Instruments and of Holding of Securities 38 SECTION 6.3 Holders to be Treated as Owners 39 SECTION 6.4 Securities Owned by Issuer Deemed Not Outstanding 39 SECTION 6.5 Right of Revocation of Action Taken 39 ARTICLE SEVEN SUPPLEMENTAL INDENTURES SECTION 7.1 Supplemental Indentures Without Consent of Securityholders 40 SECTION 7.2 Supplemental Indentures With Consent of Securityholders 41 SECTION 7.3 Effect of Supplemental Indenture 42 SECTION 7.4 Documents to Be Given to Trustee 42 SECTION 7.5 Notation on Securities in Respect of Supplemental Indentures 42 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 8.1 Issuer May Consolidate, etc. 43 SECTION 8.2 Successor Corporation Substituted 43 ARTICLE NINE SATISFACTION AND DISCHARGE OF INDENTURE;UNCLAIMED MONEYS SECTION 9.1 Satisfaction and Discharge of Indenture 44 SECTION 9.2 Application by Trustee of Funds Deposited for Payment of Securities 47 SECTION 9.3 Repayment of Moneys Held by Paying Agent 47 SECTION 9.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years 48 SECTION 9.5 Indemnity for United States Government Obligations 48 SECTION 9.6 Excess Funds 48 ARTICLE TEN MISCELLANEOUS PROVISIONS SECTION 10.1 Incorporators, Stockholders, Officers and Directors of Issuer Exempt from Individual Liability 48 SECTION 10.2 Provisions of Indenture for the Sole Benefit of Parties and Holders of Securities and Coupons49 SECTION 10.3 Successors and Assigns of Issuer Bound by Indenture 49 SECTION 10.4 Notices and Demands on Issuer, Trustee and Holders of Securities and Coupons 49 SECTION 10.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein 49 SECTION 10.6 Payments Due on Saturdays, Sundays and Holidays 50 SECTION 10.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939 50 SECTION 10.8 New York Law to Govern 51 SECTION 10.9 Counterparts 51 SECTION 10.10 Effect of Headings 51 SECTION 10.12 Judgment Currency 51 ARTICLE ELEVEN REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 11.1 Applicability of Article 52 SECTION 11.2 Notice of Redemption; Partial Redemptions 52 SECTION 11.3 Payment of Securities Called for Redemption 53 SECTION 11.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption 54 SECTION 11.5 Mandatory and Optional Sinking Funds 54 ARTICLE TWELVE MEETINGS OF HOLDERS OF SECURITIES SECTION 12.1 Purposes for Which Meetings May Be Called 56 SECTION 12.2 Call, Notice and Place of Meetings 56 SECTION 12.3 Persons Entitled to Vote at Meetings 57 SECTION 12.4 Quorum; Action 57 SECTION 12.5 Determination of Voting; Conduct and Adjournment of Meetings 58 SECTION 12.6 Counting Votes and Recording Action of Meetings 58 THIS INDENTURE, dated as of February 1, 1997 between ILLINOVA CORPORATION, an Illinois corporation (the "Issuer"), and THE FIRST NATIONAL BANK OF CHICAGO, as trustee (the "Trustee"), W I T N E S S E T H : WHEREAS, the Issuer has duly authorized the issue from time to time of its unsecured debentures, notes or other evidences of indebtedness to be issued in one or more series (the "Securities") up to such principal amount or amounts as may from time to time be authorized in accordance with the terms of this Indenture; WHEREAS, the Issuer has duly authorized the execution and delivery of this Indenture to provide, among other things, for the authentication, delivery and administration of the Securities; and WHEREAS, all things necessary to make this Indenture a valid indenture and agreement according to its terms have been done. NOW, THEREFORE, in consideration of the premises and the purchases of the Securities by the holders thereof, the Issuer and the Trustee mutually covenant and agree for the equal and proportionate benefit of the respective holders from time to time of the Securities and of the Coupons, if any, appertaining thereto as follows: ARTICLE ONE DEFINITIONS SECTION 1.1 Certain Terms Defined. The following terms (except as otherwise expressly provided or unless the context otherwise clearly requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Article. All other terms used in this Indenture that are defined in the Trust Indenture Act of 1939 or the definitions of which in the Securities Act of 1933 are referred to in the Trust Indenture Act of 1939, including terms defined therein by reference to the Securities Act of 1933 (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 this Indenture. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "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. The terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular. "Assets" shall have the meaning set forth in Section 3.6(b)(4). "Authenticating Agent" shall have the meaning set forth in Section 5.14. "Authorized Newspaper" means a newspaper (which, in the case of The City of New York, will, if practicable, be The Wall Street Journal (Eastern Edition), in the case of the United Kingdom, will, if practicable, be the Financial Times (London Edition) and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort) published in an official language of the country of publication customarily published at least once a day for at least five days in each calendar week and of general circulation in The City of New York, the United Kingdom or in Luxembourg, as applicable. If it shall be impractical in the opinion of the Trustee to make any publication of any notice required hereby in an Authorized Newspaper, any publication or other notice in lieu thereof which is made or given with the approval of the Trustee shall constitute a sufficient publication of such notice. "Bearer Security" means any Security established pursuant to Section 2.1 which is payable to bearer, including, without limitation, unless the context otherwise indicates, a Security in temporary or permanent global bearer form. "Board of Directors" means either the Board of Directors of the Issuer or any committee of such Board or other individuals duly authorized to act on its behalf. "Board Resolution" means a copy of one or more resolutions, certified by the secretary or an assistant secretary of the Issuer to have been duly adopted or consented to by the Board of Directors and to be in full force and effect, and delivered to the Trustee. "Business Day" means, with respect to any Security, a day that in the city (or in any of the cities, if more than one) in which amounts are payable, as specified in the form of such Security, is not a day on which banking institutions are authorized or required by law or regulation to close. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Securities Exchange Act of 1934, or if at any time after the execution and delivery of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties on such date. "Consolidated Capitalization" shall have the meaning set forth in Section 3.6(b)(1). "Consolidated Indebtedness" shall have the meaning set forth in Section 3.6(b)(5). "Consolidated Shareholders' Equity" shall have the meaning set forth in Section 3.6(b)(2). "Consolidated Subsidiary" shall have the meaning set forth in Section 3.6(b)(3). "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date as of which this Indenture is dated, located in the City of New York, New York. "Coupon" means any interest coupon appertaining to a Security. "Covenant Defeasance" shall have the meaning set forth in Section 9.1(C). "Depositary" means, with respect to the Securities of any series issuable or issued in the form of one or more Registered Global Securities, the Person designated as Depositary by the Issuer pursuant to Section 2.3 until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean or include each Person who is then a Depositary hereunder, and if at any time there is more than one such Person, "Depositary" as used with respect to the Securities of any such series shall mean the Depositary with respect to the Registered Global Securities of that series. "Dollar" means the coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. "ECU" means the European Currency Unit as defined and revised from time to time by the Council of European Communities. "Event of Default" means any event or condition specified as such in Section 4.1. "Foreign Currency" means a currency issued by the government of a country other than the United States. "Holder", "Holder of Securities", "Securityholder" or other similar terms mean (a) in the case of any Registered Security, the Person in whose name such Security is registered in the security register kept by the Issuer for that purpose in accordance with the terms hereof, and (b) in the case of any Unregistered Security, the bearer of such Security, or any Coupon appertaining thereto, as the case may be. "Illinois Power" means Illinois Power Company, a subsidiary of the Issuer. "Indebtedness" means indebtedness which is for money borrowed from others. For purposes of Section 3.6 only, "Indebtedness" shall have the meaning set forth in Section 3.6. "Indenture" means this instrument as originally executed and delivered or, if amended or supplemented as herein provided, as so amended or supplemented or both, and shall include the forms and terms of particular series of Securities established as contemplated hereunder. "Interest" means, when used with respect to non-interest bearing Securities, interest payable after maturity. "Issuer" means Illinova Corporation, an Illinois corporation, and, subject to Article Eight, its successors and assigns. "Issuer Order" means a written statement, request or order of the Issuer signed in its name by the Chairman of the Board, the President, a Vice President, a Secretary or a Treasurer of the Issuer. "Judgment Currency" shall have the meaning set forth in Section 10.12. "Non-Recourse Indebtedness" means indebtedness of the Issuer or Illinois Power in respect of which the recourse of the holder of such indebtedness, whether direct or indirect and whether contingent or otherwise, is effectively limited to specified assets, and with respect to which (i) neither the Issuer or Illinois Power provides any credit support, and (ii) a default thereunder will not result in a default under any Indebtedness or other obligations of the Issuer or Illinois Power. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President, and by the Controller, Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Issuer and delivered to the Trustee. Each such certificate shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in Section 10.5, if applicable. "Opinion of Counsel" means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer and who shall be satisfactory to the Trustee. Each such opinion shall comply with Section 314 of the Trust Indenture Act of 1939 and include the statements provided for in Section 10.5, if applicable. "Original Issue Date" of any Security (or portion thereof) means the earlier of (a) the date of such Security or (b) the date of any Security (or portion thereof) for which such Security was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Original Issue Discount Security" means any Security which is issued at a price lower than the principal amount payable upon the Stated Maturity thereof and that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the maturity thereof pursuant to Section 4.1. "Outstanding" when used with reference to Securities, shall, subject to the provisions of Section 6.4, mean, as of any particular time, all Securities authenticated and delivered by the Trustee under this Indenture, except: (a) securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) securities, or portions thereof, for the payment or redemption of which moneys or United States Government Obligations (as provided for in Section 9.1) in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Issuer), provided that if such Securities, or portions thereof, are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as herein provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) securities which shall have been paid or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.9 (except with respect to any such Security as to which proof satisfactory to the Trustee is presented that such Security is held by a Person in whose hands such Security is a legal, valid and binding obligation of the Issuer). In determining whether the Holders of the requisite principal amount of Outstanding Securities of any or all series have given any request, demand, authorization, direction, notice, consent or waiver hereunder or whether a quorum is present at a meeting of Holders of Securities, (1) the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding for such purposes shall be the amount of the principal thereof that would be due and payable as of the date of such determination upon a declaration of acceleration of the maturity thereof pursuant to Section 4.1, and (2) the principal amount of a Security denominated in a foreign currency or currencies, including composite currencies, shall be the Dollar equivalent, determined on the date of original issuance of such Security in the manner provided as contemplated by Section 2.3, of the principal amount (or, in the case of an Original Issue Discount Security, the Dollar equivalent on the date of original issuance of such Security of the amount determined as provided in clause (1) above) of such Security. "Periodic Offering" means an offering of Securities of a series from time to time, the specific terms of which Securities, including, without limitation, the rate or rates of interest, if any, thereon, the stated maturity or maturities thereof and the redemption provisions, if any, with respect thereto, are to be determined by the Issuer or its agents upon the issuance of such Securities. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Principal" whenever used with reference to the Securities or any Security or any portion thereof, shall be deemed to include "and premium, if any". "Record Date" shall have the meaning set forth in Section 2.7. "Registered Global Security", means a Security evidencing all or a part of a series of Registered Securities, issued to the Depositary for such series in accordance with Section 2.4, and bearing the legend prescribed in Section 2.4. "Registered Security" means any Security registered on the Security register of the Issuer. "Required Currency" shall have the meaning set forth in Section 10.12. "Responsible Officer" when used with respect to the Trustee means the chairman of the board of directors, any vice chairman of the board of directors, the chairman of the trust committee, the chairman of the executive committee, any vice chairman of the executive committee, the president, any vice president, (whether or not designated by numbers or words added before or after the title "vice president") the cashier, the secretary, the treasurer, any trust officer, any senior trust officer, any assistant trust officer, any assistant vice president, any assistant cashier, any assistant secretary, any assistant treasurer, 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 knowledge of and familiarity with the particular subject. "Security" or "Securities" has the meaning stated in the first recital of this Indenture, or, as the case may be, Securities that have been authenticated and delivered under this Indenture. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security or a coupon representing such installment of interest as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means any Person at least a majority of the outstanding securities of which having ordinary voting power shall be owned by the Issuer and/or another Subsidiary or Subsidiaries. "Trust Indenture Act of 1939" (except as otherwise provided in Sections 7.1 and 7.2) means the Trust Indenture Act of 1939, as amended by the Trust Indenture Reform Act of 1990, as in force at the date as of which this Indenture was originally executed. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof and, subject to the provisions of Article Five, shall also include any successor trustee. "Trustee" shall also mean or include each Person who is then a trustee hereunder and if at any time there is more than one such Person, "Trustee" as used with respect to the Securities of any series shall mean the trustee with respect to the Securities of such series. "Unregistered Security" means any Security other than a Registered Security. "United States Government Obligations" shall have the meaning set forth in Section 9.1(A). "Yield to Maturity" means the yield to maturity on a series of Securities, calculated at the time of issuance of such series, or, if applicable, at the most recent redetermination of interest on such series, and calculated in accordance with accepted financial practice. ARTICLE TWO SECURITIES SECTION 2.1 Forms Generally. The Securities of each series and the Coupons, if any, to be attached thereto shall be substantially in such form (not inconsistent with this Indenture) as shall be established by or pursuant to one or more Board Resolutions (as set forth in a Board Resolution or, to the extent established pursuant to rather than set forth in a Board Resolution, an Officers' Certificate detailing such establishment) or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have imprinted or otherwise reproduced thereon such legend or legends or endorsements, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto, or with any rules of any securities exchange or to conform to general usage, all as may be determined by the officers executing such Securities and Coupons, if any, as evidenced by their execution of such Securities and Coupons. The definitive Securities and Coupons, if any, shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities and Coupons, if any, as evidenced by their execution of such Securities and Coupons, if any. SECTION 2.2 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Securities shall be in substantially the following form: "This is one of the Securities referred to in the within-mentioned Indenture. --------------------------------- as Trustee By ------------------------------ Authorized Signatory" If at any time there shall be an Authenticating Agent appointed with respect to any series of Securities, then the Securities of such series may have endorsed thereon, in addition to or in lieu of the Trustee's certificate of authentication to be borne by the Securities of each such series, an alternative Certificate of Authentication substantially as follows: "This is one of the Securities referred to in the within-mentioned Indenture. ------------------------------, as Trustee By ---------------------------, as Authenticating Agent By --------------------------- Authorized Officer" SECTION 2.3 Amount Unlimited; Issuable in Series. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited. The Securities may be issued in one or more series, and each such series shall rank equally and pari passu with all other unsecured and unsubordinated debt of the Issuer, unless the Issuer is required to secure the Securities pursuant to the debt provisions described under Article III. There shall be established in or pursuant to one or more Board Resolutions (and, to the extent established pursuant to rather than set forth in a Board Resolution, in an Officers' Certificate detailing such establishment) or established in one or more indentures supplemental hereto, prior to the initial issuance of Securities of any series: (1) the designation of the Securities of the series, which shall distinguish the Securities of the series from the Securities of all other series; (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 2.8, 2.9, 2.11, 7.5 or 11.3); (3) if other than Dollars, the coin or currency in which the Securities of that series are denominated (including, but not limited to, any Foreign Currency or ECU); (4) the date or dates on which the principal of the Securities of the series is payable; (5) the rate or rates at which the Securities of the series shall bear interest, if any, the date or dates from which such interest shall accrue, on which such interest shall be payable and (in the case of Registered Securities) on which a record shall be taken for the determination of Holders to whom interest is payable and/or the method by which such rate or rates or date or dates shall be determined and (if different) the rate or rates payable following a default thereunder; (6) the place or places where the principal of and any interest on Securities of the series shall be payable (if other than as provided in Section 3.2); (7) the right, if any, of the Issuer to redeem Securities, in whole or in part, at its option and the period or periods within which, the price or prices at which and any terms and conditions upon which Securities of the series may be so redeemed, pursuant to any sinking fund or otherwise; (8) the obligation, if any, of the Issuer to redeem, repurchase or repay Securities of the series pursuant to any mandatory redemption, sinking fund or analogous provisions or at the option of a Holder thereof and the price or prices at which and the period or periods within which and any terms and conditions upon which Securities of the series shall be redeemed, repurchased or repaid, in whole or in part, pursuant to such obligation; (9) if other than denominations of $1,000 and any integral multiple thereof in the case of Registered Securities, or $1,000 and $5,000 in the case of Unregistered Securities, the denominations in which Securities of the series shall be issuable; (10) if an Original Issue Discount Security, the method of calculation of the amount of the principal of the Securities of the series which shall be payable upon declaration of acceleration of the maturity thereof; (11) if other than the coin or currency in which the Securities of that series are denominated, the coin or currency in which payment of the principal of or interest on the Securities of such series shall be payable; (12) if the principal of or interest on the Securities of such series are to be payable, at the election of the Issuer or a Holder thereof, in a coin or currency other than that in which the Securities are denominated, the period or periods within which, and the terms and conditions upon which, such election may be made; (13) if the amount of payments of principal of and interest on the Securities of the series may be determined with reference to an index based on a coin or currency other than that in which the Securities of the series are denominated, the manner in which such amounts shall be determined; (14) whether the Securities of the series will be issuable as Registered Securities (and if so, whether such Securities will be issuable as Registered Global Securities) or Unregistered Securities (with or without Coupons), or any combination of the foregoing, any restrictions applicable to the offer, sale or delivery of Unregistered Securities or the payment of interest thereon and, if other than as provided in Section 2.8, the terms upon which Unregistered Securities of any series may be exchanged for Registered Securities of such series and vice versa; (15) whether and under what circumstances the Issuer will pay additional amounts on the Securities of the series held by a Person who is not a United States Person in respect of any tax, assessment or governmental charge withheld or deducted and, if so, whether the Issuer will have the option to redeem such Securities rather than pay such additional amounts; (16) if the Securities of such series are to be issuable in definitive form (whether upon original issue or upon exchange of a temporary Security of such series) only upon receipt of certain certificates or other documents or satisfaction of other conditions, the form and terms of such certificates, documents or conditions; (17) any trustees, depositaries, authenticating or paying agents, transfer agents or registrars or any other agents with respect to the Securities of such series; (18) any other Events of Default or covenants with respect to the Securities of such series; and (19) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture). All Securities of any one series and Coupons, if any, appertaining thereto, shall be substantially identical, except in the case of Registered Securities as to denomination and securities issued in a periodic offering and except as may otherwise be provided by or pursuant to the Board Resolution or Officers' Certificate referred to above or as set forth in any such indenture supplemental hereto. All Securities of any one series need not be issued at the same time and may be issued from time to time, consistent with the terms of this Indenture, if so provided by or pursuant to such Board Resolution, such Officers' Certificate or in any such indenture supplemental hereto. SECTION 2.4 Authentication and Delivery of Securities. The Issuer may deliver Securities of any series having attached thereto appropriate Coupons, if any, executed by the Issuer to the Trustee for authentication together with the applicable documents referred to below in this Section, and the Trustee shall thereupon authenticate and deliver such Securities to or upon the order of the Issuer (contained in the Issuer Order referred to below in this Section) or pursuant to such procedures acceptable to the Trustee and to such recipients as may be specified from time to time by an Issuer Order. The maturity date, original issue date, interest rate and any other terms of the Securities of such series and Coupons, if any, appertaining thereto shall be specified in or pursuant to such Issuer Order and procedures. If provided for in such procedures, such Issuer Order may authorize authentication and delivery pursuant to oral instructions from the Issuer or its duly authorized agent, which instructions shall be promptly confirmed in writing. In authenticating such Securities and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive (in the case of subparagraphs 2 and 3 below only at or before the time of the first request of the Issuer to the Trustee to authenticate Securities of such series) and (subject to Section 5.1) shall be fully protected in relying upon, unless and until such documents have been superceded or revoked: (1) an Issuer Order requesting such authentication and setting forth delivery instructions if the Securities and Coupons, if any, are not to be delivered to the Issuer, provided that, with respect to Securities of a series subject to a Periodic Offering, (a) such Issuer Order may be delivered by the Issuer to the Trustee prior to the delivery to the Trustee of such Securities for authentication and delivery, (b) the Trustee shall authenticate and deliver Securities of such series for original issue from time to time, in an aggregate principal amount not exceeding the aggregate principal amount established for such series, pursuant to an Issuer Order or pursuant to procedures acceptable to the Trustee as may be specified from time to time by an Issuer Order, (c) the maturity date or dates, original issue date or dates, interest rate or rates and any other terms of Securities of such series shall be determined by an Issuer Order or pursuant to such procedures and (d) if provided for in such procedures, such Issuer Order may authorize authentication and delivery pursuant to oral or electronic instructions from the Issuer or its duly authorized agent or agents, which instructions shall be promptly confirmed in writing; (2) the Board Resolution, Officers' Certificate and/or executed supplemental indenture referred to in Sections 2.1 and 2.3 authorizing the issuance of the Securities and by or pursuant to which the forms and terms of the Securities and Coupons, if any, were established; and (3) at the option of the Issuer, either an Opinion of Counsel, or a letter addressed to the Trustee permitting to it to rely on an enclosed Opinion of Counsel, substantially to the effect that: (a) the forms of the Securities and Coupons, if any, have been duly authorized and established in conformity with the provisions of this Indenture; (b) the terms of the Securities have been duly authorized and established in conformity with the provisions of this Indenture; (c) when the Securities and Coupons, if any, have been executed by the Issuer and authenticated by the Trustee in accordance with the provisions of this Indenture and delivered to and duly paid for by the purchasers thereof, they will have been duly issued under this Indenture and will be valid and legally binding obligations of the Issuer, enforceable in accordance with their respective terms, and will be entitled to the benefits of this Indenture; and (d) the execution and delivery by the Issuer of, and the performance by the Issuer of its obligations under, the Securities and Coupons, if any, will not contravene any provision of applicable law or the articles of incorporation or by-laws of the Issuer or any agreement or other instrument binding upon the Issuer or any of its Subsidiaries that is material to the Issuer and its Subsidiaries, considered as one enterprise, or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Issuer or any Subsidiary, and no consent, approval or authorization of any governmental body or agency is required for the performance by the Issuer of its obligations under the Securities and Coupons, if any, except such as are specified and have been obtained and such as may be required by the securities or blue sky laws of the various states in connection with the offer and sale of the Securities. In rendering such opinions, such counsel may qualify any opinions as to enforceability by stating that such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium and other similar laws affecting the rights and remedies of creditors and is subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Such counsel may rely, as to all matters governed by the laws of jurisdictions and the federal law of the United States, upon opinions of other counsel (copies of which shall be delivered to the Trustee), in which case the opinion shall state that such counsel believes he and the Trustee are entitled so to rely. As to matters governed by the Laws of the State of New York, such counsel may assume that the laws of the State of New York are identical to the laws of the State of Illinois. Such counsel may also state that, insofar as such opinion involves factual matters, he has relied, to the extent he deems proper, upon certificates of officers of the Issuer and its subsidiaries and certificates of public officials. The Trustee shall have the right to decline to authenticate and deliver any Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken by the Issuer or if the Trustee in good faith by its board of directors or board of trustees, executive committee, or a trust committee of directors or trustees or Responsible Officers shall determine that such action would expose the Trustee to personal liability to existing Holders or would affect the Trustee's own rights, duties or immunities under the Securities, this Indenture or otherwise. If the Issuer shall establish pursuant to Section 2.3 that the Securities of a series are to be issued in the form of one or more Registered Global Securities, then the Issuer shall execute and the Trustee shall, in accordance with this Section and the Issuer Order with respect to such series, authenticate and deliver one or more Registered Global Securities that (i) shall represent and shall be denominated in an amount equal to all or part of the aggregate principal amount of the Securities of such series issued and not yet canceled, (ii) shall be registered in the name of the Depositary for such Registered Global Security or Securities or the nominee of such Depositary, (iii) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions and (iv) shall bear a legend substantially to the following effect: "Unless and until it is exchanged in whole or in part for Securities in definitive registered form, this Security may not be transferred except as a whole by the Depositary to the nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary." Each Depositary must, at the time of its designation and at all times while it serves as Depositary, be a clearing agency registered under the Securities Exchange Act of 1934 and any other applicable statute or regulation. SECTION 2.5 Execution of Securities. The Securities and, if applicable, each Coupon appertaining thereto shall be signed on behalf of the Issuer by its Chairman of the Board, its President, one of its Vice Presidents, or its Treasurer under its corporate seal (except in the case of Coupons) which may, but need not, be attested. Such signatures may be the manual or facsimile signatures of the present or any future such officers. The seal of the Issuer may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Typographical and other minor errors or defects in any such reproduction of the seal or any such signature shall not affect the validity or enforceability of any Security that has been duly authenticated and delivered by the Trustee. In case any officer of the Issuer who shall have signed any of the Securities or Coupons, if any, shall cease to be such officer before the Security or Coupon so signed (or the Security to which the Coupon so signed appertains) shall be authenticated and delivered by the Trustee or disposed of by the Issuer, such Security or Coupon nevertheless may be authenticated and delivered or disposed of as though the person who signed such Security or Coupon had not ceased to be such officer of the Issuer; and any Security or Coupon may be signed on behalf of the Issuer by such persons as, at the actual date of the execution of such Security or Coupon, shall be the proper officers of the Issuer, although at the date of the execution and delivery of this Indenture any such person was not such an officer. SECTION 2.6 Certificate of Authentication. Only such Securities as shall bear thereon a certificate of authentication substantially in the form hereinbefore recited, executed by the Trustee by the manual signature of one of its authorized officers, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. No Coupon shall be entitled to the benefits of this Indenture or shall be valid and obligatory for any purpose until the certificate of authentication on the Security to which such Coupon appertains shall have been duly executed by the Trustee. The execution of such certificate by the Trustee upon any Security executed by the Issuer shall be conclusive evidence that the Security so authenticated has been duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this Indenture. SECTION 2.7 Denomination and Date of Securities; Payments of Interest. The Securities of each series shall be issuable as Registered Securities or Unregistered Securities in denominations established as contemplated by Section 2.3 or, with respect to the Registered Securities of any series, if not so established, in denominations of $1,000 and any integral multiple thereof. If denominations of Unregistered Securities of any series are not so established, such Securities shall be issuable in denominations of $1,000 and $5,000. The Securities of each series shall be numbered, lettered or otherwise distinguished in such manner or in accordance with such plan as the officers of the Issuer executing the same may determine with the approval of the Trustee, as evidenced by the execution and authentication thereof. Each Registered Security shall be dated the date of its authentication. Each Unregistered Security shall be dated as provided in or pursuant to the resolution or resolutions of the Board of Directors of the Issuer referred to in Section 2.3. The Securities of each series shall bear interest, if any, from the date, and such interest shall be payable on the dates, established as contemplated by Section 2.3. Unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3, the Person in whose name any Registered Security of any series is registered at the close of business on any record date applicable to a particular series with respect to any interest payment date for such series shall be entitled to receive the interest, if any, payable on such interest payment date notwithstanding any transfer or exchange of such Registered Security subsequent to the record date and prior to such interest payment date, except if and to the extent the Issuer shall default in the payment of the interest due on such interest payment date for such series, in which case such defaulted interest shall be paid to the Persons in whose names Outstanding Registered Securities for such series are registered at the close of business on a subsequent record date (which shall be not less than five Business Days prior to the date of payment of such defaulted interest) established by notice given by mail by or on behalf of the Issuer to the Holders of Registered Securities not less than 15 days preceding such subsequent record date. The term "record date" as used with respect to any interest payment date (except a date for payment of defaulted interest) for the Securities of any series shall mean the date specified as such in the terms of the Registered Securities of such series established as contemplated by Section 2.3, or, if no such date is so established, if such interest payment date is the first day of a calendar month, the fifteenth day of the next preceding calendar month or, if such interest payment date is the fifteenth day of a calendar month, the first day of such calendar month, whether or not such record date is a Business Day. SECTION 2.8 Registration, Transfer and Exchange. The Issuer will keep or cause to be kept at each office or agency to be maintained for the purpose as provided in Section 3.2 for each series of Securities a register in which, subject to such reasonable regulations as it may prescribe, it will provide for the registration of Registered Securities of such series and the registration of transfer of Registered Securities of such series. Such register shall be in written form in the English language or in any other form capable of being converted into such form within a reasonable time. At all reasonable times such register or registers shall be open for inspection by the Trustee. Upon due presentation for registration of transfer of any Registered Security of any series at any such office or agency to be maintained for the purpose as provided in Section 3.2, the Issuer shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Registered Security or Registered Securities of the same series, maturity date, interest rate and original issue date in authorized denominations for a like aggregate principal amount. Unregistered Securities (except for any temporary global Unregistered Securities) and Coupons (except for Coupons attached to any temporary global Unregistered Securities) shall be transferable by delivery. At the option of the Holder thereof, Registered Securities of any series (other than a Registered Global Security, except as set forth below) may be exchanged for a Registered Security or Registered Securities of such series having authorized denominations and an equal aggregate principal amount, upon surrender of such Registered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 and upon payment, if the Issuer shall so require, of the charges hereinafter provided. If the Securities of any series are issued in both registered and unregistered form, except as otherwise specified pursuant to Section 2.3, at the option of the Holder thereof, Unregistered Securities of any series may be exchanged for Registered Securities of such series having authorized denominations and an equal aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. At the option of the Holder thereof, if Unregistered Securities of any series, maturity date, interest rate and original issue date are issued in more than one authorized denomination, except as otherwise specified pursuant to Section 2.3, such Unregistered Securities may be exchanged for Unregistered Securities of such series, maturity date, interest rate and original issue date having authorized denominations and an equal aggregate principal amount, upon surrender of such Unregistered Securities to be exchanged at the agency of the Issuer that shall be maintained for such purpose in accordance with Section 3.2 or as specified pursuant to Section 2.3, with, in the case of Unregistered Securities that have Coupons attached, all unmatured Coupons and all matured Coupons in default thereto appertaining, and upon payment, if the Issuer shall so require, of the charges hereinafter provided. Unless otherwise specified pursuant to Section 2.3, Registered Securities of any series may not be exchanged for Unregistered Securities of such series. Whenever any Securities are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities and Coupons surrendered upon any exchange or transfer provided for in this Indenture shall be promptly canceled and disposed of by the Trustee and the Trustee will deliver a certificate of disposition thereof to the Issuer. All Registered Securities presented for registration of transfer, exchange, redemption or payment shall (if so required by the Issuer or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Issuer and the Trustee duly executed by the Holder or his attorney duly authorized in writing. The Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any exchange or registration of transfer of Securities. No service charge shall be made for any such transaction. The Issuer shall not be required to exchange or register a transfer of (a) any Securities of any series for a period of 15 days next preceding the first mailing of notice of redemption of Securities of such series to be redeemed or (b) any Securities selected, called or being called for redemption, in whole or in part, except, in the case of any Security to be redeemed in part, the portion thereof not so to be redeemed. Notwithstanding any other provision of this Section 2.8, unless and until it is exchanged in whole or in part for Securities in definitive registered form, a Registered Global Security representing all or a portion of the Securities of a series may not be transferred except as a whole by the Depositary for such series to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for such series or a nominee of such successor Depositary. If at any time the Depositary for any Registered Securities of a series represented by one or more Registered Global Securities notifies the Issuer that it is unwilling or unable to continue as Depositary for such Registered Securities or if at any time the Depositary for such Registered Securities shall no longer be eligible under Section 2.4, the Issuer shall appoint a successor Depositary with respect to such Registered Securities. If a successor Depositary for such Registered Securities is not appointed by the Issuer within 90 days after the Issuer receives such notice or becomes aware of such ineligibility, the Issuer's election pursuant to Section 2.3 that such Registered Securities be represented by one or more Registered Global Securities shall no longer be effective and the Issuer will execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of definitive Securities of such series, will authenticate and deliver, Securities of such series in definitive registered form without Coupons, in any authorized denominations, in an aggregate principal amount equal to the principal amount of the Registered Global Security or Securities representing such Registered Securities in exchange for such Registered Global Security or Securities. The Issuer may at any time and in its sole discretion determine that the Registered Securities of any series issued in the form of one or more Registered Global Securities shall no longer be represented by a Registered Global Security or Securities. In such event the Issuer will execute, and the Trustee, upon receipt of an Officers' Certificate for the authentication and delivery of definitive Securities of such series, will authenticate and deliver, Securities of such series in definitive registered form without Coupons, in any authorized denominations, in an aggregate principal amount equal to the principal amount of the Registered Global Security or Securities representing such Registered Securities, in exchange for such Registered Global Security or Securities. If specified by the Issuer pursuant to Section 2.3 with respect to Securities represented by a Registered Global Security, the Depositary for such Registered Global Security may surrender such Registered Global Security in exchange in whole or in part for Securities of the same series in definitive registered form on such terms as are acceptable to the Issuer and such Depositary. Thereupon, the Issuer shall execute, and the Trustee shall authenticate and deliver, without service charge, (i) to the Person specified by such Depositary a new Registered Security or Securities of the same series, of any authorized denominations as requested by such Person, in an aggregate principal amount equal to and in exchange for such Person's beneficial interest in the Registered Global Security; and (ii) to such Depositary a new Registered Global Security in a denomination equal to the difference, if any, between the principal amount of the surrendered Registered Global Security and the aggregate principal amount of Registered Securities authenticated and delivered pursuant to clause (i) above. Upon the exchange of a Registered Global Security for Securities in definitive registered form without Coupons, in authorized denominations, such Registered Global Security shall be canceled by the Trustee or its agent. Securities in definitive registered form without Coupons issued in exchange for a Registered Global Security pursuant to this Section 2.8 shall be registered in such names and in such authorized denominations as the Depositary for such Registered Global Security, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee or an agent of the Issuer or the Trustee. The Trustee or such agent shall deliver such Securities to or as directed by the Persons in whose names such Securities are so registered. All Securities issued upon any transfer or exchange of Securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange. Notwithstanding anything herein or in the terms of any series of Securities to the contrary, none of the Issuer, the Trustee or any agent of the Issuer or the Trustee (any of which, other than the Issuer, shall rely on an Officers' Certificate and an Opinion of Counsel) shall be required to exchange any Unregistered Security for a Registered Security if such exchange would result in adverse Federal income tax consequences to the Issuer (such as, for example, the inability of the Issuer to deduct from its income, as computed for Federal income tax purposes, the interest payable on the Unregistered Securities) under then applicable United States Federal income tax laws. SECTION 2.9 Mutilated, Defaced, Destroyed, Lost and Stolen Securities. In case any temporary or definitive Security or any Coupon appertaining to any Security shall become mutilated, defaced or be destroyed, lost or stolen, the Issuer in its discretion may execute, and upon the written request of any officer of the Issuer, the Trustee shall authenticate and deliver a new Security of the same series, maturity date, interest rate and original issue date, bearing a number or other distinguishing symbol not contemporaneously outstanding, in exchange and substitution for the mutilated or defaced Security, or in lieu of and in substitution for the Security so destroyed, lost or stolen with Coupons corresponding to the Coupons appertaining to the Securities so mutilated, defaced, destroyed, lost or stolen, or in exchange or substitution for the Security to which such mutilated, defaced, destroyed, lost or stolen Coupon appertained, with Coupons appertaining thereto corresponding to the Coupons so mutilated, defaced, destroyed, lost or stolen. In every case the applicant for a substitute Security or Coupon shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as may be required by them to indemnify and defend and to save each of them harmless and, in every case of destruction, loss or theft, evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof and in the case of mutilation or defacement shall surrender the Security and related Coupons to the Trustee or such agent. Upon the issuance of any substitute Security or Coupon, the Issuer 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 or its agent) connected therewith. In case any Security or Coupon which has matured or is about to mature or has been called for redemption in full shall become mutilated or defaced or be destroyed, lost or stolen, the Issuer may instead of issuing a substitute Security, pay or authorize the payment of the same or the relevant Coupon (without surrender thereof except in the case of a mutilated or defaced Security or Coupon), if the applicant for such payment shall furnish to the Issuer and to the Trustee and any agent of the Issuer or the Trustee such security or indemnity as any of them may require to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Issuer and the Trustee and any agent of the Issuer or the Trustee evidence to their satisfaction of the destruction, loss or theft of such Security or Coupon and of the ownership thereof. Every substitute Security or Coupon of any series issued pursuant to the provisions of this Section by virtue of the fact that any such Security or Coupon is destroyed, lost or stolen shall constitute an additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Security or Coupon shall be at any time enforceable by anyone and shall be entitled to all the benefits of (but shall be subject to all the limitations of rights set forth in) this Indenture equally and proportionately with any and all other Securities or Coupons of such series duly authenticated and delivered hereunder. All Securities and Coupons shall be held and owned upon the express condition that, to the extent permitted by law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, defaced or destroyed, lost or stolen Securities and Coupons and shall preclude 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 2.10 Cancellation of Securities; Disposition Thereof. All Securities and Coupons surrendered for payment, redemption, registration of transfer or exchange, or for credit against any payment in respect of a sinking or analogous fund, if surrendered to the Issuer or any agent of the Issuer or the Trustee or any agent of the Trustee, shall be delivered to the Trustee or its agent for cancellation or, if surrendered to the Trustee, shall be canceled by it; and no Securities or Coupons shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. The Trustee or its agent shall dispose of canceled Securities and Coupons held by it and deliver a certificate of disposition to the Issuer. If the Issuer or its agent shall acquire any of the Securities or Coupons, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities or Coupons unless and until the same are delivered to the Trustee or its agent for cancellation. SECTION 2.11 Temporary Securities. Pending the preparation of definitive Securities for any series, the Issuer may execute and the Trustee shall authenticate and deliver temporary Securities for such series (printed, lithographed, typewritten or otherwise reproduced, in each case in form satisfactory to the Trustee). Temporary Securities of any series shall be issuable as Registered Securities without Coupons, or as Unregistered Securities with or without Coupons attached thereto, of any authorized denomination, and substantially in the form of the definitive Securities of such series but with such omissions, insertions and variations as may be appropriate for temporary Securities, all as may be determined by the Issuer with the concurrence of the Trustee as evidenced by the execution and authentication thereof. Temporary Securities may contain such references to any provisions of this Indenture as may be appropriate. Every temporary Security shall be executed by the Issuer and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Securities. Without unreasonable delay the Issuer shall execute and shall furnish definitive Securities of such series and thereupon temporary Registered Securities of such series may be surrendered in exchange therefor without charge at each office or agency to be maintained by the Issuer for that purpose pursuant to Section 3.2 and, in the case of Unregistered Securities, at any agency maintained by the Issuer for such purpose as specified pursuant to Section 3.2, and the Trustee shall authenticate and deliver in exchange for such temporary Securities of such series an equal aggregate principal amount of definitive Securities of the same series having authorized denominations and, in the case of Unregistered Securities, having attached thereto any appropriate Coupons. Until so exchanged, the temporary Securities of any series shall be entitled to the same benefits under this Indenture as definitive Securities of such series, unless otherwise established pursuant to Section 2.3. The provisions of this Section are subject to any restrictions or limitations on the issue and delivery of temporary Unregistered Securities of any series that may be established pursuant to Section 2.3 (including any provision that Unregistered Securities of such series initially be issued in the form of a single global Unregistered Security to be delivered to a depositary or agency located outside the United States and the procedures pursuant to which definitive or global Unregistered Securities of such series would be issued in exchange for such temporary global Unregistered Security). ARTICLE THREE COVENANTS OF THE ISSUER SECTION 3.1 Payment of Principal and Interest. The Issuer covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay or cause to be paid the principal of, and interest on, each of the Securities of such series (together with any additional amounts payable pursuant to the terms of such Securities) at the place or places, at the respective times and in the manner provided in such Securities and in the Coupons, if any, appertaining thereto and in this Indenture. The interest on Securities with Coupons attached (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only upon presentation and surrender of the several Coupons for such interest installments as are evidenced thereby as they severally mature. If any temporary Unregistered Security provides that interest thereon may be paid while such Security is in temporary form, the interest on any such temporary Unregistered Security (together with any additional amounts payable pursuant to the terms of such Security) shall be paid, as to the installments of interest evidenced by Coupons attached thereto, if any, only upon presentation and surrender thereof, and, as to the other installments of interest, if any, only upon presentation of such Securities for notation thereon of the payment of such interest, in each case subject to any restrictions that may be established pursuant to Section 2.3. The interest on Registered Securities (together with any additional amounts payable pursuant to the terms of such Securities) shall be payable only to or upon the written order of the Holders thereof entitled thereto and, at the option of the Issuer, may be paid by wire transfer or by mailing checks for such interest payable to or upon the written order of such Holders at their last addresses as they appear on the registry books of the Issuer. SECTION 3.2 Offices for Payments, etc. So long as any Registered Securities are authorized for issuance pursuant to this Indenture or are outstanding hereunder, the Issuer will maintain in the Borough of Manhattan, The City of New York, an office or agency where the Registered Securities of each series may be presented for payment, where the Securities of each series may be presented for exchange as is provided in this Indenture and, if applicable, pursuant to Section 2.3 and where the Registered Securities of each series may be presented for registration of transfer as in this Indenture provided. The Issuer will maintain one or more offices or agencies in a city or cities located outside the United States (including any city in which such an agency is required to be maintained under the rules of any stock exchange on which the Securities of such series are listed) where the Unregistered Securities, if any, of each series and Coupons, if any, appertaining thereto may be presented for payment. No payment on any Unregistered Security or Coupon will be made upon presentation of such Unregistered Security or Coupon at an agency of the Issuer within the United States nor will any payment be made by transfer to an account in, or by mail to an address in, the United States unless pursuant to applicable United States laws and regulations then in effect such payment can be made without adverse tax consequences to the Issuer. Notwithstanding the foregoing, payments in Dollars of Unregistered Securities of any series and Coupons appertaining thereto which are payable in Dollars may be made at an agency of the Issuer maintained in the Borough of Manhattan, The City of New York if such payment in Dollars at each agency maintained by the Issuer outside the United States for payment on such Unregistered Securities is illegal or effectively precluded by exchange controls or other similar restrictions. The Issuer will maintain in the Borough of Manhattan, The City of New York, an office or agency where notices and demands to or upon the Issuer in respect of the Securities of any series, the Coupons appertaining thereto or this Indenture may be served. The Issuer will give to the Trustee written notice of the location of each such office or agency and of any change of location thereof. In case the Issuer shall fail to maintain any agency required by this Section to be located in the Borough of Manhattan, The City of New York, or shall fail to give such notice of the location or of any change in the location of any of the above agencies, presentations and demands may be made and notices may be served at the Corporate Trust Office of the Trustee. The Issuer may from time to time designate one or more additional offices or agencies where the Securities of a series and any Coupons appertaining thereto may be presented for payment, where the Securities of that series may be presented for exchange as provided in this Indenture and pursuant to Section 2.3 and where the Registered Securities of that series may be presented for registration of transfer as in this Indenture provided, and the Issuer may from time to time rescind any such designation, as the Issuer may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Issuer of its obligation to maintain the agencies provided for in this Section. The Issuer will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.3 Appointment to Fill a Vacancy in Office of Trustee. The Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 5.9, a Trustee, so that there shall at all times be a Trustee with respect to each series of Securities hereunder. SECTION 3.4 Paying Agents. Whenever the Issuer shall appoint a paying agent other than the Trustee with respect to the Securities of any series, it will cause 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: (a) that it will hold all sums received by it as such agent for the payment of the principal of or interest on the Securities of such series (whether such sums have been paid to it by the Issuer or by any other obligor on the Securities of such series) in trust for the benefit of the Holders of the Securities of such series, or Coupons appertaining thereto, if any, or of the Trustee, (b) that it will give the Trustee notice of any failure by the Issuer (or by any other obligor on the Securities of such series) to make any payment of the principal of or interest on the Securities of such series when the same shall be due and payable, and (c) that it will at any time during the continuance of any such failure, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. The Issuer will, on or prior to each due date of the principal of or interest on the Securities of such series, deposit with the paying agent a sum sufficient to pay such principal or interest so becoming due, and (unless such paying agent is the Trustee) the Issuer will promptly notify the Trustee of any failure to take such action. If the Issuer shall act as its own paying agent with respect to the Securities of any series, it will, on or before each due date of the principal of or interest on the Securities of such series, set aside, segregate and hold in trust for the benefit of the Holders of the Securities of such series or the Coupons appertaining thereto a sum sufficient to pay such principal or interest so becoming due. The Issuer will promptly notify the Trustee of any failure to take such action. Anything in this Section to the contrary notwithstanding, but subject to Section 9.1, the Issuer may at any time, for the purpose of obtaining a satisfaction and discharge with respect to one or more or all series of Securities hereunder, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust for any such series by the Issuer or any paying agent hereunder, as required by this Section, such sums to be held by the Trustee upon the trusts herein contained. Anything in this Section to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section is subject to the provisions of Sections 9.3 and 9.4. SECTION 3.5 Written Statement to Trustee. The Issuer will furnish to the Trustee on or before May 31 in each year (beginning with May 31, 1997) a brief certificate (which need not comply with Section 10.5) from the principal executive, financial or accounting officer of the Issuer as to his or her knowledge of the Issuer's compliance with all conditions and covenants under the Indenture (such compliance to be determined without regard to any period of grace or requirement of notice provided under the Indenture). SECTION 3.6 Limitations upon Liens. (a) After the date hereof and so long as any Securities are Outstanding, the Issuer will not pledge, mortgage, hypothecate or grant a security interest in, or permit any mortgage, pledge, security interest or other lien upon, any capital stock of any Subsidiary now or hereafter owned by the Issuer to secure any Indebtedness (hereinafter defined), without making effective provisions whereby the Outstanding Securities shall (so long as such other Indebtedness shall be so secured) be equally and ratably secured with any and all such other Indebtedness and any other indebtedness similarly entitled to be equally and ratably secured; provided, however, that this restriction shall not apply to nor prevent the creation or existence of (i) any mortgage, pledge, security interest, lien or encumbrance upon any such capital stock created at the time of the acquisition of such capital stock by the Issuer or within one year after such time to secure all or a portion of the purchase price for such capital stock or existing thereon at the time of the acquisition thereof by the Issuer (whether or not the obligations secured thereby are assumed by the Issuer), or (ii) any extension, renewal or refunding of any mortgage, pledge, security interest, lien or encumbrance described in clause (i) above on capital stock of any Subsidiary theretofore subject thereto (or substantially the same capital stock) or any portion thereof. For purposes of this Section 3.6, "Indebtedness" means all indebtedness, whether or not represented by bonds, debentures, notes or other securities, created or assumed by the Issuer for the repayment of money borrowed. All indebtedness for money borrowed secured by a lien upon property owned by the Issuer and upon which indebtedness for money borrowed the Issuer customarily pays interest, although the Issuer has not assumed or become liable for the payment of such indebtedness for money borrowed, shall for purposes of this Section 3.6 be deemed to be indebtedness of the Issuer. All indebtedness for money borrowed of others guaranteed as to payment of principal by the Issuer or in effect guaranteed by the Issuer through a contingent agreement to purchase such indebtedness for money borrowed shall for purposes of this Section 3.6 be deemed to be Indebtedness of the Issuer, but no other contingent obligation of the Issuer in respect of indebtedness for money borrowed or other obligations incurred by others shall for purposes of this Section 3.6 be deemed to be Indebtedness of the Issuer. In case the Issuer or any Subsidiary shall propose to pledge, mortgage, hypothecate or grant a security interest in any capital stock of any Subsidiary owned by the Issuer to secure any Indebtedness, other than as permitted by clauses (i) and (ii) in the second preceding paragraph, the Issuer will prior thereto give written notice thereof to the Trustee, and the Issuer will prior to or simultaneously with such pledge, mortgage, hypothecation or grant of security interest, by supplemental indenture executed to the Trustee (or to the extent legally necessary to another trustee or an additional or separate trustee), in form satisfactory to the Trustee, effectively secure (for so long as other Indebtedness shall be so secured) all the Securities equally and ratably with such Indebtedness and with any other indebtedness for money borrowed similarly entitled to be equally and ratably secured. (b) Except as otherwise specified as contemplated by Section 2.3 for Securities of any series, the provisions of subsection (a) of this Section 3.6 shall not apply in the event that the Issuer or any Subsidiary shall pledge, mortgage, hypothecate or grant a security interest in, or permit any mortgage pledge, security interest or other lien upon, any capital stock of any Subsidiary now or hereafter owned by the Issuer to secure any Indebtedness (which would otherwise be subject to the foregoing restriction) in an aggregate amount which, together with all other Indebtedness (other than mortgages, pledges, security interests, liens or encumbrances permitted by Subsection (a) of this Section 3.6), which would otherwise be subject to the foregoing restriction, does not at the time exceed 5% of Consolidated Capitalization. For purposes of this Section 3.6: (1) The term "Consolidated Capitalization" means the sum obtained by adding (i) Consolidated Shareholders' Equity, (ii) Consolidated Indebtedness (exclusive of any thereof which is due and payable within one year of the date such sum is determined) and, without duplication, (iii) any preference or preferred stock of the Issuer or any Consolidated Subsidiary which is subject to mandatory redemption or sinking fund provisions. (2) The term "Consolidated Shareholders' Equity" means the total Assets of the Issuer and its Consolidated Subsidiaries less all liabilities of the Issuer and its Consolidated Subsidiaries. As used in this definition, "liabilities" means all obligations which would, in accordance with generally accepted accounting principles, be classified on a balance sheet as liabilities, including without limitation, (i) indebtedness secured by property of the Issuer or any of its Consolidated Subsidiaries whether or not the Issuer or such Consolidated Subsidiary is liable for the payment thereof unless, in the case that the Issuer or such Consolidated Subsidiary is not so liable, such property has not been included among the Assets of the Issuer or such Consolidated Subsidiary on such balance sheet, (ii) deferred liabilities, and (iii) indebtedness of the Issuer or any of its Consolidated Subsidiaries that is expressly subordinated in right and priority of payment to other liabilities of the Issuer or such Consolidated Subsidiary. As used in this definition, "liabilities" includes preference or preferred stock of the Issuer or any Consolidated Subsidiary only to the extent of any such preference or preferred stock that is subject to mandatory redemption or sinking fund provisions. (3) The term "Consolidated Subsidiary" means at any date any Subsidiary the financial statements of which under generally accepted accounting principles would be consolidated with those of the Issuer in its consolidated financial statements as of such date. (4) The "Assets" of any Person means the whole or any part of its business, property, assets, cash and receivables. (5) The term "Consolidated Indebtedness" means total indebtedness as shown on the consolidated balance sheet of the Issuer and its Consolidated Subsidiaries. SECTION 3.7 Luxembourg Publications. In the event of the publication of any notice pursuant to Section 4.11, 5.9(a), 5.10, 7.2, 9.4, 11.2 or 11.5, the party making such publication in the Borough of Manhattan, The City of New York and London shall also, to the extent that notice is required to be given to Holders of Securities of any series by applicable Luxembourg law or stock exchange regulation, as evidenced by an Officers' Certificate delivered to such party, make a similar publication in Luxembourg. SECTION 3.8 Securityholders Lists. (a) If and so long as the Trustee shall not be the Security registrar for the Securities of any series, the Issuer will furnish or cause to be furnished to the Trustee a list in such form as the Trustee may reasonably require of the names and addresses of the holders of the Securities of such series pursuant to Section 312 of the Trust Indenture Act of 1939 (i) semi-annually not more than 15 days after each record date for the payment of interest on such Securities, as hereinabove specified, as of such record date and on dates to be determined pursuant to Section 2.3 for non-interest bearing securities in each year, and (ii) at such other times as the Trustee may request in writing, within thirty days after receipt by the Issuer of any such request as of a date not more than 15 days prior to the time such information is furnished. (b) If three or more Holders of Securities (herein after referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other Holders of Securities with respect to their rights under this Indenture or under the Securities and is accompanied by a copy of the form of proxy or other communication that such applicants propose to transmit to such other Holders, then the Trustee shall, within five business days after the receipt of such application, at its election, either (i) afford such applicants access to the information preserved at the time by the Trustee in accordance with Section 3.8(a), or (ii) inform such applicants as to the approximate number of Holders of Securities whose names and addresses appear in the information preserved at the time by the Trustee in accordance with Section 3.8(a), and as to the approximate cost of mailing to such Holders the form of proxy or other communication, if any, specified in such application. If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Holder of Securities whose name and address appear in the information preserved at the time by the Trustee in accordance with Section 3.8(a) a copy of the form of proxy or other communication that is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender the Trustee shall mail to such applicants and file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interest of the Holders of Securities or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Holders of Securities with reasonable promptness after the entry of such order and the renewal of such tender; otherwise, the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Every Holder of Securities or coupons, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders of Securities in accordance with Section 3.8(b), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 3.8(b). SECTION 3.9 Reports by the Issuer. The Issuer covenants to file with the Trustee, within 15 days after the Issuer is required to file the same with the Commission, copies of the annual reports and of the information, documents, and other reports which the Issuer may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934. SECTION 3.10 Reports by the Trustee. Any Trustee's report required under Section 313(a) of the Trust Indenture Act of 1939 shall be transmitted on or before July 15 in each year following the date hereof, so long as any Securities are outstanding hereunder, and shall be dated as of a date convenient to the Trustee no more than 60 nor less than 45 days prior thereto. SECTION 3.11 Waiver of Certain Covenants. The Issuer may omit in any particular instance to comply with any term, provision or condition set forth in Section 3.6 with respect to the Securities of any series if before the time for such compliance the Holders of a majority in principal amount of the Outstanding Securities of such series shall either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Issuer and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. ARTICLE FOUR REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS ON EVENT OF DEFAULT SECTION 4.1 Event of Default Defined; Acceleration of Maturity; Waiver of Default. "Event of Default" with respect to Securities of any series wherever used herein, means each one of the following events which shall have occurred and be continuing (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of all or any part of the principal on any of the Securities of such series as and when the same shall become due and payable either at maturity, upon any redemption, by declaration of acceleration or otherwise; (b) default in the payment of any instalment of interest upon any of the Securities of such series as and when the same shall become due and payable, and continuance of such default for a period of 30 days; (c) default in the performance, or breach, of any covenant or warranty of the Issuer in the Securities of such series (other than a covenant or warranty in respect of the Securities of such series a default in whose performance or whose breach is elsewhere in this Section specifically dealt with) and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Issuer by the Trustee or to the Issuer and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of all series affected thereby, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (d) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Issuer a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization arrangement, adjustment or composition of or in respect of the Issuer under the Federal bankruptcy law or any other applicable Federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Issuer or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (e) the institution by the Issuer of proceedings to be adjudicated a bankrupt or insolvent or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal bankruptcy law or any other applicable Federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Issuer or of any substantial part of its property, or the making by it of a general assignment for the benefit of creditors; (f) the acceleration of the maturity of any indebtedness for borrowed money of the Issuer or Illinois Power or the failure to pay any portion of such indebtedness when due and payable after the expiration of any applicable grace period (in each case, other than the Securities of such series or Non-Recourse Indebtedness) having an aggregate principal amount outstanding in excess of $25,000,000, if such acceleration is not rescinded or annulled, such failure to pay is not cured, or such indebtedness shall not have been discharged, within 15 days after written notice thereof to the Issuer by either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities of such series; or (g) any other Event of Default provided in the supplemental indenture under which such series of Securities is issued or in the form of Security for such series; provided, however, that, except as otherwise may be established for a series of Senior Debt Securities, the occurrence of any of the events described in the foregoing clause (c) or (g) shall not constitute an Event of Default if such occurrence is the result of changes in generally accepted accounting principles as recognized by the American Institute of Certified Public Accountants at the date as of which this Indenture is executed and a certificate to such effect is delivered to the Trustee by the Issuer's independent public accountants. If an Event of Default described in clauses (a), (b), (c) or (g) (if the Event of Default under clause (c) or (g), as the case may be, is with respect to less than all series of Securities then Outstanding) occurs and is continuing, then, and in each and every such case, except for any series of Securities the principal of which shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of the Securities of each such affected series then Outstanding hereunder (voting as a single class) by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if the Securities of any such affected series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) of all Securities of all such affected series, and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration, the same shall become immediately due and payable. If an Event of Default described in clause (c) or (g) (if the Event of Default under clause (c) or (g), as the case may be, is with respect to all series of Securities then Outstanding), (d) or (e) occurs and is continuing, then and in each and every such case, unless the principal of all the Securities shall have already become due and payable, either the Trustee or the Holders of not less than 25% in aggregate principal amount of all the Securities then Outstanding hereunder (treated as one class), by notice in writing to the Issuer (and to the Trustee if given by Securityholders), may declare the entire principal (or, if any Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of all the Securities then Outstanding, and interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal (or, if the Securities are Original Issue Discount Securities, such portion of the principal as may be specified in the terms thereof) of the Securities of any series (or of all the Securities, as the case may be) 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 Issuer shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Securities of such series (or of all the Securities, as the case may be) and the principal of any and all Securities of each such series (or of all the Securities, as the case may be) which shall have become due otherwise than by acceleration (with interest upon such principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of each such series (or at the respective rates of interest or Yields to Maturity of all the Securities, as the case may be) to the date of such payment or deposit) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, its agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith, and if any and all Events of Default under the Indenture, other than the non-payment of the principal of Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein--then and in every such case the Holders of a majority in aggregate principal amount of all the Securities of each such series, or of all the Securities, in each case voting as a single class, then Outstanding, by written notice to the Issuer and to the Trustee, may waive all defaults with respect to each such series (or with respect to all the Securities, as the case may be) and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. For all purposes under this Indenture, if a portion of the principal of any Original Issue Discount Securities shall have been accelerated and declared due and payable pursuant to the provisions hereof, then, from and after such declaration, unless such declaration has been rescinded and annulled, the principal amount of such Original Issue Discount Securities shall be deemed, for all purposes hereunder, to be such portion of the principal thereof as shall be due and payable as a result of such acceleration, and payment of such portion of the principal thereof as shall be due and payable as a result of such acceleration, together with interest, if any, thereon and all other amounts owing thereunder, shall constitute payment in full of such Original Issue Discount Securities. SECTION 4.2 Collection of Indebtedness by Trustee; Trustee May Prove Debt. The Issuer covenants that (a) in case default shall be made in the payment of any instalment of interest on any of the Securities of any series when such interest shall have become due and payable, and such default shall have continued for a period of 30 days or (b) in case default shall be made in the payment of all or any part of the principal of any of the Securities of any series when the same shall have become due and payable, whether upon maturity of the Securities of such series or upon any redemption or by declaration or otherwise - then upon demand of the Trustee, the Issuer will pay to the Trustee for the benefit of the Holders of the Securities of such series the whole amount that then shall have become due and payable on all Securities of such series, and such Coupons, for principal or interest, as the case may be (with interest to the date of such payment upon the overdue principal and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series); and in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and any expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of its negligence or bad faith. Until such demand is made by the Trustee, the Issuer may pay the principal of and interest on the Securities of any series to the registered Holders, whether or not the Securities of such series be overdue. In case the Issuer shall fail forthwith to pay such amounts 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 proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer or other obligor upon the Securities and collect in the manner provided by law out of the property of the Issuer or other obligor upon the Securities, wherever situated the moneys adjudged or decreed to be payable. In case there shall be pending proceedings relative to the Issuer or any other obligor upon the Securities under Title 11 of the United States Code or any other applicable Federal or state bankruptcy, insolvency or other similar law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Issuer or its property or such other obligor, or in case of any other comparable judicial proceedings relative to the Issuer or other obligor upon the Securities, or to the creditors or property of the Issuer or such other obligor, the Trustee, irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section, shall be entitled and empowered, by intervention in such proceedings or otherwise: (a) to file and prove a claim or claims for the whole amount of principal and interest (or, if the Securities of any series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of such series) owing and unpaid in respect of the Securities of any series, and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee, except as a result of negligence or bad faith) and of the Securityholders allowed in any judicial proceedings relative to the Issuer or other obligor upon the Securities, or to the creditors or property of the Issuer or such other obligor, (b) unless prohibited by applicable law and regulations, to vote on behalf of the Holders of the Securities of any series in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings, and (c) to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute all amounts received with respect to the claims of the Securityholders and of the Trustee on their behalf; and any trustee, receiver, or liquidator, custodian or other similar official is hereby authorized by each of the Securityholders to make payments to the Trustee, and, in the event that the Trustee shall consent to the making of payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or vote for or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities of any 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 except, as aforesaid, to vote for the election of a trustee in bankruptcy or similar Person. All rights of action and of asserting claims under this Indenture, or under any of the Securities of any series or Coupons appertaining to such Securities, may be enforced by the Trustee without the possession of any of the Securities of such series or Coupons appertaining to such Securities or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Securities or Coupons appertaining to such Securities in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the Holders of the Securities or Coupons appertaining to such Securities in respect to which such action was taken, and it shall not be necessary to make any Holders of such Securities or Coupons appertaining to such Securities parties to any such proceedings. SECTION 4.3 Application of Proceeds. Any moneys collected by the Trustee pursuant to this Article in respect of any series 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 interest, upon presentation of the several Securities and Coupons appertaining to such Securities in respect of which monies have been collected and stamping (or otherwise noting) thereon the payment, or issuing Securities of such series in reduced principal amounts in exchange for the presented Securities of like series if only partially paid, or upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses applicable to such series in respect of which monies have been collected, including reasonable compensation to the Trustee and each predecessor Trustee and their respective agents and attorneys and of all expenses and liabilities incurred, and all advances made, by the Trustee and each predecessor Trustee except as a result of negligence or bad faith; SECOND: In case the principal of the Securities of such series in respect of which moneys have been collected shall not have become and be then due and payable, to the payment of interest on the Securities of such series in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in such Securities, such payments to be made ratably to the Persons entitled thereto, without discrimination or preference; THIRD: In case the principal of the Securities of such series in respect of which moneys have been collected shall have become and shall be then due and payable, to the payment of the whole amount then owing and unpaid upon all the Securities of such series for principal and interest, with interest upon the overdue principal, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the same rate as the rate of interest or Yield to Maturity (in the case of Original Issue Discount Securities) specified in the Securities of such series; and in case such moneys shall be insufficient to pay in full the whole amount so due and unpaid upon the Securities of such series, then to the payment of such principal and interest or Yield to Maturity, without preference or priority of principal over interest or Yield to Maturity, or of interest or Yield to Maturity over principal, or of any instalment of interest over any other instalment of interest, or of any Security of such series over any other Security of such series, ratably to the aggregate of such principal and accrued and unpaid interest or Yield to Maturity; and FOURTH: To the payment of the remainder, if any, to the Issuer or any other Person lawfully entitled thereto. SECTION 4.4 Suits for Enforcement. In case an Event of Default has occurred, has not been waived and is continuing, 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. SECTION 4.5 Restoration of Rights on Abandonment of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Securityholders shall continue as though no such proceedings had been taken. SECTION 4.6 Limitations on Suits by Securityholders. No Holder of any Security of any series or of any Coupon appertaining thereto shall have any right by virtue or by availing of any provision of this Indenture to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder, unless such Holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of not less than 25% in aggregate principal amount of the Securities of each affected series then Outstanding (treated as a single class) shall have made written request upon the Trustee to institute such action or proceedings in its own name as Trustee hereunder and 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 and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 4.9; it being understood and intended, and being expressly covenanted by the taker and Holder of every Security or Coupon with every other taker and Holder and the Trustee, that no one or more Holders of Securities of any series or Coupons appertaining to such Securities shall have any right in any manner whatever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other such Holder of Securities or Coupons appertaining to such 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 Securities of the applicable series and Coupons appertaining to such Securities. 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 4.7 Unconditional Right of Securityholders to Institute Certain Suits. Notwithstanding any other provision in this Indenture and any provision of any Security, the right of any Holder of any Security or Coupon to receive payment of the principal of and interest on such Security or Coupon on or after the respective due dates expressed or provided for in such Security or Coupon, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 4.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. Except as provided in Section 4.6 and the last paragraph of Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders of Securities or Coupons is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Trustee or of any Holder of Securities or Coupons 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 Event of Default or an acquiescence therein; and, subject to Section 4.6, every power and remedy given by this Indenture or by law to the Trustee or to the Holders of Securities or Coupons may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Holders of Securities or Coupons. SECTION 4.9 Control by Holders of Securities. The Holders of a majority in aggregate principal amount of the Securities of each series affected (with all such series voting as a single class) at the time Outstanding 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 the Securities of such series by this Indenture; provided that such direction shall not be otherwise than in accordance with law and the provisions of this Indenture and provided further that (subject to the provisions of Section 5.1) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by its board of directors, the executive committee, or a trust committee of directors or Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all series so affected not joining in the giving of said direction, it being understood that (subject to Section 5.1) the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such Holders. Nothing in this Indenture shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Securityholders. SECTION 4.10 Waiver of Past Defaults. Prior to the acceleration of the maturity of any Securities as provided in Section 4.1, the Holders of a majority in aggregate principal amount of the Securities of all series at the time Outstanding with respect to which an Event of Default shall have occurred and be continuing (voting as a single class) may on behalf of the Holders of all such Securities waive any past default or Event of Default described in Section 4.1 and its consequences, except a default (1) in the payment of the principal of or any premium or interest on any Security of such series, or (2) in respect of a covenant or provision hereof which cannot be modified or amended without the consent of the Holder of each Security affected. In the case of any such waiver, the Issuer, the Trustee and the Holders of all such Securities 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. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 4.11 Trustee to Give Notice of Default, But May Withhold in Certain Circumstances. The Trustee shall, within 30 days after the occurrence of a default with respect to the Securities of any series of which the Trustee has actual notice, give notice in compliance with Section 10.4 of all defaults with respect to that series known to the Trustee (i) if any Unregistered Securities of that series are then Outstanding, to the Holders thereof, by publication at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg) and (ii) to all Holders of Securities of such series in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act of 1939, unless in each case such defaults shall have been cured before the mailing or publication of such notice (the term "defaults" for the purpose of this Section being hereby defined to mean any event or condition which is, or with notice or lapse of time or both would become, an Event of Default); provided that, except in the case of default in the payment of the principal of or interest on any of the Securities of such series, or in the payment of any sinking fund instalment on such series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors or trustees and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders of such series. SECTION 4.12 Right of Court to Require Filing of Undertaking to Pay Costs. All parties to this Indenture agree, and each Holder of any Security or Coupon by his 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, suffered 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 of any series holding in the aggregate more than 10% in aggregate principal amount of the Securities of such series, or, in the case of any suit relating to or arising under clause (c) or (g) of Section 4.1 (if the suit relates to Securities of more than one but less than all series), l0% in aggregate principal amount of Securities then Outstanding and affected thereby, or in the case of any suit relating to or arising under clause (c) or (g) (if the suit under clause (c) or (g) relates to all the Securities then Outstanding), (d) or (e) of Section 4.1, 10% in aggregate principal amount of all Securities then Outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of or interest on any Security on or after the due date expressed in such Security or any date fixed for redemption. ARTICLE FIVE CONCERNING THE TRUSTEE SECTION 5.1 Duties and Responsibilities of the Trustee; During Default; Prior to Default. With respect to the Holders of any series of Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Securities of a particular series and after the curing or waiving of all Events of Default which may have occurred with respect to such series, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Securities of a series has occurred (which has not been cured or waived) the Trustee shall exercise with respect to such series of Securities 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. 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 wilful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Securities of any series and after the curing or waiving of all such Events of Default with respect to such series which may have occurred: (i) the duties and obligations of the Trustee with respect to the Securities of any series shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable 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 (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which 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 requirements of this Indenture; (b) 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; and (c) 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 pursuant to Section 4.9 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. 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 shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. The provisions of this Section 5.1 are in furtherance of and subject to Sections 315 and 316 of the Trust Indenture Act of 1939. SECTION 5.2 Certain Rights of the Trustee. In furtherance of and subject to the Trust Indenture Act of 1939, subject to Section 5.1: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, Officers' Certificate or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, Coupon, 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 Issuer mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the secretary or an assistant secretary of the Issuer; (c) the Trustee may consult with counsel and any written advice or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the trusts 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 which might be incurred therein or thereby; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture; (f) prior to the occurrence of an Event of Default hereunder and after the curing or waiving of all Events of Default, 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, appraisal, bond, debenture, note, Coupon, Security, or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Securities of all series affected then Outstanding; provided 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 expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Issuer or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Issuer upon demand; and (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 not regularly in its employ and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. SECTION 5.3 Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Issuer, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities or Coupons. The Trustee shall not be accountable for the use or application by the Issuer of any of the Securities or of the proceeds thereof. SECTION 5.4 Trustee and Agents May Hold Securities or Coupons; Collections, etc. The Trustee or any agent of the Issuer or the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities or Coupons with the same rights it would have if it were not the Trustee or such agent and may otherwise deal with the Issuer and receive, collect, hold and retain collections from the Issuer with the same rights it would have if it were not the Trustee or such agent. SECTION 5.5 Moneys Held by Trustee. Subject to the provisions of Section 9.4 hereof, 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 mandatory provisions of law. Neither the Trustee nor any agent of the Issuer or the Trustee shall be under any liability for interest on any moneys received by it hereunder. SECTION 5.6 Compensation and Indemnification of Trustee and Its Prior Claim. The Issuer covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) and the Issuer covenants and agrees to pay or reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by or on behalf of it 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 agents and other persons not regularly in its employ) except any such expense, disbursement or advance as may result from its negligence or bad faith. The Issuer also covenants to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or the trusts hereunder and its duties hereunder, including the costs and expenses of defending itself against or investigating any claim of liability in the premises. The obligations of the Issuer under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor 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 a senior claim to that of the 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 Securities or Coupons, and the Securities are hereby subordinated to such senior claim. SECTION 5.7 Right of Trustee to Rely on Officers' Certificate, etc. Subject to Sections 5.1 and 5.2, whenever in the administration of the trusts 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 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 by it under the provisions of this Indenture upon the faith thereof. SECTION 5.8 Persons Eligible for Appointment as Trustee. The Trustee for each series of Securities hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State or the District of Columbia having a combined capital and surplus of at least $5,000,000, and which is eligible in accordance with the provisions of Section 310(a) of the Trust Indenture Act of 1939. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of a Federal, State or District of Columbia 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. SECTION 5.9 Resignation and Removal; Appointment of Successor Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign with respect to one or more or all series of Securities by giving written notice of resignation to the Issuer and (i) if any Unregistered Securities of a series affected are then Outstanding, by giving notice of such resignation to the Holders thereof, by publication at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York, and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered Securities of a series affected are then Outstanding, by mailing notice of such resignation to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 313(c)(2) of the Trust Indenture Act of 1939 at such addresses as were so furnished to the Trustee and (iii) by mailing notice of such resignation to the Holders of then Outstanding Registered Securities of each series affected at their addresses as they shall appear on the registry books. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee or trustees with respect to the applicable series by written instrument in duplicate, executed by authority of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee or trustees. If no successor trustee shall have been so appointed with respect to any series 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, or any Securityholder who has been a bona fide Holder of a Security or Securities of the applicable series for at least six months may, subject to the provisions of Section 4.12, 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 of the following shall occur: (i) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act of 1939 with respect to any series of Securities after written request therefor by the Issuer or by any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months; or (ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 310(a) of the Trust Indenture Act of 1939 and shall fail to resign after written request therefor by the Issuer or by any Securityholder; or (iii) the Trustee shall become incapable of acting with respect to any series of Securities, or shall be adjudged a bankrupt or insolvent, or a receiver or liquidator of the Trustee or of its property shall be appointed, 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 Issuer may remove the Trustee with respect to the applicable series of Securities and appoint a successor trustee for 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 Trustee so removed and one copy to the successor trustee, or, subject to Section 315(e) of the Trust Indenture Act of 1939, any Securityholder who has been a bona fide Holder of a Security or Securities of such series for at least six months may on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee with respect to such series. 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 Securities of each series at the time Outstanding may at any time remove the Trustee with respect to Securities of such series and appoint a successor trustee with respect to the Securities of such series by delivering to the Trustee so removed, to the successor trustee so appointed and to the Issuer the evidence provided for in Section 6.1 of the action in that regard taken by the Securityholders. (d) Any resignation or removal of the Trustee with respect to any series and any appointment of a successor trustee with respect to such series pursuant to any of the provisions of this Section 5.9 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 5.10. SECTION 5.10 Acceptance of Appointment by Successor Trustee. Any successor trustee appointed as provided in Section 5.9 shall execute and deliver to the Issuer and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee with respect to all or any applicable series shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all rights, powers, duties and obligations with respect to such series of its predecessor hereunder, with like effect as if originally named as trustee for such series hereunder; but, nevertheless, on the written request of the Issuer or of the successor trustee, upon payment of its charges then unpaid, the trustee ceasing to act shall, subject to Section 9.4, pay over to the successor trustee all moneys at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor trustee all such rights, powers, duties and obligations. Upon request of any such successor trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 5.6. If a successor trustee is appointed with respect to the Securities of one or more (but not all) series, the Issuer, the predecessor trustee and each successor trustee with respect to the Securities of any applicable series shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the predecessor trustee with respect to the Securities of any series as to which the predecessor trustee is not retiring shall continue to be vested in the predecessor trustee, and 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 and that each such trustee shall be trustee of a trust or trusts under separate indentures. Upon acceptance of appointment by any successor trustee as provided in this Section 5.10, the Issuer shall give notice thereof (a) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof, by publication of such notice at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg), (b) if any Unregistered Securities of a series affected are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 313(c)(2) of the Trust Indenture Act of 1939, by mailing such notice to such Holders at such addresses as were so furnished to the Trustee (and the Trustee shall make such information available to the Issuer for such purpose) and (c) to the Holders of Registered Securities of each series affected, by mailing such notice to such Holders at their addresses as they shall appear on the registry books. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 5.9. If the Issuer fails to give such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be given at the expense of the Issuer. SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business of Trustee. 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 all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be eligible under the provisions of Section 5.8, 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 at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Securities of any series shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities of any series shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities of such series or in this Indenture provided that the certificate of the Trustee shall have; provided, that the right to adopt the certificate of authentication of any predecessor trustee or to authenticate Securities of any series in the name of any predecessor trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 5.12 Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act of 1939, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act of 1939 and this Indenture. SECTION 5.13 Preferential Collection of Claims Against the Issuer. The Trustee shall comply with Section 311(a) of the Trust Indenture Act of 1939, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act of 1939. A Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act of 1939 to the extent included therein. SECTION 5.14 Appointment of Authenticating Agent. As long as any Securities of a series remain Outstanding, the Trustee may, by an instrument in writing, appoint with the approval of the Issuer an authenticating agent (the "Authenticating Agent") which shall be authorized to act on behalf of the Trustee to authenticate Securities, including Securities issued upon exchange, registration of transfer, partial redemption or pursuant to Section 2.9. Securities of each such series authenticated by such Authenticating Agent shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee. Whenever reference is made in this Indenture to the authentication and delivery of Securities of any series by the Trustee or to the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent for such series and a certificate of authentication executed on behalf of the Trustee by such Authenticating Agent. Such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States of America or of any State, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $5,000,000 (determined as provided in Section 5.8 with respect to the Trustee) and subject to supervision or examination by Federal or State authority. Any corporation into which any Authenticating Agent may be merged or converted, or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which any Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency business of any Authenticating Agent, shall continue to be the Authenticating Agent with respect to all series of Securities for which it served as Authenticating Agent without the execution or filing of any paper or any further act on the part of the Trustee or such Authenticating Agent. 4 Any Authenticating Agent may at any time, and if it shall cease to be eligible shall, resign by giving written notice of resignation to the Trustee and to the Issuer. The Trustee may at any time terminate the Agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Issuer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 5.12 with respect to one or more series of Securities, the Trustee may upon receipt of an Issuer Order appoint a successor Authenticating Agent and the Issuer shall provide notice of such appointment to all Holders of Securities of such series in the manner and to the extent provided in Section 5.10. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent. The Issuer agrees to pay to the Authenticating Agent for such series from time to time reasonable compensation. The Authenticating Agent for the Securities of any series shall have no responsibility or liability for any action taken by it as such at the direction of the Trustee. Sections 5.2, 5.3, 5.4, 5.6, 5.8, 5.12 and 6.3 shall be applicable to any Authenticating Agent. ARTICLE SIX CONCERNING THE SECURITYHOLDERS SECTION 6.1 Evidence of Action Taken by Securityholders. Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by a specified percentage in principal amount of the Securityholders of any or all series may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such specified percentage of Securityholders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee. Proof of execution of any instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Sections 5.1 and 5.2) conclusive in favor of the Trustee and the Issuer, if made in the manner provided in this Article. SECTION 6.2 Proof of Execution of Instruments and of Holding of Securities. Subject to Sections 5.1 and 5.2, the execution of any instrument by a Securityholder or his agent or proxy may be proved in the following manner: (a) The fact and date of the execution by any Holder of any instrument may be proved by the certificate of any notary public or other officer of any jurisdiction authorized to take acknowledgments of deeds or administer oaths that the Person executing such instruments acknowledged to him the execution thereof, or by an affidavit of a witness to such execution sworn to before any such notary or other such officer. Where such execution is by or on behalf of any legal entity other than an individual, such certificate or affidavit shall also constitute sufficient proof of the authority of the Person executing the same. The fact of the holding by any Holder of an Unregistered Security of any series, and the identifying number of such Security and the date of his holding the same, may be proved by the production of such Security or by a certificate executed by any trust company, bank, banker or recognized securities dealer wherever situated satisfactory to the Trustee, if such certificate shall be deemed by the Trustee to be satisfactory. Each such certificate shall be dated and shall state that on the date thereof a Security of such series bearing a specified identifying number was deposited with or exhibited to such trust company, bank, banker or recognized securities dealer by the Person named in such certificate. Any such certificate may be issued in respect of one or more Unregistered Securities of one or more series specified therein. The holding by the Person named in any such certificate of any Unregistered Securities of any series specified therein shall be presumed to continue for a period of one year from the date of such certificate unless at the time of any determination of such holding (1) another certificate bearing a later date issued in respect of the same Securities shall be produced, or (2) the Security of such series specified in such certificate shall be produced by some other Person, or (3) the Security of such series specified in such certificate shall have ceased to be Outstanding. The fact and date of the execution of any such instrument and the amount and numbers of Securities of any series held by the Person so executing such instrument and the amount and numbers of any Security or Securities for such series may also be proven in accordance with such reasonable rules and regulations as may be prescribed by the Trustee for such series or in any other manner which the Trustee for such series may deem sufficient. (b) In the case of Registered Securities, the ownership of such Securities shall be proved by the Security register or by a certificate of the Security registrar. SECTION 6.3 Holders to be Treated as Owners. The Issuer, the Trustee and any agent of the Issuer or the Trustee may deem and treat the Person in whose name any Security shall be registered upon the Security register for such series as the absolute owner of such Security (whether or not such Security shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of and, subject to the provisions of this Indenture, interest on such Security and for all other purposes; and neither the Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. The Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the Holder of any Unregistered Security and the Holder of any Coupon as the absolute owner of such Unregistered Security or Coupon (whether or not such Unregistered Security or Coupon shall be overdue) for the purpose of receiving payment thereof or on account thereof and for all other purposes and neither the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be affected by any notice to the contrary. All such payments so made to any such Person, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Unregistered Security or Coupon. SECTION 6.4 Securities Owned by Issuer Deemed Not Outstanding. In determining whether the Holders of the requisite aggregate principal amount of Outstanding Securities of any or all series have concurred in any direction, consent or waiver under this Indenture, Securities which are owned by the Issuer or any other obligor on the Securities with respect to which such determination is being made or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities with respect to which such determination is being made 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 Securities which the Trustee knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Issuer or any other obligor upon the Securities or any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer or any other obligor on the Securities. In case of a dispute as to such right, the advice of counsel shall be full protection in respect of any decision made by the Trustee in accordance with such advice. Upon request of the Trustee, the Issuer shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Securities, if any, known by the Issuer to be owned or held by or for the account of any of the above-described Persons; and, subject to Sections 5.1 and 5.2, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Securities not listed therein are Outstanding for the purpose of any such determination. SECTION 6.5 Right of Revocation of Action Taken. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 6.1, of the taking of any action by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action, any Holder of a Security the serial number of which is shown by the evidence to be included among the serial numbers of the Securities the Holders of which have consented to such action may, by filing written notice at the Corporate Trust Office and upon proof of holding as provided in this Article, revoke such action so far as concerns such Security. Except as aforesaid any such action taken by the Holder of any Security shall be conclusive and binding upon such Holder and upon all future Holders and owners of such Security and of any Securities issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon any such Security. Any action taken by the Holders of the percentage in aggregate principal amount of the Securities of any or all series, as the case may be, specified in this Indenture in connection with such action shall be conclusively binding upon the Issuer, the Trustee and the Holders of all the Securities affected by such action. ARTICLE SEVEN SUPPLEMENTAL INDENTURES SECTION 7.1 Supplemental Indentures Without Consent of Securityholders. The Issuer, when authorized by a resolution of its Board of Directors (which resolution may provide general terms or parameters for such action and may provide that the specific terms of such action may be determined in accordance with or pursuant to an Officers' Certificate), and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Securities of one or more series any property or assets; (b) to evidence the succession of another corporation to the Issuer, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Issuer pursuant to Article Eight; (c) to add to the covenants of the Issuer such further covenants, restrictions, conditions or provisions as the Issuer and the Trustee shall consider to be for the protection of the Holders of Securities or Coupons, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions, conditions or provisions an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such an Event of Default or may limit the remedies available to the Trustee upon such an Event of Default or may limit the right of the Holders of a majority in aggregate principal amount of the Securities of such series to waive such an Event of Default; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make any other provisions as the Issuer may deem necessary or desirable, provided that no such action shall adversely affect the interests of the Holders of the Securities or Coupons; (e) to establish the form or terms of Securities of any series or of the Coupons appertaining to such Securities as permitted by Sections 2.1 and 2.3; and (f) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities of one or more series and to 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, pursuant to the requirements of Section 5.10. The Trustee is hereby authorized to join with the Issuer in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer, assignment, mortgage or pledge of any property thereunder, but the Trustee shall not be obligated to enter into any such supplemental indenture which 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 without the consent of the Holders of any of the Securities at the time Outstanding, notwithstanding any of the provisions of Section 7.2. SECTION 7.2 Supplemental Indentures With Consent of Securityholders. With the consent (evidenced as provided in Article Six) of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding of all series affected by such supplemental indenture (voting as one class), the Issuer, when authorized by a resolution of its Board of Directors (which resolution may provide general terms or parameters for such action and may provide that the specific terms of such action may be determined in accordance with or pursuant to an Issuer Order), and the Trustee may, from time to time and at any time, enter into an indenture or indentures supplemental hereto 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 the rights of the Holders of the Securities of each such series or of the Coupons appertaining to such Securities; provided, that no such supplemental indenture shall (a) extend the final maturity of any Security, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof, or make the principal thereof (including any amount in respect of original issue discount) or interest thereon payable in any coin or currency other than that provided in the Securities and Coupons or in accordance with the terms thereof, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon an acceleration of the maturity thereof pursuant to Section 4.1 or the amount thereof provable in bankruptcy pursuant to Section 4.2, or alter the provisions of Section 10.11 or 10.12 or impair or affect the right of any Securityholder to institute suit for the payment thereof or, if the Securities provide therefor, any right of repayment at the option of the Securityholder, in each case without the consent of the Holders of each Security so affected, or (b) reduce the aforesaid percentage of Securities of any series, the consent of the Holders of which is required for any such supplemental indenture, without the consent of the Holders of each Security so affected. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of Holders of Securities of such series, or of Coupons appertaining to such Securities, with respect to such covenant or provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series or of the Coupons appertaining to such Securities. Upon the request of the Issuer, accompanied by a copy of a resolution of the Board of Directors (which resolution may provide general terms or parameters for such action and may provide that the specific terms of such action may be determined in accordance with or pursuant to an Issuer Order) certified by the secretary or an assistant secretary of the Issuer authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of the Holders of the Securities as aforesaid and other documents, if any, required by Section 6.1, the Trustee shall join with the Issuer 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. It shall not be necessary for the consent of the Securityholders 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. Promptly after the execution by the Issuer and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall give notice thereof (i) to the Holders of then Outstanding Registered Securities of each series affected thereby, by mailing a notice thereof by first-class mail to such Holders at their addresses as they shall appear on the Security register, (ii) if any Unregistered Securities of a series affected thereby are then Outstanding, to the Holders thereof who have filed their names and addresses with the Trustee pursuant to Section 313(c)(2) of the Trust Indenture Act of 1939, by mailing a notice thereof by first-class mail to such Holders at such addresses as were so furnished to the Trustee and (iii) if any Unregistered Securities of a series affected thereby are then Outstanding, to all Holders thereof, by publication of a notice thereof at least once in an Authorized Newspaper in the Borough of Manhattan, The City of New York and at least once in an Authorized Newspaper in London (and, if required by Section 3.7, at least once in an Authorized Newspaper in Luxembourg), and in each case such notice shall set forth in general terms the substance of such supplemental indenture. Any failure of the Issuer to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 7.3 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions hereof, this Indenture shall 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 Issuer and the Holders of Securities of each 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 7.4 Documents to Be Given to Trustee. The Trustee, subject to the provisions of Sections 5.1 and 5.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article Seven complies with the applicable provisions of this Indenture. SECTION 7.5 Notation on Securities in Respect of Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article may bear a notation in form approved by the Trustee for such series as to any matter provided for by such supplemental indenture or as to any action taken by Securityholders. If the Issuer or the Trustee shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Issuer, authenticated by the Trustee and delivered in exchange for the Securities of such series then Outstanding. ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 8.1 Issuer May Consolidate, etc., Only on Certain Terms. The Issuer shall not consolidate with or merge into any other corporation or convey, transfer or lease its properties and assets substantially as an entirety to any Person, unless: (a) the corporation formed by such consolidation or into which the Issuer is merged or the Person which acquires by conveyance, transfer or lease the properties and assets of the Issuer substantially as an entirety shall expressly assume, by a supplemental indenture hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and interest on all the Securities and Coupons, if any, according to their tenor, and the performance of every covenant of this Indenture on the part of the Issuer to be performed or observed; (b) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default, shall have happened and be continuing; (c) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with; and (d) the Issuer has delivered to the Trustee such other documents as the Trustee may, in its discretion, reasonably require. SECTION 8.2 Successor Corporation Substituted. In case of any such consolidation, merger, sale, lease or conveyance, and following such an assumption by the successor Person, such successor Person shall succeed to and be substituted for the Issuer, with the same effect as if it had been named herein. Such successor Person may cause to be signed, and may issue either in its own name or in the name of the Issuer prior to such succession any or all of the Securities issuable hereunder which together with any Coupons appertaining thereto theretofore shall not have been signed by the Issuer and delivered to the Trustee; and, upon the order of such successor Person, instead of the Issuer, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities together with any Coupons appertaining thereto which previously shall have been signed and delivered by the officers of the Issuer to the Trustee for authentication, and any Securities which such successor Person thereafter shall cause to be signed and delivered to the Trustee for that purpose. All of the Securities so issued together with any Coupons appertaining thereto shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. In case of any such consolidation, merger, sale, lease or conveyance, such changes in phrasing and form (but not in substance) may be made in the Securities and Coupons thereafter to be issued as may be appropriate. In the event of any such sale or conveyance (other than a conveyance by way of lease) the Issuer or any successor Person which shall theretofore have become such in the manner described in this Article shall be discharged from all obligations and covenants under this Indenture and the Securities and may be liquidated and dissolved. ARTICLE NINE SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 9.1 Satisfaction and Discharge of Indenture. (A) If at any time (a) the Issuer shall have paid or caused to be paid the principal of and interest on all the Securities of any series Outstanding hereunder and all unmatured Coupons appertaining thereto (other than Securities of such series and Coupons appertaining thereto which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.9) as and when the same shall have become due and payable, or (b) the Issuer shall have delivered to the Trustee for cancellation all Securities of any series theretofore authenticated and all unmatured Coupons appertaining thereto (other than any Securities of such series and Coupons appertaining thereto which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.9) or (c) in the case of any series of Securities where the exact or maximum amount (including the currency of payment) of principal of and interest due on which can be determined at the time of making the deposit referred to in clause (ii) below, (i) all the Securities of such series and all unmatured Coupons appertaining thereto 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 (ii) the Issuer shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Issuer in accordance with Section 9.4) or, in the case of any series of Securities the payments on which may only be made in Dollars, direct obligations of the United States of America, backed by its full faith and credit (and not subject to redemption or prepayment at the option of the holders thereof) ("United States Government Obligations"), maturing as to principal and interest at such times and in such amounts as will insure the availability of cash, 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 (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on each date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the dates on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; and if, in any such case, the Issuer shall also pay or cause to be paid all other sums payable hereunder by the Issuer with respect to the Securities of such series, then this Indenture with respect to the Securities of such series shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange of Securities of such series and of Coupons appertaining thereto and the Issuer's right of optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of Holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration), and remaining rights of the Holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) the rights of the Holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, on demand of the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Issuer, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture with respect to the Securities of such series; provided, that the rights of Holders of the Securities and Coupons to receive amounts in respect of principal of and interest on the Securities and Coupons held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Securities are listed. The Issuer agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Securities of such series. (B) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In addition to discharge of the Indenture pursuant to the next preceding paragraph, in the case of any series of Securities the exact or maximum amounts (including the currency of payment) of principal of and interest due on which can be determined at the time of making the deposit referred to in clause (a) below, the Issuer shall be deemed to have paid and discharged the entire indebtedness on all the Securities of such a series and the Coupons appertaining thereto on the 91st day after the date of the deposit referred to in subparagraph (a) below, and the provisions of this Indenture with respect to the Securities of such series and Coupons appertaining thereto shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Securities of such series and of Coupons appertaining thereto and the Issuer's right of optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of Holders of Securities and Coupons appertaining thereto to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration), and remaining rights of the Holders to receive mandatory sinking fund payments, if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) the rights of the Holders of Securities of such series and Coupons appertaining thereto as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Issuer under Section 3.2) and the Trustee, at the expense of the Issuer, shall at the Issuer's request, execute proper instruments acknowledging the same, if (a) with reference to this provision the Issuer has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series and Coupons appertaining thereto (i) cash in an amount, or (ii) in the case of any series of Securities the payments on which may only be made in Dollars, United States Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) 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 (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on each date that such principal or interest is due and payable and (B) any mandatory sinking fund payments on the dates on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Issuer is a party or by which it is bound; (c) the Issuer has delivered to the Trustee an Opinion of Counsel (from an expert in matters relating to Federal income tax law who is not an employee of the Issuer) based on the fact that (x) the Issuer 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 Federal income tax law, in either case to the effect that, and such opinion shall confirm that, the Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amounts, in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; (d) the Issuer has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with; (e) no Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as subsections 4.1(d) and (e) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (f) such covenant defeasance contemplated by this provision shall not cause any Securities then listed on any registered national securities exchange under the Securities Exchange Act of 1934, as amended, to be delisted; and (g) such covenant defeasance shall not cause the Trustee to have a conflicting interest as described in Section 310 of the Trust Indenture Act of 1939 with respect to any securities of the Issuer. (C) The following provisions shall apply to the Securities of each series unless specifically otherwise provided in a Board Resolution, Officers' Certificate or indenture supplemental hereto provided pursuant to Section 2.3. In the case of any series of Securities the exact or maximum amounts (including the currency of payment) of principal of and interest due on which can be determined at the time of making the deposit referred to in clause (a) below, the Issuer shall be released from its obligations under Sections 3.6 and 8.1 with respect to the Securities of any such series, and any Coupons appertaining thereto, Outstanding on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"). For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities of any series, the Issuer may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in such Sections, whether directly or indirectly by reason of any reference elsewhere herein to such Sections or by reason of any reference in such Sections to any other provision herein or in any other document and such omission to comply shall not constitute an Event of Default under Section 4.1, but the remainder of this Indenture and such Securities and Coupons shall be unaffected thereby. The following shall be the conditions to application of this subsection C of this Section 9.1: (a) the Issuer has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series and Coupons appertaining thereto, (i) cash in an amount, or (ii) in the case of any series of Securities the payments on which may only be made in Dollars, United States Government Obligations maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) 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 (A) the principal and interest on all Securities of such series and Coupons appertaining thereto on each date that such principal and interest is due and payable and (B) any mandatory sinking fund payments on the day on which such payments are due and payable in accordance with the terms of the Indenture and the Securities of such series; (b) no Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as subsections 4.1(d) and (e) are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (c) such covenant defeasance shall not cause the Trustee to have a conflicting interest as described in Section 310 of the Trust Indenture Act of 1939 with respect to any securities of the Issuer; (d) such covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Issuer is a party or by which it is bound; (e) such covenant defeasance shall not cause any Securities then listed on any registered national securities exchange under the Securities Exchange Act of 1934, as amended, to be delisted.; (f) the Issuer shall have delivered to the Trustee an Officers' Certificate and Opinion of Counsel (from an expert in matters relating to Federal income tax law who is not an employee of the Issuer) to the effect that the Holders of the Securities of such series and Coupons appertaining thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (g) The Issuer shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the covenant defeasance contemplated by this provision have been complied with. SECTION 9.2 Application by Trustee of Funds Deposited for Payment of Securities. Subject to Section 9.4, all moneys deposited with the Trustee (or other trustee) pursuant to Section 9.1 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Issuer acting as its own paying agent), to the Holders of the particular Securities of such series and of Coupons appertaining thereto for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. SECTION 9.3 Repayment of Moneys Held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to Securities of any series, all moneys then held by any paying agent under the provisions of this Indenture with respect to such series of Securities shall, upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 9.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for Two Years. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Security of any series or Coupons attached thereto and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Issuer and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee for such series or such paying agent, and the Holder of the Securities of such series and of any Coupons appertaining thereto shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Issuer for any payment which such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; provided, however, that the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment (a) in respect of Registered Securities of any series, shall at the expense of the Issuer, mail by first-class mail to Holders of such Securities at their addresses as they shall appear on the Security register, and (b) in respect of Unregistered Securities of any series, shall at the expense of the Issuer cause to be published once, in an Authorized Newspaper in the Borough of Manhattan, The City of New York and once in an Authorized Newspaper in London (and if required by Section 3.7, once in an Authorized Newspaper in Luxembourg), notice, that such moneys remain and that, after a date specified therein, which shall not be less than 30 days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Issuer. SECTION 9.5 Indemnity for United States Government Obligations. The Issuer shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the United States Government Obligations deposited pursuant to Section 9.1 or the principal or interest received in respect of such obligations. SECTION 9.6 Excess Funds. The Trustee shall deliver to the Issuer from time to time upon Issuer Order any United States Government Obligations or money held by it as provided in Section 9.1 which, as expressed in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may include the applicable such opinion delivered to the Trustee pursuant to Section 9.1), are then in excess of the amount thereof which then would have been required to be deposited for the purpose for which such obligations or money were deposited or received. ARTICLE TEN MISCELLANEOUS PROVISIONS SECTION 10.1 Incorporators, Stockholders, Officers and Directors of Issuer Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement contained in this Indenture, or in any Security, or because of any indebtedness evidenced thereby, shall be had against any incorporator, as such or against any past, present or future stockholder, officer or director, as such, of the Issuer or of any successor, either directly or through the Issuer or any successor, under any rule of law, statute or constitutional provision or by the enforcement of any assessment or by any legal or equitable proceeding or otherwise, all such liability being expressly waived and released by the acceptance of the Securities and the Coupons appertaining thereto by the Holders thereof and as part of the consideration for the issue of the Securities and the Coupons appertaining thereto. SECTION 10.2 Provisions of Indenture for the Sole Benefit of Parties and Holders of Securities and Coupons. Nothing in this Indenture, in the Securities or in the Coupons appertaining thereto, expressed or implied, shall give or be construed to give to any Person, other than the parties hereto and their successors and the Holders of the Securities or Coupons, if any, any legal or equitable right, remedy or claim under this Indenture or under any covenant or provision herein contained, all such covenants and provisions being for the sole benefit of the parties hereto and their successors and of the Holders of the Securities or Coupons, if any. SECTION 10.3 Successors and Assigns of Issuer Bound by Indenture. All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Issuer shall bind its successors and assigns, whether so expressed or not. SECTION 10.4 Notices and Demands on Issuer, Trustee and Holders of Securities and Coupons. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities or Coupons to or on the Issuer may be given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Issuer is filed by the Issuer with the Trustee) to Illinova Corporation, 500 South 27th Street, Decatur, Illinois 62525, Attention: Treasurer. Any notice, direction, request or demand by the Issuer or any Holder of Securities or Coupons to or upon the Trustee shall be deemed to have been sufficiently given or served by being deposited postage prepaid, first-class mail (except as otherwise specifically provided herein) addressed (until another address of the Trustee is filed by the Trustee with the Issuer) to The First National Bank of Chicago, c/o First Chicago Trust Company of New York, 14 Wall Street, 8th Floor, Window 2, New York, NY 10005, Attn: Corporate Trust Administration. Where this Indenture provides for notice to Holders of Registered Securities, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder entitled thereto, at his last address as it appears in the Security register. In any case where notice to such Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service, it shall be impracticable to mail notice to the Issuer when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be reasonably satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. SECTION 10.5 Officers' Certificates and Opinions of Counsel; Statements to Be Contained Therein. Upon any application or demand by the Issuer to the Trustee to take any action under any of the provisions of this Indenture, the Issuer 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. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (a) a statement that the person making such certificate or opinion has read such covenant or condition, (b) 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, (c) 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 opinion as to whether or not such covenant or condition has been complied with and (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Any certificate, statement or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of or representations by counsel, unless such officer knows that the certificate or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of counsel may be based, insofar as it relates to factual matters, information with respect to which is in the possession of the Issuer, upon the certificate, statement or opinion of or representations by an officer or officers of the Issuer, unless such counsel knows that the certificate, statement or opinion or representations with respect to the matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate, statement or opinion of an officer of the Issuer or of counsel may be based, insofar as it relates to accounting matters, upon a certificate or opinion of or representations by an accountant or firm of accountants in the employ of the Issuer, unless such officer or counsel, as the case may be, knows that the certificate or opinion or representations with respect to the accounting matters upon which his certificate, statement or opinion may be based as aforesaid are erroneous, or in the exercise of reasonable care should know that the same are erroneous. Any certificate or opinion of any independent firm of public accountants filed with and directed to the Trustee shall contain a statement that such firm is independent. SECTION 10.6 Payments Due on Saturdays, Sundays and Holidays. If the date of maturity of interest on or principal of the Securities of any series or any Coupons appertaining thereto or the date fixed for redemption or repayment of any such Security or Coupon shall not be a Business Day, then payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption or repayment, and no interest shall accrue for the period after such date. SECTION 10.7 Conflict of Any Provision of Indenture with Trust Indenture Act of 1939. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with another provision included in this Indenture by operation of Sections 310 to 317, inclusive, of the Trust Indenture Act of 1939 (an "incorporated provision"), such incorporated provision shall control. SECTION 10.8 New York Law to Govern. This Indenture and each Security and Coupon shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of such State, except as may otherwise be required by mandatory provisions of law. SECTION 10.9 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 10.10 Effect of Headings. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 10.11 Securities in a Foreign Currency or in ECU. Unless otherwise specified in an Officers' Certificate delivered pursuant to Section 2.3 of this Indenture with respect to a particular series of Securities, whenever for purposes of this Indenture any action may be taken by the Holders of a specified percentage in aggregate principal amount of Securities of all series or all series affected by a particular action at the time Outstanding and, at such time, there are Outstanding Securities of any series which are denominated in a coin or currency other than Dollars (including ECUs), then the principal amount of Securities of such series which shall be deemed to be Outstanding for the purpose of taking such action shall be that amount of Dollars that could be obtained for such amount at the Market Exchange Rate as of the date of initial issuance of such Securities. For purposes of this Section 10.11, Market Exchange Rate as of any date shall mean the noon Dollar buying rate in New York City for cable transfers of that currency on such date as published by the Federal Reserve Bank of New York; provided, however, in the case of ECUs, Market Exchange Rate shall mean the rate of exchange determined by the Commission of the European Communities (or any successor thereto) as published in the Official Journal of the European Communities (such publication or any successor publication, the "Journal"). If such Market Exchange Rate is not available for any reason with respect to such currency, the Trustee shall use, in its sole discretion and without liability on its part, such quotation of the Federal Reserve Bank of New York or, in the case of ECUs, the rate of exchange as published in the Journal, as of the most recent available date, or quotations or, in the case of ECUs, rates of exchange from one or more major banks in The City of New York or in the country of issue of the currency in question, which for purposes of the ECU shall be Brussels, Belgium, or such other quotations or, in the case of ECU, rates of exchange as the Trustee shall deem appropriate. The provisions of this paragraph shall apply in determining the equivalent principal amount in respect of Securities of a series denominated in a currency other than Dollars in connection with any action taken by Holders of Securities pursuant to the terms of this Indenture. All decisions and determinations of the Trustee regarding the Market Exchange Rate alternative determination provided for in the preceding paragraph shall be in its sole discretion and shall, in the absence of manifest error, be conclusive to the extent permitted by law for all purposes and irrevocably binding upon the Issuer and all Holders. SECTION 10.12 Judgment Currency. The Issuer agrees, to the fullest extent that it may effectively do so under applicable law, that (a) if for the purpose of obtaining judgment in any court it is necessary to convert the sum due in respect of the principal of or interest on the Securities of any series (the "Required Currency") into a currency in which a judgment will be rendered (the "Judgment Currency"), the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the day on which a final unappealable judgment is entered, unless such day is not a New York Banking Day, then, to the extent permitted by applicable law, the rate of exchange used shall be the rate at which in accordance with normal banking procedures the Trustee could purchase in The City of New York the Required Currency with the Judgment Currency on the New York Banking Day preceding the day on which a final unappealable judgment is entered, and (b) its obligations under this Indenture to make payments in the Required Currency (i) shall not be discharged or satisfied by any tender, or any recovery pursuant to any judgment (whether or not entered in accordance with subsection (a)), in any currency other than the Required Currency, except to the extent that such tender or recovery shall result in the actual receipt, by the payee, of the full amount of the Required Currency expressed to be payable in respect of such payments, (ii) shall be enforceable as an alternative or additional cause of action for the purpose of recovering in the Required Currency the amount, if any, by which such actual receipt shall fall short of the full amount of the Required Currency so expressed to be payable and (iii) shall not be affected by judgment being obtained for any other sum due under this Indenture. For purposes of the foregoing, "New York Banking Day" means any day except a Saturday, Sunday or a legal holiday in The City of New York or a day on which banking institutions in The City of New York are authorized or required by law or executive order to close. ARTICLE ELEVEN REDEMPTION OF SECURITIES AND SINKING FUNDS SECTION 11.1 Applicability of Article. The provisions of this Article shall be applicable to the Securities of any series which are redeemable before their maturity or to any sinking fund for the retirement of Securities of a series except as otherwise specified as contemplated by Section 2.3 for Securities of such series. SECTION 11.2 Notice of Redemption; Partial Redemptions. Notice of redemption to the Holders of Registered Securities of any series to be redeemed as a whole or in part at the option of the Issuer shall be given by mailing notice of such redemption by first class mail, postage prepaid, at least 30 days and not more than 60 days prior to the date fixed for redemption to such Holders of Securities of such series at their last addresses as they shall appear upon the registry books. Notice of redemption to the Holders of Unregistered Securities to be redeemed as a whole or in part, who have filed their names and addresses with the Trustee pursuant to Section 313(c)(2) of the Trust Indenture Act of 1939, shall be given by mailing notice of such redemption, by first class mail, postage prepaid, at least 30 days and not more than 60 prior to the date fixed for redemption, to such Holders at such addresses as were so furnished to the Trustee (and, in the case of any such notice given by the Issuer, the Trustee shall make such information available to the Issuer for such purpose). Notice of redemption to all other Holders of Unregistered Securities shall be published in an Authorized Newspaper in the Borough of Manhattan, The City of New York and in an Authorized Newspaper in London (and, if required by Section 3.7, in an Authorized Newspaper in Luxembourg), in each case, once in each of three successive calendar weeks, the first publication to be not less than 30 nor more than 60 days prior to the date fixed for redemption. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. Failure to give notice by mail, or any defect in the notice to the Holder of any Security of a series designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security of such series. The notice of redemption to each such Holder shall specify the principal amount of each Security of such series held by such Holder to be redeemed, the date fixed for redemption, the redemption price, the numbers of the certificate for such Security being redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Securities and, in the case of Securities with Coupons attached thereto, of all Coupons appertaining thereto maturing after the date fixed for redemption, that such redemption is pursuant to the mandatory or optional sinking fund, or both, if such be the case, that interest accrued to the date fixed for redemption will be paid as specified in such notice and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. In case any Security of a series is to be redeemed in part only the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Security, a new Security or Securities of such series in principal amount equal to the unredeemed portion thereof will be issued. The notice of redemption of Securities of any series to be redeemed at the option of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. On or before the redemption date specified in the notice of redemption given as provided in this Section, the Issuer will deposit with the Trustee or with one or more paying agents (or, if the Issuer is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 3.4) an amount of money sufficient to redeem on the redemption date all the Securities of such series so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. The Issuer will deliver to the Trustee at least 70 days prior to the date fixed for redemption an Officers' Certificate stating the aggregate principal amount of Securities to be redeemed. In case of a redemption at the election of the Issuer prior to the expiration of any restriction on such redemption or subject to compliance with a condition precedent, the Issuer shall deliver to the Trustee, prior to the giving of any notice of redemption to Holders pursuant to this Section, an Officers' Certificate stating that such restriction or condition precedent has been complied with. If less than all the Securities of a series are to be redeemed, the Trustee shall select, in such manner as it shall deem appropriate and fair, Securities of such series to be redeemed in whole or in part. Securities may be redeemed in part in multiples equal to the minimum authorized denomination for Securities of such series or any multiple thereof. The Trustee shall promptly notify the Issuer in writing of the Securities of such series selected for redemption and, in the case of any Securities of such series selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities of any series shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 11.3 Payment of Securities Called for Redemption. If notice of redemption has been given as above provided, the Securities or portions of Securities 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 on and after said date (unless the Issuer shall default in the payment of such Securities at the redemption price, together with interest accrued to said date) interest on the Securities or portions of Securities so called for redemption shall cease to accrue, and the unmatured Coupons, if any, appertaining thereto shall be void, and, except as provided in Sections 5.5 and 9.4, such Securities shall cease from and after the date fixed for redemption to be entitled to any benefit or security under this Indenture, and the Holders thereof shall have no right in respect of such Securities except the right to receive the redemption price thereof and unpaid interest to the date fixed for redemption. On presentation and surrender of such Securities at a place of payment specified in said notice, together with all Coupons, if any, appertaining thereto maturing after the date fixed for redemption, said Securities or the specified portions thereof shall be paid and redeemed by the Issuer at the applicable redemption price, together with interest accrued thereon to the date fixed for redemption; provided that payment of interest becoming due on or prior to the date fixed for redemption shall be payable in the case of Securities with Coupons attached thereto, to the Holders of the Coupons for such interest upon surrender thereof, and in the case of Registered Securities, to the Holders of such Registered Securities registered as such on the relevant record date subject to the terms and provisions of Sections 2.3 and 2.7 hereof. If any Security with Coupons attached thereto is surrendered for redemption and is not accompanied by all appurtenant Coupons maturing after the date fixed for redemption, the surrender of such missing Coupon or Coupons may be waived by the Issuer and the Trustee, if there be furnished to each of them such security or indemnity as they may require to save each of them harmless. Upon presentation of any Security redeemed in part only, the Issuer shall execute and the Trustee shall authenticate and deliver to or on the order of the Holder thereof, at the expense of the Issuer, a new Security or Securities of such series, of authorized denominations, in principal amount equal to the unredeemed portion of the Security so presented. SECTION 11.4 Exclusion of Certain Securities from Eligibility for Selection for Redemption. Securities shall be excluded from eligibility for selection for redemption if they are identified by registration and certificate number in an Officers' Certificate delivered to the Trustee at least 40 days prior to the last date on which notice of redemption may be given as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such written statement as directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. SECTION 11.5 Mandatory and Optional Sinking Funds. The minimum amount of any sinking fund payment provided for by the terms of the 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 the Securities of any series is herein referred to as an "optional sinking fund payment". The date on which a sinking fund payment is to be made is herein referred to as the "sinking fund payment date". To the extent specifically provided in the terms of any Security established pursuant to this Indenture, in lieu of making all or any part of any mandatory sinking fund payment with respect to any series of Securities in cash, the Issuer may at its option (a) deliver to the Trustee Securities of such series theretofore purchased or otherwise acquired (except upon redemption pursuant to the mandatory sinking fund) by the Issuer or receive credit for Securities of such series (not previously so credited) theretofore purchased or otherwise acquired (except as aforesaid) by the Issuer and delivered to the Trustee for cancellation pursuant to Section 2.10, (b) receive credit for optional sinking fund payments (not previously so credited) made pursuant to this Section, or (c) receive credit for Securities of such series (not previously so credited) redeemed by the Issuer through any optional redemption provision contained in the terms of such series. Securities so delivered or credited shall be received or credited by the Trustee at the sinking fund redemption price specified in such Securities. On or before the 60th day next preceding each sinking fund payment date for any series, the Issuer will deliver to the Trustee an Officers' Certificate (which need not contain the statements required by Section 10.5) (a) specifying the portion of the mandatory sinking fund payment to be satisfied by payment of cash and the portion to be satisfied by credit of Securities of such series and the basis for such credit, (b) stating that none of the Securities of such series has theretofore been so credited, (c) stating that no defaults in the payment of interest or Events of Default with respect to such series have occurred (which have not been waived or cured) and are continuing and (d) stating whether or not the Issuer intends to exercise its right to make an optional sinking fund payment with respect to such series and, if so, specifying the amount of such optional sinking fund payment which the Issuer intends to pay on or before the next succeeding sinking fund payment date. Any Securities of such series to be credited and required to be delivered to the Trustee in order for the Issuer to be entitled to credit therefor as aforesaid which have not theretofore been delivered to the Trustee shall be delivered for cancellation pursuant to Section 2.10 to the Trustee with such Officers' Certificate (or reasonably promptly thereafter if acceptable to the Trustee). Such Officers' Certificate shall be irrevocable and upon its receipt by the Trustee the Issuer shall become unconditionally obligated to make all the cash payments or payments therein referred to, if any, on or before the next succeeding sinking fund payment date. Failure of the Issuer, on or before any such 60th day, to deliver such Officers' Certificate and Securities specified in this paragraph, if any, shall not constitute a default but shall constitute, on and as of such date, the irrevocable election of the Issuer (i) that the mandatory sinking fund payment for such series due on the next succeeding sinking fund payment date shall be paid entirely in cash without the option to deliver or credit Securities of such series in respect thereof and (ii) that the Issuer will make no optional sinking fund payment with respect to such series as provided in this Section. If the sinking fund payment or payments (mandatory or optional or both) to be made in cash on the next succeeding sinking fund payment date plus any unused balance of any preceding sinking fund payments made in cash shall exceed $50,000 (or the equivalent thereof in any Foreign Currency or ECU) or a lesser sum in Dollars (or the equivalent thereof in any Foreign Currency or ECU) if the Issuer shall so request with respect to the Securities of any particular series, such cash shall be applied on the next succeeding sinking fund payment date to the redemption of Securities of such series at the sinking fund redemption price together with accrued interest to the date fixed for redemption. If such amount shall be $50,000 (or the equivalent thereof in any Foreign Currency or ECU) or less and the Issuer makes no such request then it shall be carried over until a sum in excess of $50,000 (or the equivalent thereof in any Foreign Currency or ECU) is available. The Trustee shall select, in the manner provided in Section 11.2, for redemption on such sinking fund payment date a sufficient principal amount of Securities of such series to absorb said cash, as nearly as may be, and shall (if requested in writing by the Issuer) inform the Issuer of the serial numbers of the Securities of such series (or portions thereof) so selected. Securities shall be excluded from eligibility for redemption under this Section if they are identified by registration and certificate number in an Officers' Certificate delivered to the Trustee at least 60 days prior to the sinking fund payment date as being owned of record and beneficially by, and not pledged or hypothecated by either (a) the Issuer or (b) an entity specifically identified in such Officers' Certificate as directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer. The Trustee, in the name and at the expense of the Issuer (or the Issuer, if it shall so request the Trustee in writing) shall cause notice of redemption of the Securities of such series to be given in substantially the manner provided in Section 11.2 (and with the effect provided in Section 11.3) for the redemption of Securities of such series in part at the option of the Issuer. The amount of any sinking fund payments not so applied or allocated to the redemption of Securities of such series shall be added to the next cash sinking fund payment for such series and, together with such payment, shall be applied in accordance with the provisions of this Section. Any and all sinking fund moneys held on the stated maturity date of the Securities of any particular series (or earlier, if such maturity is accelerated), which are not held for the payment or redemption of particular Securities of such series shall be applied, together with other moneys, if necessary, sufficient for the purpose, to the payment of the principal of, and interest on, the Securities of such series at maturity. On or before each sinking fund payment date, the Issuer shall pay to the Trustee in cash or shall otherwise provide for the payment of all interest accrued to the date fixed for redemption on Securities to be redeemed on such sinking fund payment date. The Trustee shall not redeem or cause to be redeemed any Securities of a series with sinking fund moneys or give any notice of redemption of Securities for such series by operation of the sinking fund during the continuance of a default in payment of interest on such Securities or of any Event of Default with respect to such series, except that, where the giving of notice of redemption of any Securities shall theretofore have been made, the Trustee shall redeem or cause to be redeemed such Securities, provided that it shall have received from the Issuer a sum sufficient for such redemption. Except as aforesaid, any moneys in the sinking fund for such series at the time when any such default or Event of Default shall occur, and any moneys thereafter paid into the sinking fund, shall, during the continuance of such default or Event of Default, be deemed to have been collected under Article Four and held for the payment of all such Securities. In case such Event of Default shall have been waived as provided in Section 4.10 or the default cured on or before the sixtieth day preceding the sinking fund payment date in any year, such moneys shall thereafter be applied on the next succeeding sinking fund payment date in accordance with this Section to the redemption of such Securities. ARTICLE TWELVE MEETINGS OF HOLDERS OF SECURITIES SECTION 12.1 Purposes for Which Meetings May Be Called. A meeting of Holders of Securities of any or all series may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given or taken by Holders or Securities of such series. SECTION 12.2 Call, Notice and Place of Meetings. (a) The Trustee may at any time call a meeting of Holders of Securities of any series for any purpose specified in Section 12.1, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 10.4, not less than 20 nor more than 180 days prior to the date fixed for the meeting. (b) In case at any time the Issuer, pursuant to a Board Resolution, or the Holders of at least 10 percent in aggregate principal amount of the Outstanding Securities of any series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 12.1, by written request setting forth in reasonable detail the action proposed to be taken at the meeting and if the Trustee shall not have made the first publication of the notice of such meeting within 20 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Issuer or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place for such meeting and may call such meeting for such purposes by giving notice thereof as provided in Subsection (a) of this Section. SECTION 12.3 Persons Entitled to Vote at Meetings. To be entitled to vote at any meeting of Holders of Securities of any series, a Person shall be (1) a Holder of one or more Outstanding Securities of such series, or (2) a Person appointed by an instrument in writing as proxy for a Holder or Holders of one or more Outstanding Securities of such series by such Holder or Holders. The only Persons who shall be entitled to be present or to speak at any meeting of Holders of Securities of any series shall be the Persons entitled to vote at such meeting and their counsel, any representatives of the Trustee and its counsel and any representatives of the Issuer and its counsel. SECTION 12.4 Quorum; Action. The Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided, however, that if any action is to be taken at such meeting with respect to a consent or waiver which this Indenture expressly provides may be given by the Holders of a specified percentage, which is greater than a majority in aggregate principal amount of the Outstanding Securities of a series, the Persons entitled to vote such specified percentage in aggregate principal amount of the Outstanding Securities of such series shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of the Holders of Securities of such series, be dissolved. In any other case, the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 12.2(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the aggregate principal amount of the Outstanding Securities of such series which shall constitute a quorum. Except as limited by the proviso to Section 7.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series; provided, however, that, except as limited by the proviso to Section 7.2, any resolution with respect to any consent or waiver which this Indenture expressly provides may be given by the Holders of a specified percentage, which is greater than a majority in aggregate principal amount of the Outstanding Securities of the series may be adopted at a meeting or an adjourned meeting duly convened and at which a quorum is present as aforesaid only by the affirmative vote of the Holders of such specified percentage in aggregate principal amount of the Outstanding Securities of that series; and provided, further, that, except as limited by the proviso to Section 7.2, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in aggregate principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in aggregate principal amount of the Outstanding Securities of that series. Any resolution passed or decision taken at any meeting of Holder of Securities of any series duly held in accordance with this Section shall be binding on all of the Holders of Securities of a series and the related coupons, whether or not present or represented at the meeting. SECTION 12.5 Determination of Voting; Conduct and Adjournment of Meetings. (a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 6.1 and the appointment of any proxy shall be proved in the manner specified in Section 6.1 or by having the signature of the person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 6.1 to certify to the holding of Bearer Securities. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 6.1 or other proof. (b) Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Issuer or by Holders of Securities as provided in Section 12.2(b), in which case the Issuer or the Holders of Securities of the series calling the meeting, as the case may be, shall appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of such series represented at the meeting. (c) At any meeting each Holder of a Security of such series and each proxy shall be entitled to one vote for each $1,000 principal of the Outstanding Securities of such series held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or as a proxy. (d) Any meeting of Holders of Securities of any series duly called pursuant to Section 12.2 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in aggregate principal amount of the Outstanding Securities of such series represented at the meeting; and the meeting may be held as so adjourned without further notice. SECTION 12.6 Counting Votes and Recording Action of Meetings. The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make the file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate of the proceedings of each meeting of Holders of Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to such record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that such notice was given as provided in Section 12.2 and, if applicable, Section 12.4. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Issuer, and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ________________________________ 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 February 1, 1997. ILLINOVA CORPORATION By: /s/ Larry F. Altenbaumer ------------------------ Larry F. Altenbaumer Chief Financial Officer, Treasurer and Controller [CORPORATE SEAL] Attest: By /s/ Leah Manning Stetzner ------------------------- Leah Manning Stetzner General Counsel and Corporate Secretary THE FIRST NATIONAL BANK OF CHICAGO, AS TRUSTEE By:/s/ Joseph J. Morand ----------------------------- Name: Joseph J. Morand Title: Vice President [CORPORATE SEAL] Attest: By : /s/ Amy Movitz - --------------------- Name: Amy Movitz Title: Trust Officer STATE OF ILLINOIS ) ) ss.: COUNTY OF,_______ ) On this ____ of _________, 1997 before me personally came ___________, to me personally known, who, being by me duly sworn, did depose and say that he is __________ of Illinova Corporation, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. [NOTARIAL SEAL] -------------------------- Notary Public STATE OF ) ) ss.: COUNTY OF,_______) On this ____ of ______, 1997 before me personally came ___________, to me personally known, who, being by me duly sworn, did depose and say that he is a __________ of _____________, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. [NOTARIAL SEAL] ---------------------------- Notary Public CHI3:77747.7 02.06.97 17.08 EX-12.1 5 ILLINOVA CORPORATION STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars) Year Ended December 31, Supplemental** - ------------------------------------------------------------------------------------------------------------------------------------ 1992 1993 1993 1994 1995 1996 Earnings Available for Fixed Charges: Net Income (Loss) $93,234 ($81,874) ($81,874) $151,786 $151,601 $191,021 Add: Income Taxes: Current 22,930 25,260 25,260 58,354 98,578 163,873 Deferred-Net 63,739 82,057 82,057 71,177 34,137 (16,028) Allocated income taxes (6,632) (12,599) (8,285) (11,851) (12,641) Investment tax credit-deferred (519) (782) (782) (11,331) (6,894) (7,278) Income tax effect of disallowed costs - (70,638) (70,638) - - - Interest on long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 Amortization of debt expense and premium-net, and other interest charges 12,195 17,007 17,007 15,826 29,558 22,325 One-third of all rentals (Estimated to be represen- tative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 Interest on in-core fuel 8,278 6,174 6,174 7,185 6,716 4,757 Disallowed Clinton plant costs - - 270,956 - - - ------- ------- ------- ------- ------- -------- Earnings (loss) available for fixed charges $359,137 $124,707 $395,663 $425,674 $432,647 $468,813 ========= ======== ======== ======== ======== ======== Fixed charges: Interest on long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 Amortization of debt expense and premium-net, and other interest charges 25,785 27,619 27,619 25,381 38,147 28,957 One-third of all rentals (Estimated to be representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 -------- -------- --------- -------- -------- -------- Total Fixed Charges $191,697 $187,721 $187,721 $166,343 $168,949 $151,741 ========= ========= ========== ========== ========= ======== Ratio of earnings to fixed charges 1.87 0.66* 2.11 2.56 2.56 3.09 ========= ========== ========== ========== ========= ========= * 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-12.2 6 ILLINOIS POWER COMPANY STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars) Year Ended December 31, Supplemental** - ---------------------------------------------------------------------------------------------------------------- 1992 1993 1993 1994 1995 1996 Earnings Available for Fixed Charges: Net Income (Loss) $122,088 ($56,038) ($56,038) $180,242 $182,713 $228,618 Add: Income Taxes: Current 22,930 25,260 25,260 58,354 98,578 163,873 Deferred-Net 63,739 82,057 82,057 71,177 34,137 (16,028) Allocated income taxes (6,632) (12,599) (12,599) (8,285) (8,417) (2,642) Investment tax credit-deferred (519) (782) (782) (11,331) (6,894) (7,278) Income tax effect of disallowed costs - (70,638) (70,638) - - - Interest on long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 Amortization of debt expense and premium-net, and other interest charges 12,195 17,007 17,007 15,826 29,558 22,325 One-third of all rentals (Estimated to be representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 Interest on in-core fuel 8,278 6,174 6,174 7,185 6,716 4,757 Disallowed Clinton plant costs - - 270,956 - - - -------- -------- -------- -------- -------- --------- Earnings (loss) available for fixed charges $387,991 $150,543 $421,499 $454,130 $467,193 $516,409 ========== ========== ========== ========== ========== ========== Fixed charges: Interest on long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 Amortization of debt expense and premium-net, and other interest charges 25,785 27,619 27,619 25,381 38,147 28,957 One-third of all rentals (Estimated to be representative of the interest component) 5,117 5,992 5,992 5,847 5,221 4,346 ---------- -------- --------- --------- --------- --------- Total Fixed Charges $191,697 $187,721 $187,721 $166,343 $168,949 $151,741 ========== ========= ========== ========= ========= ========= Ratio of earnings to fixed charges 2.02 0.81* 2.25 2.73 2.77 3.40 ========== ========= ========= ========= ========= ========= * 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-13.1 7 1996 Proxy Statement and Annual Report to Shareholders First Notice of Annual Meeting of Shareholders Proxy Statement Table of Contents Notice of Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . 2 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Appendix: 1996 Annual Report to Shareholders . . . . . . . . . . . . . . A-1 ----------------------------------- / / / / / / / / / Map to Location of Annual / / Shareholders Meeting / / / / / / / ------------------------------------ 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 9, 1997, at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, for the following purposes: (1) To elect the Board of Directors for the ensuing year. (2) To transact any other business which may properly come before the meeting or any adjournment. Shareholders of record at the close of business on February 10, 1997, will be entitled to notice of and to vote at the Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, General Counsel and Corporate Secretary Decatur, Illinois March 3, 1997 IMPORTANT Illinova invites each of its approximately 38,000 shareholders to attend the Annual Meeting. Shareholders will be admitted upon verification of record share ownership at the admission desk. Shareholders who own shares through banks, brokerage firms, nominees or other account custodians must present proof of beneficial share ownership (such as a brokerage account statement) at the admission desk. 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 that 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 9, 1997, 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 Illinoise prior to the Annual Meeting. All duly executed proxies received prior to the Annual Meeting will be voted. Shares credited to the accounts of participants in Illinova's Investment Plus Plan and Illinois Power Company's ("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 10, 1997 (the "Record Date"), will be entitled to receive notice of and to vote at the Annual Meeting. As of such date, Illinova had outstanding 75,681,937 shares of Common Stock. Shareholders who are present at the Annual Meeting in person or by proxy will be entitled to one vote for each share of Illinova's Common Stock which they held of record at the close of business on the Record Date. When voting for candidates nominated to serve as directors, all shareholders will be entitled to 10 votes (the number of directors to be elected) for each of their shares and may cast all of their votes for any one candidate whose name has been placed in nomination prior to the voting or distribute their votes among two or more such candidates in such proportions as they may determine. In voting on other matters presented for consideration at the Annual Meeting, each shareholder will be entitled to one vote for each share of 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 1996. This Proxy Statement and accompanying documents are first being mailed to shareholders on or about March 3, 1997. Board of Directors Information Regarding the Board of Directors The Board of Directors held eight Board meetings during 1996. All directors attended at least 75 percent of the aggregate meetings of the Board and Committees of which they were members during 1996. The Board has three standing committees: the Audit Committee, the Finance Committee, and the Compensation and Nominating Committee. The duties and members of the standing committees are: Audit Committee (1) Review with the Chairman, President and Chief Executive Officer and the independent accountants the scope and adequacy of Illinova's system of internal controls; (2) review the scope and results of the annual examination performed by the independent accountants; (3) review the activities of Illinova's internal auditors; (4) report its findings to the Board and provide a line of communication between the Board and both the internal auditors and the independent accountants; and (5) recommend to the Board the appointment of the independent accountants and approval of the services performed by the independent accountants, considering their independence with regard thereto. The Audit Committee met three times during 1996. This Committee consists of the following non-employee directors ("Outside Directors"): Robert M. Powers, Chairman, Richard R. Berry, C. Steven McMillan, Walter M. Vannoy, and Marilou von Ferstel. Finance Committee (1) Review management's capital and operations and maintenance expenditure budgets, financial forecasts and financing program, and make recommendations to the Board regarding the approval of such budgets and plans; (2) review Illinova's banking relationships, short-term borrowing arrangements, dividend policies, arrangements with the transfer agent and registrar, investment objectives and the performance of Illinois Power's pension and other trust funds, evaluate fund managers, and make recommendations to the Board concerning such matters; (3) review Illinova's risk management programs, including insurance coverage, and make recommendations to the Board; and (4) act in an advisory capacity to management, the Board of Directors, and the Chairman, President and Chief Executive Officer on other financial matters as they may arise. The Finance Committee met three times during 1996. This Committee consists of the following members of the Board: Walter D. Scott, Chairman, Richard R. Berry, Larry D. Haab, C. Steven McMillan, Robert M. Powers, and Marilou von Ferstel. Compensation and Nominating Committee (1) Review performance and recommend salaries plus other forms of compensation of elected 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 1996. This Committee consists of the following Outside Directors: Donald S. Perkins, Chairman, Robert M. Powers, Walter D. Scott, Ronald L. Thompson, Marilou von Ferstel, and John D. Zeglis. 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 had a Retirement Plan for Outside Directors. Under this plan, each Outside Director who attained age 65 and served on the Board for a period of 60 or more consecutive months was eligible for annual retirement benefits at the rate of the annual retainer fee in effect when the director retired. In 1996, the Board of Directors adopted a Comprehensive Deferred Stock Plan for Outside Directors, replacing the Retirement Plan. Each former Outside Director whose right to receive the retirement benefit had vested continues to receive such benefits in accordance with the term of the Retirement Plan. All Outside Directors serving at the time this new plan was adopted were granted a lump sum amount based on the net present value of these benefits to them, were they to have retired under the Retirement Plan, based on the number of years they have served on the Board but not to exceed 10. This dollar amount was converted into stock units, based on the then market value of Illinova Common Stock, and placed into an account. The value of these stock units is to be paid out to the director in cash on termination of service, based on the then market value of Illinova Common Stock, plus dividend equivalents, in a lump sum or installments. In addition, each Outside Director receives an annual award of stock units having a value of $6,000, to be paid to the Outside Directorin cash on retirement, at once or in installments as the Director may elect, with the amount of such payment determined by multiplying the number of stock units in the account times the then market value of Illinova Common Stock, and adding the dividend equivalents attributable to such stock units. Pursuant to Illinova's Deferred Compensation Plan for Certain Directors, the Outside Directors may elect to defer all or any portion of their fees and stock grants until termination of their services as directors. Such deferred amounts are converted into stock units representing shares of Illinova's Common Stock with the value of each stock unit based on the last reported sales price of such stock. Additional credits are made to the participating director's account in dollar amounts equal to the dividends paid on Common Stock which the director would have received if the director had been the record owner of the shares represented by stock units, and are converted into additional stock units. On termination of the participating directors' services as directors, payment of their deferred fees and stock grants is made in shares of 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 or until their successors are elected and qualified. At the Annual Meeting a vote will be taken on a proposal to elect the 10 directors nominated by Illinova's Board of Directors. The names and certain additional information concerning each of the director nominees is set forth on the following pages. The dates shown for service as a director include service as a director of Illinois Power prior to the May 1994 restructuring in which Illinois Power became a wholly owned subsidiary of Illinova. If any nominee should become unable to serve as a director, another nominee may be selected by the current Board of Directors. Name of Director Nominee, Age, Year in Which First Business Experience and Elected a Director Other Information of Illinova Richard R. Berry, 65 1988 - ---------- / / From June 1983 until retirement in February 1990, Mr. Berry was / / Executive Vice President and director of Olin Corporation, Stamford, / Picture/ Conn., a diversified manufacturer concentrated in chemicals, metals / / and aerospace/defense products. - ---------- Larry D. Haab, 59 1986 - ----------- / / Chairman, President and Chief Executive Officer of Illinova since / / December 1993, and of Illinois Power since June 1991, and an / Picture / employee of Illinois Power since 1965. He is a director of First / / Decatur Bancshares, Inc.; The First National Bank of Decatur; and - ----------- Firstech, Incorporated. C. Steven McMillan, 51 1996 - ----------- / / Executive Vice President and Director of Sara Lee Corporation, / / Chicago, Ill., a global packaged food and consumer products / Picture / company, since 1993. He was Senior Vice President-Strategy / / Development from 1986 to 1993. He is Chairman of the Board of - ----------- Electrolux Corporation. Robert M. Powers, 65 1984 - ----------- / / From 1980 until retirement in December 1988, Mr. Powers was / / President and Chief Executive Officer of A. E. Staley / Picture / Manufacturing Company, Decatur, Ill., a processor of grain and / / oil seeds. He is a director of A. E. Staley Manufacturing Company. - ----------- Sheli Z. Rosenberg, 55 - ------------ / / President and Chief Executive Officer since 1994 and General / / Counsel 1980 to 1994 of Equity Group Investments, Inc., / Picture / Chicago, Ill., a privately held business conglomerate holding / / controlling interests in 10 publicly traded corporations involved - ------------ in basic manufacturing, radio stations, retail, insurance, and real estate. She is a director of American Classic Voyages Company; REVCO D.S., Inc.; Quality Food Centers, Inc.; Jacor Communications, Inc.; Anixter Corporation; Capsure Holdings Corporation; Falcon Building Products; and Equity Residential Properties Trust. Walter D. Scott, 65 1990 - ------------- / / Professor of Management and Senior Austin Fellow, J. L. Kellogg / / Graduate School of Management, Northwestern University, / Picture / Evanston, Ill., since 1988. He was Chairman of GrandMet USA / / from 1984 to 1986 and President and Chief Executive Officer of - ------------- IDS Financial Services from 1980 to 1984. He is a director of Chicago Title and Trust Company, Chicago Title Insurance Company, and Intermatic Incorporated. Ronald L. Thompson, 47 1991 - ------------- / / Chairman and Chief Executive Officer of Midwest Stamping / / and Manufacturing Co., Bowling Green, Ohio, a manufacturer / Picture / of automotive parts, since 1993. He was President and / / Chief Executive Officer and a director of The GR Group, Inc., - ------------- St. Louis, Mo., from 1980 to 1993. He is a director of McDonnell Douglas Corporation, Teachers Insurance and Annuity Association, and Ryerson Tull. Walter M. Vannoy, 69 1990 - -------------- / / Chairman until retirement in May 1995 and Chief Executive / / Officer from May 1994 until January 1995 of Figgie / Picture / International, Inc., Willoughby, Ohio, a diversified / / operating company serving consumer, industrial, technical, - -------------- and service markets world-wide. From 1980 to 1988 he was President and Chief Operating Officer, Babcock and Wilcox, and Vice Chairman of McDermott International. He is a director of Figgie International, Inc. Marilou von Ferstel, 59 1990 - -------------- / / Executive Vice President and General Manager of Ogilvy / / Adams & Rinehart, Inc., a public relations firm in Chicago, / Picture / Ill., since June 1990. She was Managing Director and Senior / / Vice President of Hill and Knowlton, Chicago, Ill., from 1981 - -------------- to 1990. She is a director of Walgreen Company. John D. Zeglis, 49 1993 - -------------- / / Senior Executive Vice President and General Counsel of / / AT&T, Basking Ridge, N.J., a diversified communications / Picture / company, since 1995. He was Senior Vice President-General / / Counsel and Government Affairs from 1989 to 1995. He is a - -------------- director of the Helmerich & Payne Corporation. Security Ownership of Management and Certain Beneficial Owners The following table shows shares of stock beneficially owned as of January 31, 1997, by each director nominee and the executive officers named in the Summary Compensation Table. To the best of Illinova's knowledge, no owner holds more than 5 percent of Illinova Common Stock. Number of Shares Name of Class Beneficially Percent Beneficial Owner of Stock Owned (1) of Class - ------------------------------------------------------------------------------ Richard R. Berry Common 4,390 (2) Larry D. Haab Common 10,725 (2) C. Steven McMillan Common 650 (2) Robert M. Powers Common 7,900 (2) Sheli Z. Rosenberg Common 0 (2) Walter D. Scott Common 4,500 (2) Ronald L. Thompson Common 4,338 (2) Walter M. Vannoy Common 4,000 (2) Marilou von Ferstel Common 4,907 (2) John D. Zeglis Common 3,154 (2) Paul L. Lang Common 3,162 (2) Larry F. Altenbaumer Common 4,644 (2) John G. Cook Common 1,862 (2) Wilfred Connell Common 1,630 (2)
(1) The nature of beneficial ownership for shares shown is sole voting and/or investment power. (2) No director or executive officer owns any other equity securities of Illinova. No director or executive officer owns as much as 1% of the Common Stock. All directors and executive officers of both Illinova and Illinois Power Company as a group own 64,658 shares of Common Stock (less than 1%). (3) This number includes 1105 stock units under the Directors' Deferred Compensation Plan. (4) This number includes 664 stock units under the Directors' Deferred Compensation Plan. Executive Compensation The following table sets forth a summary of the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of 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 --------------------------------- ----------------------------- Other Restricted Securities All Other Bonus Annual Stock Awards Underlying Compensation Name and Principal Position Year Salary (1) Compensation (2) Options (3) - ------------------------------------------------------------------------------------------------------------------------------ Larry D. Haab 1996 $ 493,709 $ 69,267 $ 15,973 $ 69,267 22,000 shs. $ 2,615 Chairman, President and 1995 472,250 91,144 19,088 91,144 20,000 shs. 2,550 Chief Executive Officer of 1994 451,375 42,881 15,783 42,881 20,900 shs. 360 Illinova and Illinois Power Paul L. Lang 1996 $ 233,450 $ 19,747 $ 8,863 $ 19,747 6,500 shs. $ 2,595 Senior Vice President 1995 222,812 23,841 8,265 23,841 6,500 shs. 2,510 of Illinois Power 1994 213,562 20,289 8,672 20,289 6,800 shs. 440 Larry F. Altenbaumer 1996 $ 222,374 $ 19,832 $ 8,459 $ 19,832 7,500 shs. $ 1,976 Chief Financial Officer, 1995 204,937 20,391 7,686 20,391 6,500 shs. 2,378 Treasurer and Controller 1994 196,562 18,674 8,975 18,674 6,800 shs. 400 of Illinova, and Senior Vice President and Chief Financial Officer of Illinois Power John G. Cook 1996 $ 196,474 $ 16,293 $ 7,409 $ 16,293 6,500 shs. $ 2,575 Senior Vice President 1995 179,069 16,620 6,930 16,620 4,500 shs. 2,530 of Illinois Power 1994 163,708 15,553 7,068 15,553 4,400 shs. 400 Wilfred Connell 1996 $ 185,950 $ 9,832 $ 7,373 $ 9,832 4,500 shs. $ 2,559 Vice President 1995 172,975 16,087 7,230 16,087 3,900 shs. 2,402 of Illinois Power 1994 165,562 15,729 7,705 15,729 4,400 shs. 480
(1) The amounts shown in this column are the cash award portion of grants made to these individuals under the Executive Incentive Compensation Plan ("Compensation Plan") for 1996, including amounts deferred under the Executive Deferred Compensation Plan. See the Compensation Plan description in footnote (2) below. (2) This table sets forth stock unit awards for 1996 under the Compensation Plan. One-half of each year's award under this plan is converted into stock units representing shares of Illinova Common Stock based on the closing price of Common Stock on the last trading day of the award year. The other one-half of the award is cash and is included under Bonus in the Summary Compensation Table. Stock units awarded in a given year, together with cash representing the accumulated dividend equivalents on those stock units, become fully vested after a three-year holding period. Stock units are converted into cash based on the closing price of Common Stock on the first trading day of the distribution year. Participants (or beneficiaries of deceased participants) whose employment is terminated by retirement on or after age 55, disability, or death receive the present value of all unpaid awards on the date of such termination. Participants whose employment is terminated for reasons other than retirement, disability, or death forfeit all unvested awards. In the event of a termination of employment within two years after a change in control of Illinova, without good cause or by any participant with good reason, all awards of the participant become fully vested and payable. As of December 31, 1996, named executive officers were credited with the following total aggregate number of unvested stock units under the Compensation Plan since its inception, valued on the basis of the closing proce of Common Stock on December 31, 1996: Mr. Haab, 7,085 units valued at $214,633; Mr. Lang, 2,550 units valued at $70,123; Mr. Altenbaumer, 2,353 units valued at $64,718; Mr. Cook, 1,939 units valued at $53,330; Mr. Connell, 1,695 units valued at $46,600. Although stock units have been rounded, valuation is based on total stock units, including partial shares. (3) The amounts shown in this column are Illinois Power's contributions under the Incentive Savings Plan (including the market value of shares of Illinova Common Stock at the time of allocation). The following tables summarize grants during 1996 of stock options under Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards outstanding at year end for the individuals named in the Summary Compensation Table. Option Grants In 1996 Individual Grants -------------------------------------------------------------- Number of Securities % of Total Options Underlying Options Granted to Employees Exercise or Base Grant Date Granted (1) in 1996 Price Per Share (1) Expiration Date Present Value (2) ---------------------------------------------------------------------------------------------------------- Larry D. Haab 22,000 27% $29.75 2/7/2006 $ 125,400 Paul L. Lang 6,500 8% 29.75 2/7/2006 37,050 Larry F. Altenbaumer 7,500 9% 29.75 2/7/2006 42,750 John G. Cook 6,500 8% 29.75 2/7/2006 37,050 Wilfred Connell 4,500 6% 29.75 2/7/2006 26,650
(1) Each option becomes exercisable on February 7, 1999. In addition to the specified expiration date, the grant expires on the first anniversary of the recipient's death and/or the 90th day following retirement, and is not exercisable in the event a recipient's employment terminates. In the event of certain change-in-control circumstances, the Compensation and Nominating Committee may declare the option immediately exercisable. The exercise price of each option is equal to the fair market value of the Common Stock on the date of the grant. Recipients shall also receive, on or shortly after February 7, 1999, a target performance award, determined by calculating the difference between the return earned by Illinova on its invested capital and its cost of capital (the "spread"), then comparing this spread to that of a peer group and reducing or increasing the target award depending on Illinova's relative performance, but not reducing the payment below zero. The target award is equal to one-half of the mid-point of compensation for each officer's salary grade (a market-based number) times a percentage, determined by the Compensation and Nominating Committee. In 1996 those percentages ranged between 15 and 35 percent. At the discretion of the Board of Directors, the foregoing payment may be made in the form of Illinova Common Stock of equivalent value based on the average New York Stock Exchange price of the stock during February, 1999, or in cash. (2) The Grant Date Present Value has been calculated using the Black-Scholes option pricing model. Disclosure of the Grant Date Present Value, or the potential realizable value of option grants assuming 5% and 10% annualized growth rates, is mandated by regulation; however, Illinova does not necessarily view the Black-Scholes pricing methodology, or any other present methodology, as a valid or accurate means of valuing stock option grants. The calculation was based on the following assumptions: (i) As of the grant date, Illinova's calculated Black-Scholes ratio was .2036. After discounting for risk of forfeiture at three percent per year over Illinova's three-year vesting schedule, the ratio is reduced to .1914; (ii) An annual dividend yield on Illinova Common Stock of 3.84%; (iii) A risk-free interest rate of 5.87%, based on the yield of a zero-coupon government bond maturing at the end of the option term; and (iv) Stock volatility of 17.34%. 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 16,000 shs./82,900 shs. $66,000/$255,963 Paul L. Lang 5,000 shs./25,800 shs. $20,625/$81,613 Larry F. Altenbaumer 5,000 shs./26,800 shs. $20,625/$81,613 John G. Cook 2,500 shs./18,400 shs. $10,313/$50,713 Wilfred Connell 3,000 shs./17,300 shs. $12,375/$54,013
Pension Benefits Illinois Power maintains a Retirement Income Plan for Salaried Employees (the "Retirement Plan") providing pension benefits for all eligible salaried employees. In addition to the Retirement Plan, Illinois Power also maintains a nonqualified Supplemental Retirement Income Plan for Salaried Employees (the "Supplemental Plan") that covers all elected officers eligible to participate in the Retirement Plan and provides for payments from general funds of Illinois Power of any monthly retirement income not payable under the Retirement Plan because of benefit limits imposed by law or because of certain Retirement Plan rules limiting the amount of credited service accrued by a participant. The following table shows the estimated annual pension benefits on a straight life annuity basis payable upon retirement based on specified annual average earnings and years of credited service classifications, assuming continuation of the Retirement Plan and Supplemental Plan and employment until age 65. This table does not show, but any actual pension benefit payments would be subject to, the Social Security offset. 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, 1996, for purposes of both the Retirement Plan and the Supplemental Plan, Messrs. Haab, Lang, Altenbaumer, Cook and Connell had completed 31, 10, 24, 21 and 13 years of credited service, respectively. Employee Retention Agreements Illinova has entered into Employee Retention Agreements with each of its executive officers and officers of its subsidiaries. Under each agreement, the officer would be entitled to receive a lump sum cash payment if his or her employment were terminated without good cause or voluntarily by the officer for good reason within two years following a change in control of Illinova (as defined in the Agreement). The amount of the lump sum payment would be equal to (1) 36 months' salary at the greater of the officer's salary rate in effect on the date the change in control occurred or the salary rate in effect on the date the officer's employment with Illinova terminated; plus (2) three times the latest bonus earned by the officer during the three calendar years preceding termination of employment. Under the agreement, the officer would continue, after any such termination of employment, to participate in and receive benefits under other benefit plans of Illinova. Such coverage would continue for 36 months following termination of employment, or, if earlier, until the officer reached age 65 or was employed by another employer; provided that, if the officer was 50 years of age or older at the time of such termination, then coverage under health, life insurance and similar welfare plans would continue until the officer became 55 years of age, at which time he or she would be eligible to receive the benefits extended to the employees of Illinova who elect early retirement. Compensation and Nominating Committee Report on Officer Compensation The six-member Compensation and Nominating Committee of the Board of Directors (the "Committee") is composed entirely of Outside Directors. The Committee's role includes a review of the performance of the elected officers and the establishment of specific officer salaries subject to Board approval. The Committee establishes performance goals for the officers under the Compensation Plan, approves payments made pursuant to the Compensation Plan and recommends grants under the Long-Term Incentive Compensation Plan approved by the shareholders in 1992. The Committee also reviews other forms of compensation and benefits making recommendations to the Board on changes whenever appropriate. The Committee carries out these responsibilities with assistance from an executive compensation consulting firm and with input from the Chief Executive Officer and management as it deems appropriate. Officer Compensation Philosophy Illinova's compensation philosophy reflects a commitment to compensate officers competitively with other companies in the electric and gas utility industry while rewarding executives for achieving levels of operational and financial excellence consistent with continuous improvement in customer satisfaction and shareholder value. Illinova's compensation policy is to provide a total compensation opportunity targeted to all utilities in the Edison Electric Institute (EEI) database. Eighty-four percent of the companies in the S & P Utilities Index are also in the EEI database. The S&P Utilities Index is used to relate Illinova's shareholder value in the following performance graphs. The S&P index covers the utility indsutry broadly including electric, gas, and telecommunication utilities. After careful consideration, the Committe has decided to maintain a separate compensation peer group limited to electric or combination electric and gas companies for reference purposes. As an additional point of reference, Illinova also looks at the pay practices of general industry (non-utility) companies. While such pay practices have not traditionally been a major driver of Illinova's compensation philosophy, this reference point may be regarded more closely in the future as the utility indsutry migrates toward deregulation and diversification. The compensation program for officers consists of base salary, annual incentive and long-term incentive components. The combination of these three elements balances short- and long-term business performance goals and aligns officer financial rewards with those of Illinova's shareholders. The compensation program is structured so that, depending on the salary level, between 25 and 45 percent of an officer's total compensation target is composed of incentive compensation. Base Salary Plan The Committee determines base salary ranges for executive officers based on competitive pay practices of similar utilities. Officer salaries correspond to approximately the average of the companies in the compensation peer group. Individual increases are based on several factors, including the officer's performance during the year, the relationship of the officer's salary to the market salary level for the position and competitive industry salary increase practices. Annual Incentive Compensation Plan Annual incentive awards are earned based on the achievement of specific annual financial and operational goals by the Illinois Power officer group as a whole and consideration of the officer's individual contribution. If payment is earned under this Plan, one-half of the bonus is payable in cash during the year following the award year, and one-half is credited to the participant in the form of Common Stock units, the number of which is determined by dividing half of the earned bonus amount by the closing price of the Common Stock on the last trading day of the award year. The officer's interest in the stock units vests at the end of the three-year period which begins the year after the award year. The officer receives this award in cash equal to (1) the closing stock price on the first trading day of the distribution year times the number of units held plus (2) dividend equivalents that would have been received if the stock had actually been issued. For Illinois Power officers, 1996 awards under the Compensation Plan are based on achievement in the performance areas: earnings per share, customer satisfaction, safety and employee teamwork, cost management and shareholder value added. Up to 25 percent of the awarded amount is based on an assessment of the individual officer's performance during the year. Awards shown under Bonus in the Summary Compensation Table for performance during 1996 were based on the following results. Earnings per share, customer satisfaction and shareholder value added were at or better than the threshold level for the award. Safety performance and cost management performance were not at threshold for the award. For the unregulated subsidiaries, Illinova Generating and Illinova Energy Partners, 1996 officer awards were based on achievement of specific marketing and earnings objectives. Up to 50 percent of the awarded amount is based on an assessment of the individual officer's performance during the year. Long-Term Incentive Compensation Plan Awards under the LTIC Plan are based on corporate performance as well as individual officers' contribution to corporate performance subject to the review of this Committee. The Committee may grant awards in the form of stock options, stock appreciation rights, dividend equivalents, restricted stock grants or performance-based cash awards. In 1996, it was determined that awards under the LTIC plan be delivered in two components. One-half of each officer's LTIC plan award is delivered in the form of stock options granted at fair market value. The stock options granted to the officers for 1996 represent an award based on Illinova and individual performance as evaluated by the Chairman and reviewed by the Committee. The other half of the LTIC plan award is distributed to officers in cash based upon Illinova's Share- holder Value-Added (SVA) performance relative to a peer group of other utility companies, as measured in overlapping three-year periods. Since 1996 represented the first year of SVA plan's first measurement cycle, no awards are due to be paid out under the plan until 1999. CEO Compensation Larry Haab became Chairman, President, and Chief Executive Officer ("CEO") of Illinois Power on June 12, 1991, and Chairman, President and Chief Executive Officer of Illinova in December 1993. Illinova based Mr. Haab's 1996 compensation on the policies and plans described above. The Committee invokes the active participation of all non-management directors in reviewing Mr. Haab's performance before it makes recommendations regarding his compensation. The Committee is responsible for administering the processes for completing this review. The process starts early in the year when the Board of Directors works with Mr. Haab to establish his personal goals and short- and long-term strategic goals for Illinova. At the conclusion of the year Mr. Haab reviews his performance with the non-management directors. The Committee oversees this review and recommends to the Board appropriate adjustments to compensation. In setting the CEO's salary for 1996, the Committee, with the participation of all Outside Directors, determined that important goals were achieved and the results for Illinova for the year were strong. Mr. Haab's vision of the industry's evolution has led, and is continuing to lead, to appropriate redeployment of Illinova resources. The Committee concluded that in 1996 Mr. Haab's performance continued to advance Illinova toward the accomplishment of its strategic objectives. The 1996 Annual Incentive Compensation Plan award for the Chief Executive Officer was calculated consistent with the determination of awards for all other Illinois Power officers. Under the terms of the plan, one-half of the award was paid in cash and one-half was converted to 2,519 stock units which vest over a three-year period as described above. The 22,000 option shares granted to the CEO reflect the Committee's recognition of his work in directing Illinova towards its long-term objectives of outstanding customer satisfaction and sustained growth in shareholder return. Compensation and Nominating Committee Donald S. Perkins, Chairman Robert M. Powers Walter D. Scott Ronald L. Thompson Marilou von Ferstel John D. Zeglis 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, 1991, through December 31, 1996, and (ii) December 31, 1993, through December 31, 1996. Comparison of Five-Year Cumulative Total Return Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities 1991 1992 1993 1994 1995 1996 Illinova 100 98 101 104 148 141 S&P 500 100 108 118 120 165 203 S&P Midcap 400 100 112 128 123 161 192 S&P Utilities 100 108 124 114 161 165
Assumes $100 invested on December 31, 1991, in Illinova Common Stock, S&P 500 Index, S&P MidCap 400 Index, and S&P Utilities Index. Comparison of Three-Year Cumulative Total Return Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities 1993 1994 1995 1996 Illinova 100 103 147 140 S&P 500 100 101 139 171 S&P Midcap 400 100 96 126 151 S&P Utilities 100 92 130 134
Assumes $100 invested on December 31, 1993, in Illinova Common Stock, S&P 500 Index, S&P MidCap 400 Index, and S&P Utilities Index. Independent Auditors The Board of Directors of Illinova has selected Price Waterhouse LLP as independent auditors for Illinova for 1997. A representative of that firm will be present at the Annual Meeting and available to make a statement and to respond to questions. Other Matters Illinova's 1996 Summary Annual Report to Shareholders was mailed to shareholders commencing on March 3, 1997. 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, 1997. 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 3, 1997. Other Business Management does not know of any matter which will be presented for consideration at the Annual Meeting other than the matters described in the accompanying Notice of Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, General Counsel and Corporate Secretary Decatur, Illinois March 3, 1997 Appendix: 1996 Annual Report to Shareholders Table of Contents Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . A-2 Responsibility for Information . . . . . . . . . . . . . . . . . . . . . A-10 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . A-10 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . A-11 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . A-12 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . A-13 Consolidated Statements of Retained Earnings . . . . . . . . . . . . . . A-13 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . A-14 Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . A-32 Selected Illinois Power Company Statistics . . . . . . . . . . . . . . . A-33 Management's Discussion and Analysis In this report, we refer to the Consolidated Financial Statements, related Notes to Consolidated Financial Statements, Selected Consolidated Financial Data and Selected 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 results of operations since January 1, 1994, is below. Illinova Subsidiaries The Consolidated Financial Statements include the accounts of Illinova Corporation (Illinova), a holding company, and its wholly owned subsidiaries: Illinois Power Company (IP), a combination electric and gas utility; Illinova Generating Company (IGC), which invests in energy-related projects throughout the world; Illinova Power Marketing, Inc. (IPMI), which brokers and markets electric power and natural gas in the United States; Illinova Energy Partners, Inc. (IEPI), which develops and markets energy-related services to the unregulated energy market throughout the United States, Canada, and through a distributor in the United Kingdom; and Illinova Insurance Company (IIC), whose purpose is to ensure the risks of the subsidiaries of Illinova and risks related to or associated with their business perspectives. IEPI was formed in May 1996. It has its headquarters in Oak Brook, Illinois, with offices in several Western states and in the St. Louis, Missouri, area. In August 1996, IIC was licensed by the State of Vermont as a captive insurance company. On February 12, 1997, the Illinova Board of Directors approved a merger of IEPI and IPMI. In the merger, IPMI will be dissolved, and IEPI will assume responsibility for the business functions previously handled by IPMI. 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 Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) initiating the process of mandating non-discriminatory open access to public utility transmission services at cost-based rates. Transmission of electricity for a reseller or redistributor of energy is called wholesale wheeling. Transmission of electricity for end- use customers is known as retail wheeling. On April 24, 1996, FERC issued Orders 888 and 889 which established the Final Rule resulting from the NOPR. The Orders became effective July 9, 1996. The Rule requires that all public utilities under FERC jurisdiction that own transmission facilities file Open Access Transmission Tariffs (OATTs) in compliance with Pro Forma Tariffs attached to the Order. FERC also requires that all wholesale sales made by a utility provide for transmission of the power under the terms and conditions of the OATTs. Public utilities serving customers at retail are not required, at this time, to use the OATTs to serve retail customers. The Orders do not require that retail customers be given access to alternate energy suppliers or be found eligible as customers under the OATTs. IP made a compliance filing as required on July 9, 1996, which has been accepted by FERC. While the move to open-access transmission service will likely increase the level of competition in the wholesale energy market, it is not expected to have a significant financial impact. Competition On November 21, 1996, IP and its partners in the Illinois Coalition for Responsible Electricity Choice announced a legislative proposal which would begin transformation of the Illinois electric industry from a highly regulated monopoly to a competitive, customer-choice environment. The proposal, which was introduced in the Illinois House of Representatives on January 29, 1997, would allow for a managed transition to direct access for all consumers by the year 2005. The plan would balance the need to ensure the financial stability of current utility providers with the timing of customer choice. Other parties have introduced plans that would not provide for this balance, and would allow full competition by as early as 1998. The Joint Committee on Electric Utility Regulatory Reform of the Illinois General Assembly deliberated the issue of regulatory reform for 18 months. Their report, issued December 4, 1996, stated that the Committee was unable to reach consensus on a legislative proposal. It is reasonable to assume that significant change will be made to the state laws governing IP's electric operations, but impossible to predict what these changes will be. IP received approval from the Illinois Commerce Commission (ICC) on March 13, 1996, and from FERC on April 24, 1996, to conduct an open access experiment beginning in 1996 and ending on December 31, 1999. The experiment allows certain industrial customers to purchase electricity and related services from other sources. On April 25, 1996, the first of the 21 eligible customers began buying part of their electricity from a supplier other than IP. Currently, 16 customers are participating in the experiment. The experiment has demonstrated some of the immediate advantages competition brings to customers, such as lower prices and innovative service offerings. It has also provided evidence of some of the challenges the industry faces as it moves toward customer choice. Challenges include dispatching small amounts of electricity such as one or two megawatt hours (MWHs), and the absence of requisite technology to dispatch fractional MWHs. In 1996, the experiment cost IP approximately $3.2 million in lost revenue net of avoided fuel cost and variable operating expenses. This loss was partially offset by selling the surplus energy and capacity on the open market and by $.9 million in transmission service charges. The issue of competition is one that raises both risks and opportunities. At this time, the ultimate effect of competition on Illinova's consolidated financial position and results of operations is uncertain. See "Note 1 - Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" for additional discussion of the effects of regulation. Regulatory Matters On September 6, 1996, a leaking seal in one of two reactor recirculation pumps caused IP to shut down Clinton Power Station (Clinton). While a plant shutdown to correct this problem would not be a major concern in itself, the event was significant because of broader issues which surfaced during subsequent internal investigations, involving operating philosophies, procedure compliance issues, degree of management oversight, and tolerance of equipment problems. This event prompted two special team inspections by the Nuclear Regulatory Commission (NRC). The first inspection covered the events associated with the leaking pump seal and the shutdown, while the second focused more broadly on operations at Clinton. In a public meeting held on October 4, 1996, the NRC discussed its findings, expressing concern over both the handling of the pump seal problem and general plant operating philosophies. It also commended subsequent actions taken by IP to address the issues raised. IP decided not to restart Clinton prior to the start of the scheduled refueling outage on October 13, 1996. An action plan was developed to address the operational weaknesses identified by IP. Work began to correct the items in the action plan while the refueling outage progressed. On November 19, 1996, the NRC issued a formal report of its two teams' inspections. IP agreed with the majority of the report's findings. The concerns of the NRC that had not already been addressed were incorporated into IP's action plan. On January 29, 1997, the NRC informed IP that it viewed Clinton as having a declining safety performance trend. The NRC did not, however, place Clinton on its "watch list." The NRC acknowledged that IP has allocated additional resources to correct deficiencies and noted recent conservative decisions made by management that have impacted the length of the refueling outage schedule. The NRC held an enforcement conference with IP on February 4, 1997, to discuss the event and other issues identified during assessments and inspections. The plant will remain shut down until IP management is satisfied that all safety concerns have been addressed. The operation and maintenance expense of the outage, including the scheduled refueling outage, is estimated at $30 million. The refueling outage was budgeted at $18 million. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement and severance programs. During the fourth quarter of 1995, 727 employees accepted enhanced retirement or severance under these programs. The combined enhanced retirement and severance programs generated a pretax charge of $38 million against fourth quarter 1995 earnings. Consolidated Results of Operations Overview Earnings applicable to common stock were $190 million for 1996, $148 million for 1995 and $158 million for 1994. Earnings per common share were $ 2.51 for 1996, $1.96 for 1995 ($2.26 before the one-time charge of $38 million for enhanced retirement and severance), and $2.09 for 1994. The increase in 1996 earnings per share over 1995 was due primarily to the one-time charge in 1995 for the enhanced retirement and severance programs, lower operations expense due to the employment decrease, and lower financing costs. The 1995 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 as compared to 1994 also reflect increased electric sales due to unseasonably warm summer weather, partially offset by increased operating and maintenance expenses due to the Clinton refueling and maintenance outage. The 1994 earnings per share include $.08 for the carrying amount over consideration paid for IP preferred stock redeemed in December 1994 and reflect an increase in gas rates as a result of IP's 1994 gas rate order. The 1994 earnings also reflect increased electric sales, lower operating and maintenance expenses due to ongoing cost management efforts, no Clinton refueling and maintenance outage, and lower financing costs as compared to 1993. The ICC and FERC determine IP's rates for electric service at the retail and wholesale levels, respectively, and the ICC determines IP's rates for gas service. These rates are designed to recover the cost of service and allow shareholders the opportunity to earn a fair rate of return. Future electric and natural gas sales, including interchange sales, will continue to be affected by an increasingly competitive marketplace, changes in the regulatory environment, increased transmission access, weather conditions, competing fuel sources, interchange market conditions, plant availability, fuel cost recoveries, customer conservation efforts and the overall economy. Operating Revenues (Millions of dollars) 1996 $1,688.7 1995 $1,641.4 1994 $1,589.5 1993 $1,581.2 1992 $1,479.5
Illinois Power - Results of Operations Electric Operations For the years 1994 through 1996, electric revenues including interchange increased 4.1% and the gross electric margin increased 6.1% as follows: - --------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - --------------------------------------------------------------------- Electric revenues $ 1,202.9 $ 1,252.6 $ 1,177.5 Interchange revenues 137.6 116.3 110.0 Fuel cost & power purchased (313.3) (333.4) (319.2) - ---------------------------------------------------------------------- Electric margin $ 1,027.2 $ 1,035.5 $ 968.3
The components of annual changes in electric revenues were: - ---------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - ---------------------------------------------------------------------- Price $ (7.2) $ 13.3 $ (23.2) Volume and other 6.4 42.7 44.1 Fuel cost recoveries (48.9) 19.1 21.0 - ---------------------------------------------------------------------- Revenue increase (decrease) $ (49.7) $ 75.1 $ 41.9
1996 Electric revenues excluding interchange sales decreased 4.0%, primarily due to reduction in revenues under the Uniform Fuel Adjustment Clause (UFAC). Volume changes by customer class were insignificant, as kilowatt-hour sales Major Sources of Electric Energy (Millions of megawatt-hours) 1996 1995 1994 Fossil 16.3 14.5 13.2 Nuclear 4.6 5.3 6.4 Purchases 3.4 3.2 3.1
to ultimate consumers (excluding interchange sales and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of higher plant availability in the first half of the year. 1995 The 6.4% increase in electric revenues was primarily due to a 1.9% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher residential sales (4.8%) and higher commercial sales (8.2%) due to an improving economy and warmer summer temperatures compared to 1994. Industrial sales remained essentially unchanged from 1994. Interchange revenues increased $6.3 million (5.8%) as a result of increased sales opportunities. 1994 The 3.7% increase in electric revenues was primarily due to a 6.3% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher commercial sales (8.3%) and higher industrial sales (7.0%) due to an improving economy. Residential sales remained essentially unchanged from 1993 primarily due to milder temperatures in 1994 as compared to 1993. Interchange sales decreased 19.6% from 1993 levels primarily due to unusually large sales opportunities in 1993. The cost of meeting IP's system requirements was reflected in fuel costs for electric plants and power purchased. Changes in these costs are detailed below: - ---------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 Fuel for electric plants Volume and other $ 15.4 $ 9.8 $ 13.8 Price (12.0) (35.5) (14.3) Emission allowances .8 18.5 - Fuel cost recoveries (30.0) 14.5 32.0 - ----------------------------------------------------------------------- (25.8) 7.3 31.5 Power purchased 5.7 6.9 (25.9) - ----------------------------------------------------------------------- Total increase (decrease) $ (20.1) $ 14.2 $ 5.6 - ----------------------------------------------------------------------- Weighted average system generating fuel cost ($/MWH) $ 11.01 $ 11.41 $ 12.72 - ------------------------------------------------------------------------
System load requirements, generating unit availability, fuel prices, purchased power prices, resale of energy to other utilities, emission allowance purchases and fuel cost recovery through UFAC caused changes in these costs. Changes in factors affecting the cost of fuel for electric generation are below: - ----------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------- Increase in generation 5.4% .7% 8.2% Generation mix Coal and other 78% 73% 67% Nuclear 22% 27% 33% - -----------------------------------------------------
1996 The cost of fuel decreased 9.4% and electric generation increased 5.4%. The decrease in fuel cost was primarily attributable to the effects of the UFAC, as well as a favorable price variance. These factors were partially offset by an increase in fuel cost due to the increase in generation. Power purchased increased $5.7 million primarily due to the extended Clinton outage. Clinton's equivalent availability and generation were lower than in 1995 due to that outage. Fuel Cost Per Million Btu (Percent of generation) Coal $1.28 76% Nuclear $ .81 22% Other $1.68 2%
1995 The cost of fuel increased 2.8% and electric generation increased .7%. The increase in fuel cost was attributable to the effects of the UFAC, the increase in higher-cost fossil generation and the cost of emission allowances. Clinton's equivalent availability and generation were lower in 1995 as compared to 1994 due to the scheduled refueling and maintenance outage. Clinton returned to service April 29, 1995, after completing its fifth refueling and maintenance outage, which began March 12, 1995. Power purchased increased $6.9 million. 1994 The cost of fuel increased 13.4% and electric generation increased 8.2%. The increase in fuel cost was attributable to the effects of the UFAC, partially offset by a decrease in fossil generation and an increase in lower- cost nuclear generation. Clinton's equivalent availability and generation were higher in 1994 as compared to 1993 due to no refueling and maintenance outage. Power purchased for the period decreased $25.9 million. Unusually large interchange sales opportunities during 1993, which did not recur in 1994, were the primary cause of the decrease in purchased power. Gas Operations For the years 1994 through 1996, gas revenues including transportation increased 15.3%, while the gross margin on gas revenues increased 12.4% as follows: - -------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - -------------------------------------------------------- Gas revenues $ 341.4 $ 264.5 $ 293.2 Gas cost (202.6) (138.8) (172.4) Transportation revenues 6.8 8.0 8.8 - --------------------------------------------------------- Gas margin $ 145.6 $ 133.7 $ 129.6 - --------------------------------------------------------- (Millions of therms) Therms sold 703 588 584 Therms transported 251 273 262 - ---------------------------------------------------------- Total consumption 954 861 846 - ----------------------------------------------------------
Changes in the cost of gas purchased for resale were: - ------------------------------------------------------------------------ (Millions of dollars) 1996 1995 1994 Gas purchased for resale Cost (excluding take-or-pay) $ 48.6 $ (43.1) $ (6.4) Take-or-pay costs .4 (.4) 2.8 Volume 8.5 25.3 (13.6) Gas cost recoveries 6.3 (15.4) 2.3 - -------------------------------------------------------------------------- Total increase (decrease) $ 63.8 $ (33.6) $ (14.9) - -------------------------------------------------------------------------- Average cost per therm delivered 26.7 cents 20.1 cents 26.1 cents - ---------------------------------------------------------------------------
The 1996 increase in gas costs was primarily due to higher prices from suppliers and the effects of the Uniform Gas Adjustment Clause (UGAC). The 1995 decrease in the cost of gas purchased was due to lower gas prices caused by unusually warm winter weather nationwide. The 1994 decrease in the cost of gas purchased was primarily due to lower gas prices, the expanded use of additional gas storage and a decrease in therms purchased. Also contributing to the higher gas margins in 1995 and 1994 was the 6.1% increase in gas base rates approved by the ICC in April 1994. Other Expenses A comparison of significant increases (decreases) in other operating expenses, maintenance and depreciation for the last three years is presented in the following table: - ---------------------------------------------------------- (Millions of dollars) 1996 1995 1994 Other operating expenses $ (9.8) $ (.3) $ (9.2) Maintenance (.3) 10.4 (11.2) Depreciation and amortization 3.5 7.2 6.4 - -----------------------------------------------------------
The decrease in operating expenses for 1996 is due primarily to the savings from the enhanced retirement and severance program, partially offset by the costs of the extended Clinton outage and increased amortization of Manufactured Gas Plant (MGP) site expenses. The ICC approved tariff riders in March 1996 that resulted in the current recognition of MGP site remediation costs in operating expenses. The 1996 increase amounted to $5.5 million. This increase is offset by increased revenues collected under the riders. The increase in maintenance expense for 1995 is primarily due to the refueling and maintenance outage at Clinton. The decrease in operating and maintenance expenses for 1994 is due to re-engineering efforts, improved operating efficiencies at IP's fossil plants and at Clinton, and no refueling and maintenance outage at Clinton. The increases in depreciation for each of the three years were due to increases in utility plant balances. The 1994 increase in depreciation expense is partially offset by the decrease in deferred Clinton costs as a result of a September 1993 write-off of disallowed Clinton post-construction costs. Operating and Maintenance Expenses (Millions of Dollars) 1996 $349.6 1995 $359.7 1994 $349.6 1993 $370.0 1992 $373.4
Other Income and Deductions The 1996 increase in Miscellaneous-net deductions was due primarily to increased losses for the subsidiary companies other than IP, partially offset by an increase in the credit for allocated income taxes. The 1995 change in Miscellaneous-net deductions was negligible. The 1994 increase in deductions was primarily due to the change in allocated taxes. Interest Charges Total interest charges, including Allowance for Funds Used During Construction (AFUDC) and preferred dividend requirements, decreased $16.9 million in 1996, increased $2.4 million in 1995, and decreased $23.2 million in 1994. The 1996 decrease was due to lower short-term interest rates and the impact of refinancing efforts and capitalization reduction during 1996. The 1995 increase was due to increased short-term borrowings at higher interest rates. The 1994 decrease was primarily due to refinancing with lower cost debt and the retirement of debt in 1994 and 1993. Inflation Inflation, as measured by the Consumer Price Index, was 3.3%, 2.5% and 2.5% in 1996, 1995 and 1994, respectively. IP recovers historical rather than current plant costs in rates. Liquidity and Capital Resources Soyland Power Cooperative Negotiations IP and Soyland Power Cooperative (Soyland) have entered into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP, contingent on approval by the NRC. The NRC is expected to act on IP's request during the first quarter of 1997. IP and Soyland have renegotiated the existing Power Coordination Agreement. This agreement is expected to result in a reduction of rates for Soyland while IP will be assured a long-term sales agreement for 10 to 20 years. IP is expected to file a request for approval of this agreement with FERC by the end of February 1997. 1994 Gas Rate Order On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. For customers, the increase is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Concurrent with the gas rate increase, IP's gas utility plant composite depreciation rate decreased to 3.4%. Dividends On December 11, 1996, Illinova increased the quarterly common stock dividend by 11%. The $.31 per share dividend was payable February 1, 1997 to stockholders of record as of January 10, 1997. 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. 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. Cash flows from operations during 1996 provided sufficient working capital to meet ongoing operating requirements, to service existing common and IP preferred stock dividends and debt requirements, and to meet all of IP's construction requirements. Additionally, Illinova expects that future cash flows 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. To a significant degree, the availability and cost of external financing depend on the financial health of the company seeking those funds. Security ratings are an indication of a company's financial position and may affect the cost of securities, as well as the willingness of investors to invest in these securities. The current ratings of IP's securities by three principal securities rating agencies are as follows: - ------------------------------------------------------------------------- Standard Duff & Moody's & Poor's Phelps - ------------------------------------------------------------------------- IP first/new mortgage bonds Baa1 BBB BBB+ IP preferred stock baa2 BBB- BBB- IP commercial paper P-2 A-2 D-2 - -------------------------------------------------------------------------
Under current market conditions, these ratings would afford IP the ability to issue additional securities through external financing. Illinova and IP have adequate short-term and intermediate-term bank borrowing capacity. Based on its 1993 revised standards for review of utility business and financial risks, Standard & Poor's (S&P) placed IP, along with approximately one-third of the industry, in a "somewhat below average" category. In April 1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. In August 1995, S&P revised its ratings outlook from stable to positive. In February 1996, Moody's also revised its ratings outlook from stable to positive. Moody's upgraded IP's securities on July 1, 1996. The rating for mortgage bonds was raised from Baa2 to Baa1, while preferred stock ratings went from baa3 to baa2. In March 1996, the Duff & Phelps credit rating company established credit ratings for IP's fixed income securities, as shown on the preceding page. The agency has indicated that it expects IP's ratings to remain stable, reflecting a modestly strengthening financial profile characterized by good cash flow and an average business risk profile. For the years 1996, 1995 and 1994, changes in long-term debt and IP preferred stock outstanding, including normal maturities and elective redemptions, were as follows: - -------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - --------------------------------------------------------- Bonds $ (132) $ (5) $ (10) Other long-term debt (22) - (100) Preferred stock 71 (135) 6 - --------------------------------------------------------- Total decrease $ (83) $ (140) $ (104) - ---------------------------------------------------------
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." During 1996, IP redeemed $2.2 million of Adjustable Rate Series A serial preferred stock, $20.5 million (all of the remaining) Adjustable Rate Series B serial preferred stock and $6.7 million of 7.75% serial preferred stock. During the year, IP also retired $62.9 million of 8.75% First Mortgage Bonds due 2021, $6.0 million of 8% New Mortgage Bonds due 2023 and $23 million of 7.5% New Mortgage Bonds due 2025. The $40 million of 5.85% First Mortgage Bonds matured and were retired. In addition, $21.5 million of medium-term notes matured and were retired. In February 1995, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock. In May 1995, IP redeemed the remaining $24 million of 8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed $.2 million of 7.56% serial preferred stock and $3 million of 8.24% serial preferred stock. In August 1995, IP purchased $5 million of 8.75% First Mortgage Bonds. In December 1995, IP redeemed $34.7 million of 8.00% serial preferred stock, $33.6 million of 7.56% serial preferred stock and $27 million of 8.24% serial preferred stock. In February 1994, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock and issued $35.6 million of First Mortgage Bonds, 5.7% Series due 2024 (Pollution Control Series K). In May 1994, IP retired $35.6 million of First Mortgage Bonds, 11 5/8% Series due 2014 (Pollution Control Series D) with the proceeds of the debt issuance. In August 1994, IP retired $100 million of 8 1/2% debt securities. Illinois Power Financing I (IPFI) is a statutory business trust in which IP serves as sponsor. IPFI issued $100 million of trust originated preferred securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. The TOPrS were issued by IPFI, which invested the proceeds in an equivalent amount of IP subordinated debentures due in 2045. The proceeds were used by IP to repay short-term indebtedness on varying dates on or before March 1, 1996. IP incurred the indebtedness in December 1995 to redeem $95.3 million (principal value) of higher-cost outstanding preferred stock of IP. Illinois Power Capital, L.P. (IP Capital) is a limited partnership in which IP serves as a general partner. IP Capital issued $97 million of tax- advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after- tax rate) in October 1994. The proceeds were loaned to IP and were used to redeem $97 million (principal value) of higher-cost outstanding preferred stock of IP. In December 1994, IP issued $84.1 million of First Mortgage Bonds, 7.4% Series due 2024 (Pollution Control Series L). In March 1995, the proceeds of the debt issuance were used to retire $84.1 million of First Mortgage Bonds, 103/4% Series due 2015 (Pollution Control Series E). In 1992, IP executed a new general obligation mortgage (New Mortgage) to replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both mortgages are secured by liens on substantially all of IP's properties. A corresponding issue of First Mortgage bonds, under the First Mortgage, secures any bonds issued under the New Mortgage. IP anticipates that during 1997 the 1943 mortgage will be amended to be consistent with the 1992 mortgage. At December 31, 1996, based on the most restrictive earnings test contained in the First Mortgage, IP could issue approximately $1.3 billion of additional First Mortgage bonds for other than refunding purposes. Also at December 31, 1996, the unused portion of Illinova and IP total bank lines of credit was $427 million. The amount of available unsecured borrowing capacity totaled $222 million at December 31, 1996. On February 12, 1997, the IP Board of Directors approved a change to the IP Articles of Incorporation to remove the limitation on the amount of unsecured debt that IP can issue. The purpose of the change is to give IP more financial flexibility in the changing environment of a competitive marketplace. The change will be voted on by the IP preferred stockholders at a special meeting planned to be held in 1997. In January 1997, a $300 million shelf registration statement for Illinova debt securities became effective. On February 5, 1997, Illinova issued $100 million of 71/8% Senior Notes with a seven year maturity under this registration statement. The proceeds will be used to redeem $77 million of short-term borrowings, and to invest in Illinova's unregulated subsidiaries. Construction expenditures for the years 1994 through 1996 were approximately $590.3 million, including $21.8 million of AFUDC. Illinova estimates that it will spend $200 million for construction expenditures for IP in 1997, as detailed at right. IP construction expenditures for the period 1997 through 2001 are expected to total no more than $1 billion, including $100 million for expenditures related to Phase II Clean Air Act compliance requirements. Illinova's capital expenditures for the years 1997 through 2001, in addition to the IP construction expenditures, are expected to include $140 million for nuclear fuel, $300 million for mandatory debt retirement and $425 million for investments in the unregulated subsidiaries. - --------------------------------------------------------------- (Millions of dollars) 1997 - ---------------------------------------------------------------- IP construction requirements Electric generating facilities $ 77 Electric transmission and distribution facilities 65 General plant 33 Gas facilities 25 - ---------------------------------------------------------------- Total construction requirements 200 Nuclear fuel 38 Debt retirements 11 Investments in subsidiaries 81 - ----------------------------------------------------------------- Total $ 330 - -----------------------------------------------------------------
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 environmental matters that impact or could potentially impact Illinova and IP. 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 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. ILLINOVA CORPORATION RESPONSIBILITY FOR INFORMATION The consolidated financial statements and all information in this annual report are the responsibility of management. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles 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 flow. 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. /s/ Larry D. Haab Larry D. Haab Chairman, President and Chief Executive Officer /s/ Larry F. Altenbaumer Larry F. Altenbaumer Chief Financial Officer, Treasurer and Controller ILLINOVA CORPORATION REPORT TO 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP St. Louis, Missouri February 7, 1997 ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------------------------------------------------------------- (Millions of dollars except per share amounts) - ----------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 Operating Revenues Electric $ 1,202.9 $ 1,252.6 $ 1,177.5 Electric interchange 137.6 116.3 110.0 Gas 348.2 272.5 302.0 - ---------------------------------------------------------------------------------------------------------- Total 1,688.7 1,641.4 1,589.5 - ---------------------------------------------------------------------------------------------------------- Operating Expenses and Taxes Fuel for electric plants 248.1 273.9 266.6 Power purchased 65.2 59.5 52.6 Gas purchased for resale 202.6 138.8 172.4 Other operating expenses 249.9 259.7 260.0 Maintenance 99.7 100.0 89.6 Enhanced retirement and severance - 37.8 - Depreciation and amortization 190.0 186.5 179.3 General taxes 131.3 135.0 130.3 Income taxes 140.5 125.8 118.3 - ---------------------------------------------------------------------------------------------------------- Total 1,327.3 1,317.0 1,269.1 - ---------------------------------------------------------------------------------------------------------- Operating income 361.4 324.4 320.4 - ---------------------------------------------------------------------------------------------------------- Other Income and Deductions Allowance for equity funds used during construction - - 3.8 Miscellaneous-net (21.6) (7.1) (9.1) - ----------------------------------------------------------------------------------------------------------- Total (21.6) (7.1) (5.3) - ----------------------------------------------------------------------------------------------------------- Income before interest charges 339.8 317.3 315.1 - ----------------------------------------------------------------------------------------------------------- Interest Charges Interest expense 133.0 148.0 143.9 Allowance for borrowed funds used during construction (6.5) (6.0) (5.5) Preferred dividend requirements of subsidiary 22.3 23.7 24.9 - ----------------------------------------------------------------------------------------------------------- Total 148.8 165.7 163.3 - ----------------------------------------------------------------------------------------------------------- Net income 191.0 151.6 151.8 Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary (.7) (3.5) 6.4 - ----------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 190.3 $ 148.1 $ 158.2 =========================================================================================================== Earnings per common share $ 2.51 $ 1.96 $ 2.09 Cash dividends declared per common share $ 1.15 $ 1.03 $ .65 Cash dividends paid per common share $ 1.12 $ 1.00 $ .80 Weighted average common shares 75,681,937 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, 1996 1995 Assets Utility Plant, At Original Cost Electric (includes construction work in progress of $212.5 million and $199.8 million, respectively) $ 6,335.4 $ 6,189.0 Gas (includes construction work in progress of $21.2 million and $10.2 million, respectively) 646.1 625.9 - ----------------------------------------------------------------------------------------------------- 6,981.5 6,814.9 Less - accumulated depreciation 2,419.7 2,251.7 - ------------------------------------------------------------------------------------------------------ 4,561.8 4,563.2 Nuclear fuel in process 5.3 5.7 Nuclear fuel under capital lease 96.4 95.2 - ------------------------------------------------------------------------------------------------------ 4,663.5 4,664.1 - ------------------------------------------------------------------------------------------------------ Investments and Other Assets 146.2 65.8 - ------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 24.6 11.3 Notes receivable - 6.1 Accounts receivable (less allowance for doubtful accounts of $3 million) Service 138.8 129.4 Other 62.0 13.2 Accrued unbilled revenue 106.0 89.1 Materials and supplies, at average cost Fossil fuel 7.9 9.9 Gas in underground storage 27.2 18.5 Operating materials 78.1 82.7 Prepaid and refundable income taxes - 19.6 Prepayments and other 24.1 20.8 - ------------------------------------------------------------------------------------------------------- 468.7 400.6 - ------------------------------------------------------------------------------------------------------- Deferred Charges Deferred Clinton costs 103.9 107.3 Recoverable income taxes 101.3 128.7 Other 229.2 243.3 - ------------------------------------------------------------------------------------------------------- 434.4 479.3 - -------------------------------------------------------------------------------------------------------- $ 5,712.8 $ 5,609.8 ======================================================================================================== Capital and Liabilities Capitalization Common stock - No par value, 200,000,000 shares authorized; 75,681,937 and 75,643,937 shares outstanding, respectively, stated at $ 1,425.7 $ 1,424.6 Less - Deferred compensation - ESOP 14.3 18.4 Retained earnings 233.0 129.6 Less - Capital stock expense 8.2 8.8 - -------------------------------------------------------------------------------------------------------- Total common stock equity 1,636.2 1,527.0 Preferred stock of subsidiary 96.2 125.6 Mandatorily redeemable preferred stock of subsidiary 197.0 97.0 Long-term debt of subsidiary 1,636.4 1,739.3 - ------------------------------------------------------------------------------------------------------- Total capitalization 3,565.8 3,488.9 - ------------------------------------------------------------------------------------------------------- Current Liabilities Accounts payable 166.7 119.9 Notes payable 387.0 359.6 Long-term debt and lease obligations of subsidiary maturing within one year 47.7 95.0 Dividends declared 24.7 23.0 Taxes accrued 43.9 44.8 Interest accrued 34.3 39.0 Other 43.7 66.2 - -------------------------------------------------------------------------------------------------------- 748.0 747.5 - -------------------------------------------------------------------------------------------------------- Deferred Credits Accumulated deferred income taxes 1,034.9 1,012.8 Accumulated deferred investment tax credits 215.5 222.8 Other 148.6 137.8 - -------------------------------------------------------------------------------------------------------- 1,399.0 1,373.4 - ------------------------------------------------------------------------------------------------------- $ 5,712.8 $ 5,609.8 (Commitments and Contingencies Note 4) See notes to consolidated financial statements which are an integral part of these statements.
ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOW - ---------------------------------------------------------------------------------------------------------------- (Millions of dollars) - ---------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 Cash Flows from Operating Activities Net income $ 191.0 $ 151.6 $ 151.8 Items not requiring (providing) cash - Depreciation and amortization 195.3 190.0 182.3 Allowance for funds used during construction (6.5) (6.0) (9.3) Deferred income taxes 57.4 39.1 36.4 Enhanced retirement and severance - 37.8 - Changes in assets and liabilities - Accounts and notes receivable (52.2) (7.8) (18.2) Accrued unbilled revenue (16.9) (10.2) (29.9) Materials and supplies (2.1) 22.8 (2.3) Accounts payable 46.8 (13.6) (20.6) Interest accrued and other, net (5.4) 9.5 (21.6) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 407.4 413.2 268.6 - ----------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Construction expenditures (187.3) (209.3) (193.7) Allowance for funds used during construction 6.5 6.0 9.3 Other investing activities (75.0) (34.9) (19.7) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (255.8) (238.2) (204.1) - ----------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Dividends on common stock (84.7) (75.6) (60.5) Redemptions - Short-term debt (355.8) (213.6) (259.3) Long-term debt of subsidiary (153.7) (5.2) (230.0) Preferred stock of subsidiary (29.5) (134.5) (91.0) Issuances - Short-term debt 383.2 209.5 405.8 Long-term debt of subsidiary - - 119.8 Preferred stock of subsidiary 100.0 - 97.0 Common stock 1.1 - - Premium paid on redemption of long-term debt of subsidiary - - (2.8) Other financing activities 1.1 5.0 (2.7) - ------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (138.3) (214.4) (23.7) - ------------------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents 13.3 (39.4) 40.8 Cash and cash equivalents at beginning of year 11.3 50.7 9.9 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 24.6 $ 11.3 $ 50.7 ===================================================================================================================
ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF RETAINED EARNINGS - -------------------------------------------------------------------------------------------------------------------------- (Millions of dollars) - --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 Balance (deficit) at beginning of year $ 129.6 $ 58.8 $ (64.6) Net income before dividends 213.3 175.3 176.7 - ---------------------------------------------------------------------------------------------------------------------------- 342.9 234.1 112.1 - ---------------------------------------------------------------------------------------------------------------------------- Less - Dividends - Preferred stock of subsidiary 22.6 23.6 11.1 Common stock 86.6 77.4 48.6 Plus - Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary (.7) (3.5) 6.4 - ------------------------------------------------------------------------------------------------------------------------------ (109.9) (104.5) (53.3) - ------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 233.0 $ 129.6 $ 58.8 ==============================================================================================================================
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, and its wholly owned subsidiaries: Illinois Power Company (IP), Illinova Generating Company (IGC), Illinova Insurance Company (IIC), Illinova Power Marketing, Inc. (IPMI), and Illinova Energy Partners, Inc. (IEPI). IP is a combination electric and gas utility. IGC invests in energy-related projects and competes in the independent power market. IIC's purpose is to insure the risks of the subsidiaries of Illinova and risks related to or associated with their business enterprises. IPMI is in the business of marketing energy and energy-related services to various customers. IEPI develops and markets energy-related services to the unregulated energy market. On February 12, 1997, the Illinova Board of Directors approved a merger of IEPI and IPMI. In the merger, IPMI will be dissolved, and IEPI will assume responsibility for the business functions previously handled by IPMI. 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. Actual results could differ from those estimates. Regulation IP is subject to regulation by the Illinois Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC) and, accordingly, prepares its consolidated financial statements based on the concepts of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71), which requires that the effects of the ratemaking process be recorded. Such effects primarily concern the time at which various items enter the determination of net income in order to follow the principle of matching costs and revenues. Accordingly, IP records various regulatory assets and liabilities to reflect the actions of regulators. It is reasonable to assume that significant changes will be made to state laws governing IP's electric operations, but impossible to predict what those changes will be. Management believes that IP currently meets the criteria for continued application of FAS 71, but will continue to evaluate significant changes in the regulatory and competitive environment to assess IP's overall compliance with such criteria. These criteria include: 1) whether rates set by regulators are designed to cover the specific costs of providing regulated services and products to customers and 2) whether regulators continue to establish rates based on cost. In the event that management determines that IP, or significant portions of its business, no longer meet the criteria for application of FAS71, an extraordinary non-cash charge to income would be recorded in order to remove the effects of the actions of regulators from the consolidated financial statements. The discontinuation of application of FAS71 would likely have a material adverse effect on Illinova's and IP's consolidated financial position and results of operation. Illinova's principal accounting policies are: Regulatory Assets Regulatory assets represent probable future revenues to IP associated with certain costs that are expected to be recovered from customers through the ratemaking process. Significant regulatory assets are as follows: - ------------------------------------------------------------------- (Millions of dollars) 1996 - ------------------------------------------------------------------- Deferred Clinton Power Station (Clinton) post-construction costs $ 103.9 Recoverable income taxes $ 101.3 Unamortized losses on reacquired debt $ 87.7 Manufactured-gas plant site cleanup costs $ 69.1 - -------------------------------------------------------------------
Utility Plant The cost of additions to utility plant and replacements for retired property units is capitalized. Cost includes labor, materials, and an allocation of general and administrative costs, plus an allowance for funds used during construction (AFUDC) as described below. Maintenance and repairs, including replacement of minor items of property, are charged to maintenance expense as incurred. When depreciable property units are retired, the original cost and dismantling charges, less salvage value, are charged to accumulated depreciation. Allowance for Funds Used During Construction The FERC Uniform System of Accounts defines AFUDC as the net costs for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. In 1996, 1995 and 1994, the pre-tax rate used for all construction projects was 5.8%, 6.5% and 7.0%, respectively. Although cash is not currently realized from the allowance, it is realized under the ratemaking process over the service life of the related property through increased revenues resulting from a higher rate base and higher depreciation expense. Depreciation For financial statement purposes, IP depreciates the various classes of depreciable property over their estimated useful lives by applying composite rates on a straight-line basis. In 1996, 1995 and 1994, provisions for depreciation were 2.8% of the average depreciable cost for Clinton. Provisions for depreciation for all other electric plant were 2.6% in 1996, 1995 and 1994. Provisions for depreciation of gas utility plant, as a percentage of the average depreciable cost, were 3.9% in 1996, 1995 and 1994. Amortization of Nuclear Fuel IP leases nuclear fuel from Illinois Power Fuel Company (Fuel Company) under a capital lease. Amortization of nuclear fuel (including related financing costs) is determined on a unit of production basis. A provision for spent fuel disposal costs is charged to fuel expense based on kilowatt-hours generated. See "Note 4 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of decommissioning and nuclear fuel disposal costs. Deferred Clinton Costs In accordance with an ICC order in April 1987, IP began deferring certain Clinton post-construction operating and financing costs until rates to reflect such costs became effective (April 1989). After issuance of the March 1989 ICC rate order, deferral of Clinton post- construction costs ceased and amortization of the previously deferred post- construction costs over a 37.5-year period began. Although cash is not currently realized from these deferrals, it is realized under the ratemaking process over the service life of Clinton through increased revenues, resulting from a higher rate base and higher amortization expense. Unamortized Debt Discount, Premium and Expense Discount, premium and expense associated with long-term debt are amortized over the lives of the related issues. Costs related to refunded debt are amortized over the lives of the related new debt issues or the remaining life of the old debt if no new debt is issued. Revenue and Energy Cost IP records revenue for services provided but not yet billed to more closely match revenues with expenses. Unbilled revenues represent the estimated amount customers will be billed for service delivered from the time meters were last read to the end of the accounting period. Operating revenues include related taxes that have been billed to customers in the amount of $68 million in 1996 and $66 million in each of the years 1995 and 1994. The cost of fuel for the generation of electricity, purchased power and gas purchased for resale is recovered from customers pursuant to the electric fuel and purchased gas adjustment clauses. Accordingly, allowable energy costs that are to be passed on to customers in a subsequent accounting period are deferred. The recovery of costs deferred under these clauses is subject to review and approval by the ICC. On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. The increase to customers is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Income Taxes Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), deferred tax assets and liabilities are recognized for the tax consequences of transactions that have been treated differently for financial reporting and tax return purposes, measured on the basis of the statutory tax rates. In accordance with FAS 71, a regulatory asset (recoverable income taxes) has been recorded representing the probable recovery from customers of additional deferred income taxes established under FA109. Investment tax credits used to reduce federal income taxes have been deferred and are being amortized to income over the "service life" of the property that gave rise to the credits. 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 the 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. Consolidated Statements of Cash Flows Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less. Capital lease obligations not affecting cash flows increased by $31 million, $19 million and $28 million during 1996, 1995 and 1994, respectively. Income taxes and interest paid are as follows: Years ended December 31, - ------------------------------------------------------------------------------ (Millions of dollars) 1996 1995 1994 Income taxes $ 65.9 $ 64.7 $ 71.1 Interest $ 148.5 $ 152.4 $ 165.9 - ------------------------------------------------------------------------------
Interest Rate Cap Generally, premiums paid for purchased interest rate cap agreements are being amortized to interest expense over the terms of the caps. Unamortized premiums are included in Current Assets, "Prepayments and other," in the Consolidated Balance Sheets. Amounts to be received under the cap agreements are recognized as a reduction in interest expense. Forward Contracts of Subsidiary In the normal course of business IPMI enters into contracts for the purchase and sale (physical delivery) of electricity. When markets allow, IPMI will hedge price exposure through the use of electricity futures contracts and through swaps. Since IPMI's futures contracts qualify and have been designated as hedges, any gains and losses resulting from market changes are deferred until, and generally offset by, the related physical transaction. Note 2 - Illinova Subsidiaries Illinova, a holding company, is the parent of wholly owned subsidiaries IP, IGC, IPMI, IEPI and IIC. IP, Illinois Power Company, 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 Generating Company, invests in energy-related projects throughout the world and competes in the independent power market. IPMI, Illinova Power Marketing, Inc., engages in the brokering and marketing of electric power and gas. IEPI, Illinova Energy Partners, Inc., develops and markets energy-related services to the unregulated energy market throughout the United States. On February 12, 1997, the Illinova Board of Directors approved a merger of IEPI and IPMI. In the merger, IPMI will be dissolved, and IEPI will assume responsibility for the business functions previously handled by IPMI. IIC, Illinova Insurance Company, was licensed in August 1996 by the State of Vermont as a captive insurance company. The primary business of IIC is to insure the risks of the subsidiaries of Illinova and risks related to or associated with their business enterprises. In 1994, IGC became an equity partner with Tenaska, Inc., in four natural gas- fired generation plants, of which three plants totaling approximately 700 MW are in operation and one 240 MW plant has had construction suspended. Tenaska, Inc. is an Omaha, Nebraska-based developer of independent power projects throughout the United States. 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 world-wide independent power generation indsutry and operates 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 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 the Zhejiang Province. In December 1995, IGC signed a limited liability company agreement to complete an initial investment in a 155-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 June 1996, IGC finalized an investment in the Flores Power Plant located in Barranquilla, Columbia. Flores currently operates two units totaling 250-MW. A third unit, with capacity of 150-MW, is scheduled to begin operating in the second quarter of 1997. In August 1996, Illinova's interest in the 1,000-MW coal-fired plant in Joppa, Illinois, was transferred to IGC. In September 1996, IGC achieved financial close as an investor in a 586-MW coal-fired plant in Balochistan, Pakistan, which is currently under construction and is expected to begin operating in 1998. As of December 31, 1996, IGC had ownership in power plants in operation or under construction representing approximately 730 MW. IGC's investments are primarily accounted for under the equity method. At December 31, 1996, Illinova's net investment in IGC was $122 million. See "Note 4 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for information about IGC contingencies. On May 16, 1995, IPMI obtained approval from 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. In May 1996, IPMI expanded operations to include the midwestern United States. In July 1996, IP received FERC approval to sell electricity to IPMI on an ongoing basis. Previously, IP was required to obtain FERC approval for each transaction with IPMI. The new ruling greatly increases IP's ability to sell electricity to IPMI. In December 1995, Illinova established Illinova Energy Services (IES) to provide energy-related services to customers inside and outside IP's service territory. These services range from the management of energy demand procurement usage to the development, installation and operation of the energy infrastructure of its customers. In May 1996, the services group of IPMI merged with IES and the unregulated marketing activities of Illinova to form a new venture known as Illinova Energy Partners, Inc. IEPI focuses on the development and sales of energy- related services in North America. At December 31, 1996, Illinova's total net investment in IEPI and IPMI was $9 million. 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 and Soyland have entered into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP contingent upon approval by the NRC. (See sub-caption "Soyland" of "Note 4 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements"). Clinton was placed in service in 1987 and represents approximately 18% of IP's installed generation capacity. The investment in Clinton and its related deferred costs representedapproximately 50% of Illinova's total assets at December 31, 1996. IP's 86.8% share of Clinton- related costs represented 35% of Illinova's total 1996 other operating, maintenance and depreciation expenses. Clinton's equivalent availability was 66%, 76%, and 92% for 1996, 1995, and 1994, respectively. Clinton's equivalent availability was higher in 1994 due to no refueling outage. Ownership of an operating nuclear generating unit exposes IP to significant risks, including increased and changing regulatory, safety and environmental requirements and the uncertain future cost of closing and dismantling the unit. IP expects to be allowed to continue to operate Clinton; however, if any unforeseen or unexpected developments prevent IP from doing so, Illinova and IP would be materially adversely affected. See "Note 4 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information. Note 4 - Commitments and Contingencies Commitments Estimated capital requirements in 1997 are $330 million, which includes $249 million for capital expenditures by IP and $81 million for unregulated subsidiary activities. The 1997 capital expenditures for IP include $142 million for electric facilities, $25 million for gas facilities, $38 million for nuclear fuel, $33 million for general plant and $11 million for mandatory debt retirement. Construction expenditures for IP for the 1997 through 2001 period are expected to be no more than $1 billion, including $100 million of expenditures to meet Phase II Clean Air Act Compliance requirements. Illinova's capital expenditures for the years 1997 through 2001, in addition to the IP construction expenditures, are expected to include $140 million for nuclear fuel, $300 million for mandatory debt retirement and $425 million for investments in the unregulated subsidiaries. These expenditures reflect IP's share of Clinton (ownership share under negotiation -- see sub-caption "Soyland" under Contingencies below). In addition, IP has substantial commitments for the purchase of coal under long-term contracts. Estimated coal contract commitments for 1997 through 2001 are $560 million (excluding price escalation provisions). Total coal purchases for 1996, 1995 and 1994 were $184 million, $168 million and $191 million, respectively. IP has contracts with various natural gas suppliers and interstate pipelines to provide natural gas supply, transportation and leased storage. Estimated committed natural gas, transportation and leased storage costs (including pipeline transition costs) for 1997 through 2001 total $92 million. Total natural gas purchased for 1996, 1995 and 1994 was $207 million, $150 million and $168 million, respectively. IP's share (ownership share under negotiation -- see sub-caption "Soyland" under Contingencies below) of estimated nuclear fuel commitments for Clinton is approximately $19 million for uranium concentrates through 2001, $5 million for conversion services through 1999 and $198 million for fabrication services through 2016. IP is committed to purchase approximately $52 million of emission allowances through 1999. IP anticipates that all of these costs will be recoverable under IP's electric fuel and purchased gas adjustment clauses. Insurance IP maintains insurance on behalf of IP and Soyland for certain losses involving the operation of Clinton. For physical damage to the plant, IP's insurance program has two layers: 1) a primary layer of $500 million provided by nuclear insurance pools; and 2) an excess coverage layer of $1.1 billion provided by an industry-owned mutual insurance company for a total coverage of $1.6 billion. In the event of an accident with an estimated cost of reactor stabilization and site decontamination exceeding $100 million, NRC regulations require that insurance proceeds be dedicated and used first to return the reactor to, and maintain it in, a safe and stable condition, and second, to decontaminate the reactor station site. The insurers also provide coverage for the shortfall in the Decommissioning Trust Fund caused by the premature decommissioning of the reactor due to an accident. In the event insurance limits are not exhausted by the above, the remaining coverage will be applied to property damage and a portion of the value of the undamaged property. In addition, while IP has no reason to anticipate a serious nuclear accident at Clinton, if such an accident should occur, the claims for property damage and other costs could materially exceed the limits of current or available insurance coverage. In the event of an extended shutdown of Clinton due to accidental property damage, IP also purchases approximately $.9 million per week of business interruption insurance coverage for its ownership share of Clinton through an industry-owned mutual insurance company. This insurance does not provide coverage until Clinton has been out of service for 21 weeks. (Ownership share under negotiation -- see sub-caption "Soyland" under Contingencies below.) All United States nuclear power station operators are subject to the Price- Anderson Act. This act currently limits public liability for a nuclear incident to $8.9 billion. Private insurance covers the first $200 million. Retrospective premium assessments against each licensed nuclear reactor in the United States provide excess coverage. Currently, the liability to these reactor operators/owners for such an assessment would be up to $79.3 million per incident, not including premium taxes which may be applicable, payable in annual installments of not more than $10 million. A Master Worker Policy covers worker tort claims alleging bodily injury, sickness or disease for workers whose initial radiation exposure occurred on or after January 1, 1988. The policy has an aggregate limit of $200 million that applies to the commercial nuclear industry as a whole. A provision provides for automatic reinstatement of policy limits up to an additional $200 million. IP may be subject to other risks that may not be insurable, or the amount of insurance carried to offset the various risks may not be sufficient to meet potential liabilities and losses. There is also no assurance that IP will be able to maintain insurance coverage at its present level. Under those circumstances, such losses or liabilities may have a substantial adverse effect on Illinova's and IP's financial position. Decommissioning and Nuclear Fuel Disposal Costs IP is responsible for its ownership share (ownership share under negotiation - see sub-caption "Soyland" under Contingencies below) of the costs of decommissioning Clinton and for spent nuclear fuel disposal costs. IP is collecting future decommissioning costs through its electric rates based on an ICC-approved formula that allows IP to adjust rates annually for changes in decommissioning cost estimates. Based on NRC regulations that establish a minimum funding level, IP estimates its 86.8% share (ownership share under negotiation - see sub-caption "Soyland" under Contingencies below) of Clinton decommissioning costs to be approximately $381 million (1996 dollars) or $687 million (2026 dollars, assuming a 2% inflation factor). The NRC bases the minimum only on the cost of removing radioactive plant structures. IP concluded a site-specific study in 1996 to estimate the costs of dismantlement, removal and disposal of Clinton. This study resulted in projected decommissioning costs of $473 million (1996 dollars) or $853 million (2026 dollars, assuming a 2% inflation factor) for IP. Regulatory approval for funding of this increased decommissioning cost is expected during the third quarter of 1997. External decommissioning trusts, as prescribed under Illinois law and authorized by the ICC, accumulate funds for the future decommissioning of Clinton based on the expected service life of the plant. For the years 1996, 1995 and 1994, IP contributed $3.9 million, $5.0 million and $5.5 million, respectively, to its external nuclear decommissioning trust funds. The balances in these nuclear decommissioning funds at December 31, 1996, and 1995 were $41.4 million and $32.7 million, respectively. Decommissioning funds are recorded as assets on the balance sheet. A decommissioning liability approximately equivalent to trust assets was also recorded. IP recognizes earnings and expenses from the trust fund as changes in its assets and liabilities relating to these funds. The Financial Accounting Standards Board (FASB) is reviewing the accounting for closure and removal costs of long-lived assets. Changes to current electric utility industry accounting practices for decommissioning may result in recording the estimated total cost for decommissioning as a liability and an increase to plant balances, depreciating the increased plant balances, and reporting trust fund income from the external decommissioning trusts as investment income rather than as a reduction to decommissioning expense. Based on current information, IP believes that these changes will not have an adverse effect on results of operations due to existing and anticipated future ability to recover decommissioning costs through rates. In 1992, the ICC entered an order in which it expressed concern that IP take all reasonable action to ensure that Soyland contributes its ownership share of the current or any revised estimate of decommissioning costs. The order also states that if IP becomes liable for decommissioning expenses attributable to Soyland, the ICC will then decide whether that expense should be the responsibility of IP 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. (See sub-caption "Soyland" under Contingencies below.) Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel. The DOE currently charges one mill ($0.001) per net kilowatt-hour (one dollar per MWH) generated and sold for future disposal of spent fuel. IP is recovering these charges through rates. In 1996, the D.C. Circuit Court of Appeals issued an order, at the behest of nuclear-owning utilities and state regulatory agencies, confirming DOE's unconditional obligation to take responsibility for spent nuclear fuel commencing in 1998, even if it has no permanent repository at that time. Notwithstanding this decision, which the DOE did not appeal, the DOE has indicated to all nuclear utilities that it may experience delay in performance. The impact of any such delay on IP will depend on many factors, including the duration of such delay and the cost and feasibility of interim, on-site storage. Environmental Matters Clean Air Act In August 1992, IP announced that it had suspended construction of two scrubbers at the Baldwin Power Station (Baldwin). At December 31, 1996, approximately $24 million in costs for the suspended Baldwin program continue to be carried by IP as plant held for future use. To comply with the sulfur dioxide (SO2) emission reduction requirements of Phase I (1995-1999) of the 1990 Clean Air Act Amendments, IP continues to purchase emission allowances. An emission allowance is the authorization by the United States Environmental Protection Agency (U.S. EPA) to emit one ton of SO2. The ICC approved IP's Phase I Clean Air Act compliance plan in September 1993, and IP is continuing to implement that plan. IP has acquired sufficient emission allowances to meet most of its anticipated needs for 1997 and will purchase the remainder on the spot market. In 1993, the Illinois General Assembly passed and the governor signed legislation authorizing, but not requiring, the ICC to permit expenditures and revenues from emission allowance purchases and sales to be included in rates charged to customers as a cost of fuel. In December 1994, the ICC approved the recovery of emission allowance costs through the Uniform Fuel Adjustment Clause. IP's compliance plan will defer, until at least 2000, any need for scrubbers or other capital projects associated with SO2 emission reductions. Phase II (2000 and beyond) SO2 emission requirements of the Clean Air Act could require additional actions and may result in capital expenditures and the purchase of emission allowances. To comply with the Phase I nitrogen-oxide (NOx) emission reduction requirements of the acid rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin Unit 3 and Vermilion Unit 2. On November 29, 1994, the Phase I NOx rules were remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA reinstated, with some modifications, the Phase I NOx rules effective January 1, 1996. IP was positioned to comply with these revised rules without additional modifications to any of its generating plants. The U.S. EPA issued revised Phase II NOx emission limits on December 10, 1996. IP has prepared a Phase II Compliance Plan. Litigation over the scope and legality of these Phase II NOx limits precludes a precise quantification of anticipated capital cost for compliance; however, capital expenditures for IP's NOx program, which includes upgrading two air heaters at Baldwin, are expected to be $100 million prior to the year 2000. IP is monitoring the development of several emerging clean air compliance issues which could have a significant impact on its fossil-fueled generating plants. These issues include global climate change (theorized to result from emissions of "greenhouse gases" such as carbon dioxide), controls on "hazardous air pollutants," potential requirements to further reduce NOx emissions from IP plants to help achieve compliance with the air quality standards in the St. Louis and Chicago metropolitan areas and new standards for fine particulates, ozone and SO2. Compliance with potential new regulations in these areas may require significant additional expenditures after 2000. Manufactured-Gas Plant (MGP) IP's estimated liability for MGP site remediation is $69 million. This amount represents IP's current best estimate of the costs that it will incur in remediation of the 24 MGP sites for which it is responsible. Because of the unknown and unique characteristics at each site, IP cannot presently determine its ultimate liability for remediation of the sites. IP is currently recovering MGP site remediation through tariff riders approved by the ICC. Accordingly, IP has recorded a regulatory asset on its balance sheet totaling $69 million as of December 31, 1996. Management expects that cleanup costs will be fully recovered from IP's customers. To offset the burden imposed on its customers, IP has initiated litigation against a number of insurance carriers. Any settlement proceeds or damages recovered from the carriers will be credited to IP's customers through the tariff rider mechanism which the ICC previously approved. Electric and Magnetic Fields (EMF) The possibility that exposure to EMF emanating from power lines, household appliances and other electric sources may result in adverse health effects continues to be the subject of litigation and governmental, medical and media attention. Litigants have also claimed that EMF concerns justify recovery from utilities for the loss in value of real property exposed to power lines, substations and other such sources of EMF. The National Research Council (Council) of the National Academy of Sciences released a report in 1996 which concluded there is "no conclusive and consistent evidence" that exposure to residential EMF presents a health hazard. The Council's conclusion is based on a review of more than 500 studies conducted worldwide over the last 17 years. Additional research is being conducted to attempt to resolve continuing scientific uncertainties. It is too soon to tell what, if any, impact these actions may have on 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, 1996, 68%, 20% and 12% of Accounts receivable - Service were from residential, commercial and industrial customers, respectively. IP maintains reserves for potential credit losses and such losses have been within management's expectations. Contingencies Soyland IP and Soyland have entered into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP contingent on approval by the NRC. The NRC is expected to act on IP's request during the first quarter of 1997. IP and Soyland have renegotiated the existing Power Coordination Agreement. This agreement is expected to result in a reduction of rates for Soyland while IP will be assured a long-term sales agreement for 10 to 20 years. IP is expected to file with FERC a request for approval of this agreement in February 1997. FERC Audit In 1996 FERC conducted an audit of IP's financial books and records for the years 1992 through 1995 and preliminarily identified a number of issues. IP responded to the issues raised. FERC has taken no action regarding disposition of these matters. At this time, the outcome of the audit cannot be determined; however, management does not expect that resolution of the audit will have a material adverse effect on IP's consolidated financial position or results of operations. IRS Audit The Internal Revenue Service is currently auditing IP's federal income tax returns for the years 1991 through 1993. At this time, the outcome of the audit cannot be determined; however, management does not expect that the results will have a material adverse effect on IP's consolidated financial position or results of operations. For a detailed discussion of income taxes, see "Note 7 - Income Taxes" of the "Notes to Consolidated Financial Statements." IPMI IPMI buys and sells electricity in the West and Midwest regions of the United States. In the normal course of doing business, IPMI is required to incur price exposure on the electricity bought or sold. Where the markets allow, IPMI will hedge such exposure through the use of electricity futures contracts or through swaps with qualified counterparties. The aggregate notional value, fair value, and unrealized gain related to futures contracts outstanding at December 31, 1996 are immaterial. In addition, IPMI considers the risk of counterparty non-performance to be remote. During 1996, IPMI entered into electricity sale contracts with delivery commencing in 1997 which exposed the company to risk as a result of price volatility in the western United States electricity market. At December 31, 1996, IPMI recorded a $3.2 million reserve relating to these transactions in anticipation of such amount becoming a realized loss. Illinova guarantees the performance of Tenaska Marketing Ventures (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 1996 peaked at just under $25 million. Illinova also guarantees performances by TMV of all obligations to parties providing price-hedging services. The guarantee to the parties providing hedging services is a function of the market price of gas. Management believes that its exposure under these guarantees is insignificant. See "Note 2 -- Illinova Subsidiaries" of the "Notes to Consolidated Financial Statements" for additional information about IPMI. IGC In connection with IGC, as of December 31, 1996, Illinova guarantees the payment of $27 million to creditors for the construction of independent power projects. IGC has net investment in projects of $98 million. 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, 1996. These lines of credit are renewable in May 1997, August 1997 and May 2001. These bank commitments support the amount of commercial paper outstanding at any time, limited only by the amount of unused bank commitments, and are available to support other IP activities. In addition, Illinova's total lines of credit represented by bank commitments amount to $150 million, of which $73 million was unused at December 31, 1996. Illinova's letters of credit total $30.6 million. IP pays facility fees up to .15% per annum on $350 million of the total lines of credit, regardless of usage. The interest rate on borrowings under these agreements is, at IP's option, based upon the lending banks' reference rate, their Certificate of Deposit rate, the borrowing rate of key banks in the London interbank market or competitive bid. IP has letters of credit totaling $206 million and pays fees up to .45% per annum on the unused amount of credit. In addition, IP and IP Fuel Company have a short-term financing option to obtain funds not to exceed $30 million. IP and IP Fuel Company pay no fees for this uncommitted facility and funding is subject to availability upon request. Illinova had $77 million of borrowings against its lines of credit at December 31, 1996. For the years 1996, 1995 and 1994, IP had short-term borrowings consisting of bank loans, commercial paper, extendible floating rate notes and other short-term debt outstanding at various times as follows: - ------------------------------------------------------------------------------ (Millions of dollars, except rates) 1996 1995 1994 - ------------------------------------------------------------------------------ Short-term borrowings at December 31, $ 387.0 $ 359.6 $ 238.8 Weighted average interest rate at December 31, 5.8% 6.0% 6.2% Maximum amount outstanding at any month end $ 387.0 $ 359.6 $ 238.8 Average daily borrowings outstanding during the year $ 261.9 $ 306.5 $ 165.4 Weighted average interest rate during the year 5.7% 6.2% 4.6% - ------------------------------------------------------------------------------
Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate debt. IP's three variable rate interest rate cap agreements cover up to $289 million of commercial paper. These agreements entitle IP to receive from a counterparty on a monthly basis the amount, if any, by which IP's interest payments on a nominal amount of commercial paper exceed the interest rate set by the cap. On December 31, 1996, the cap rates were set at 6.0%, 6.25% and 7.0% while the current market rate available to IP was 5.7%. Note 6 - Facilities Agreements IP and Soyland share ownership of Clinton, with IP owning 86.8% (ownership share under negotiation - see sub-caption "Soyland" of "Note 4 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information) and Soyland owning 13.2%. Agreements between IP and Soyland provide that IP has control over construction and operation of the generating station, that the parties share electricity generated in proportion to their ownership interests and that IP will have certain obligations to provide replacement power to Soyland if IP ceases to operate or reduces output from Clinton. Under the provisions of a Power Coordination Agreement (PCA) between Soyland and IP dated October 5, 1984, as amended, IP is required to provide Soyland with 12.0% (436 megawatts) of the electrical capacity from its fossil-fueled generating plants until the agreement expires or is terminated. This is in addition to the capacity Soyland receives as an owner of Clinton. IP is compensated with capacity charges and for energy costs and variable operating expenses. IP transmits energy for Soyland through IP's transmission and subtransmission systems. Under provisions of the PCA, Soyland has the option of participating financially in major capital expenditures at the fossil-fueledplants, such as those needed for Phase II Clean Air Act compliance, to the extent of its capacity entitlement with each party bearing its own direct capital costs, or by having the costs treated as plant additions and billed to Soyland in accordance with other billing provisions of the PCA. At any time after December 31, 2004, either IP or Soyland may terminate the PCA by giving not less than seven years prior written notice to the other party. The party to whom termination notice has been given may designate an earlier effective date of termination which shall be not less than 12 months after receiving notice. See "Note 4 -- Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of the Clean Air Act. Note 7 - Income Taxes Deferred tax assets and liabilities were comprised of the following: Balances as of December 31, - ------------------------------------------------------------------------------ (Millions of dollars) 1996 1995 - ------------------------------------------------------------------------------ Deferred tax assets: - ------------------------------------------------------------------------------ Current: Misc. book/tax recognition differences $ 7.7 $ 26.1 - ------------------------------------------------------------------------------ Noncurrent: Depreciation and other property related 42.0 45.5 Alternative minimum tax 198.5 183.1 Tax credit and net operating loss carryforward 32.8 32.4 Unamortized investment tax credit 120.9 126.1 Misc. book/tax recognition differences 78.9 66.7 - ------------------------------------------------------------------------------ 473.1 453.8 - ------------------------------------------------------------------------------ Total deferred tax assets $ 480.8 $ 479.9 ============================================================================== Deferred tax liabilities: - ------------------------------------------------------------------------------ Current: Misc. book/tax recognition differences $ 11.3 $ 6.5 - ------------------------------------------------------------------------------ Noncurrent: Depreciation and other property related 1,350.1 1,303.5 Deferred Clinton costs 58.2 60.1 Misc. book/tax recognition differences 99.7 103.0 - ------------------------------------------------------------------------------ 1,508.0 1,466.6 - ------------------------------------------------------------------------------ Total deferred tax liabilities $ 1,519.3 $ 1,473.1 ==============================================================================
Income taxes included in the Consolidated Statements of Income consist of the following components: Years Ended December 31, - ------------------------------------------------------------------------------ (Millions of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------ Current taxes- Included in operating expenses and taxes $ 79.2 $ 98.6 $ 58.3 Included in other income and deductions (14.5) (20.3) - - ------------------------------------------------------------------------------ Total current taxes 64.7 78.3 58.3 - ------------------------------------------------------------------------------ Deferred taxes- Included in operating expenses and taxes Property related differences 60.4 62.2 60.0 Alternative minimum tax 1.1 2.9 (50.4) Gain/loss on reacquired debt (1.6) (1.9) - Net operating loss carryforward - (.2) 62.0 Enhanced retirement and severance 2.6 (15.0) - Misc. book/tax recognition differences 6.1 (13.9) (7.8) Internal Revenue Service interest on tax issues - - 7.5 Included in other income and deductions Property related differences 10.2 9.7 10.0 Net operating loss carryforward - - (17.4) Misc. book/tax recognition differences (8.3) (1.2) (.7) - ------------------------------------------------------------------------------ Total deferred taxes 70.5 42.6 63.2 - ------------------------------------------------------------------------------- Deferred investment tax credit-net Included in operating expenses and taxes (7.3) (6.9) (11.3) Included in other income and deductions - - (.3) - ------------------------------------------------------------------------------ Total investment tax credit (7.3) (6.9) (11.6) - ------------------------------------------------------------------------------ Total income taxes $ 127.9 $ 114.0 $ 109.9 ==============================================================================
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) 1996 1995 1994 - ------------------------------------------------------------------------------ Income tax expense at the federal statutory tax rate $ 111.4 $ 92.9 $ 91.6 Increases/(decreases) in taxes resulting from- State taxes, net of federal effect 11.4 12.4 13.8 Investment tax credit amortization (7.3) (6.9) (7.8) Depreciation not normalized 9.4 7.4 4.3 Preferred dividend requirement of subsidiary 2.5 5.8 8.7 Other-net .5 2.4 (.7) - ------------------------------------------------------------------------------ Total income taxes $ 127.9 $ 114.0 $ 109.9 ==============================================================================
Combined federal and state effective income tax rates were 40.2%, 42.9% and 42.0% for the years 1996, 1995 and 1994, respectively. 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, 1996, of approximately $198.5 million. This credit can be carried forward indefinitely to offset future regular income tax liabilities in excess of the tentative minimum tax. The Internal Revenue Service is currently auditing IP's consolidated federal income tax returns for the years 1991 through 1993. At this time, the outcome of the audit cannot be determined. However, the results of the audit are not expected to have a material adverse effect on Illinova's consolidated financial position 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 1996, 1995 and 1994 were $35 million, $41 million and $52 million, respectively, including financing costs of $5 million, $7 million and $7 million, respectively. IP is obligated to make subordinated loans to the Fuel Company at any time the obligations of the Fuel Company that are due and payable exceed the funds available to the Fuel Company. IP has an obligation for nuclear fuel disposal costs of leased nuclear fuel. See "Note 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, 1996 and 1995, current obligations under capital lease for nuclear fuel are $36.9 million and $33.3 million, respectively. Over the next five years estimated payments under capital leases are as follows: - -------------------------------------------------- (Millions of dollars) - -------------------------------------------------- 1997 $ 39.7 1998 28.5 1999 18.6 2000 11.6 2001 5.1 Thereafter 2.6 - ------------------------------------------------- 106.1 Less: Interest 9.7 - ------------------------------------------------- Total $ 96.4 =================================================
Note 9 - Long-Term Debt of Subsidiary (Millions of dollars) - ------------------------------------------------------------------------------- December 31, 1996 1995 First mortgage bonds- 5.85% series due 1996 $ - $ 40.0 61/2 %series due 1999 72.0 72.0 6.60% series due 2004 (Pollution Control Series A) 6.5 6.8 7.95% series due 2004 72.0 72.0 6% series due 2007 (Pollution Control Series B) 18.7 18.7 75/8% series due 2016 (Pollution Control Series F, G and H) 150.0 150.0 8.30% series due 2017 (Pollution Control Series I) 33.8 33.8 73/8% series due 2021 (Pollution Control Series J) 84.7 84.7 83/4% series due 2021 57.1 120.0 5.70% series due 2024 (Pollution Control Series K) 35.6 35.6 7.40% series due 2024 (Pollution Control Series L) 84.1 84.1 - ------------------------------------------------------------------------------ Total first mortgage bonds 614.5 717.7 - ------------------------------------------------------------------------------ New mortgage bonds- 61/8% series due 2000 40.0 40.0 5.625%series due 2000 110.0 110.0 61/2% series due 2003 100.0 100.0 63/4% series due 2005 70.0 70.0 8% series due 2023 229.0 235.0 71/2% series due 2025 177.0 200.0 Adjustable rate series due 2028 (Pollution Control Series M, N and O) 111.8 111.8 - ------------------------------------------------------------------------------ Total new mortgage bonds 837.8 866.8 - ------------------------------------------------------------------------------ Total mortgage bonds 1,452.3 1,584.5 - ------------------------------------------------------------------------------ Medium-term notes, series A 78.5 100.0 Variable rate long-term debt due 2017 75.0 75.0 - ------------------------------------------------------------------------------ Total other long-term debt 153.5 175.0 - ------------------------------------------------------------------------------ 1,605.8 1,759.5 Unamortized discount on debt (18.1) (20.3) - ------------------------------------------------------------------------------ Total long-term debt excluding capital lease obligations 1,587.7 1,739.2 Obligations under capital leases 96.4 95.1 - ------------------------------------------------------------------------------ 1,684.1 1,834.3 Long-term debt and lease obligations maturing within one year (47.7) (95.0) - ------------------------------------------------------------------------------- Total long-term debt $ 1,636.4 $ 1,739.3 ===============================================================================
In 1996, a total of $62.9 million of 83/4% First Mortgage Bonds due 2021 was purchased at various times on the open market. In April 1996, $23.0 million of 71/2% New Mortgage Bonds due 2025 was purchased on the open market. In June 1996, $6.0 million of 8% New Mortgage Bonds due 2023 was purchased on the open market. In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At December 31, 1996, the maturity dates on these notes ranged from 1997 to 1998 with interest rates ranging from 9% to 9.31%. Interest rates on variable rate long-term debt due 2017 are adjusted weekly and ranged from 3.0% to 3.3% at December 31, 1996. For the years 1997, 1998, 1999, 2000 and 2001, IP has long-term debt maturities and cash sinking fund requirements in the aggregate of (in millions) $10.8, $68.8, $72.8, $150.8 and $.8, respectively. These amounts exclude capital lease requirements. See "Note 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 2001. These amounts are subject to reduction and historically have been met by pleding property additions, as permitted by the First Mortgage. At December 31, 1996, the aggregate total of unamortized debt expense and unamortized loss on reacquired debt was approximately $105.3 million. IP's First Mortgage Bonds are secured by a first mortgage lien on substantially all of the fixed property, franchises and rights of IP with certain minor exceptions expressly provided in the First Mortgage. In 1992, the Board authorized a new general obligation mortgage, which is intended to replace the First Mortgage. IP anticipates that during 1997 the 1943 mortgage will be amended to be consistent with the 1992 mortgage. Bonds issued under the New Mortgage were secured by a corresponding issue of First Mortgage Bonds under the First Mortgage. The remaining balance of net bondable additions at December 31, 1996, was approximately $1.5 billion. Note 10 - Preferred Stock of Subsidiary (Millions of dollars) - ------------------------------------------------------------------------------ December 31, 1996 1995 Serial Preferred Stock of Subsidiary, cumulative, $50 par value- Authorized 5,000,000 shares; 1,221,700 and 1,356,800 shares outstanding, respectively Series Shares Redemption Prices 4.08% 300,000 $ 51.50 $ 15.0 $ 15.0 4.26% 150,000 51.50 7.5 7.5 4.70% 200,000 51.50 10.0 10.0 4.42% 150,000 51.50 7.5 7.5 4.20% 180,000 52.00 9.0 9.0 7.75% 241,700 50.00 after July 1, 2003 12.1 18.8 Net premium on preferred stock .2 .2 - ----------------------------------------------------------------------------- Total Preferred Stock of Subsidiary, $50 par value $ 61.3 $ 68.0 - ----------------------------------------------------------------------------- Serial Preferred Stock of Subsidiary, cumulative, without par value- Authorized 5,000,000 shares; 698,200 and 1,152,550 shares outstanding, respectively Series Shares Redemption Prices A 698,200 $ 50.00 $ 34.9 $ 37.1 B - - - 20.5 - ----------------------------------------------------------------------------- Total Preferred Stock of Subsidiary, without par value $ 34.9 $ 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 $ 96.2 $ 125.6 ============================================================================== Company Obligated Mandatorily Redeemable Preferred Securities of: Illinois Power Capital, L.P. Monthly Income Preferred Securities, cumulative, $25 liquidation preference- 3,880,000 shares authorized and outstanding $ 97.0 $ 97.0 Illinois Power Financing I Trust Originated Preferred Securities, cumulative, $25 liquidation preference- 4,000,000 shares authorized and outstanding 100.0 - - ----------------------------------------------------------------------------- Total Mandatorily Redeemable Preferred Stock of Subsidiary $ 197.0 $ 97.0 ============================================================================= Serial Preferred Stock ($50 par value) is redeemable at the option of IP in whole or in part at any time with not less than 30 days and not more than 60 days notice by publication. Quarterly dividend rates for Serial Preferred Stock, Series A, are determined based on market interest rates of certain U.S. Treasury securities. Dividends paid in 1996 and 1995 were $.75 per quarter. The dividend rate for any dividend period will not be less than 6% per annum or greater than 12% per annum applied to the liquidation preference value of $50 per share. Illinois Power Capital, L.P. is a limited partnership in which IP serves as a general partner. Illinois Power Capital issued (1994) $97 million of tax- advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after- tax rate) with a liquidation preference of $25 per share. IP consolidates the accounts of Illinois Power Capital. Illinois Power Financing I (IPFI) is a statutory business trust in which IP serves as sponsor. IPFI issued $100 million of trust originated preferred securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. IPFI issued the TOPrS and invested the proceeds in an equivalent amount of IP subordinated debentures due in 2045. IP used the proceeds to repay short-term indebtedness on varying dates on or before March 1, 1996. IP incurred the indebtedness in December 1995, to redeem $95.3 million (principal value) of higher-cost outstanding preferred stock of IP. On April 15, 1996, IP issued a notice of redemption to all holders of its Adjustable Rate Series B Preferred Stock. All 410,250 shares outstanding were redeemed on May 15, 1996, at the redemption price of $50 per share. In 1996, IP redeemed $6.7 million of the 7.75% Serial Preferred Stock, $2.2 million of its Series A Serial Preferred Stock and the remaining $20.5 million of its Series B Serial Preferred Stock. The carrying amount was $.7 million under consideration paid and was recorded in equity and included in Net income applicable to common stock. Note 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, 1996. IP has an Incentive Savings Plan for Employees Covered Under a Collective Bargaining Agreement. IP's matching contribution is used to purchase Illinova common stock. Under this plan, 69,167 shares of common stock were designated for issuance at December 31, 1996. 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, 1996, 69,367 common shares were allocated to salaried employees and 62,975 shares to employees covered under the Collective Bargaining Agreement through the matching contribution feature of the ESOP arrangement. Under the incentive compensation feature, 83,300 common shares were allocated to employees for the year ended December 31, 1996. During 1996, IP contributed $5.2 million to the ESOP and using the shares allocated method, recognized $1.6 million of expense. Interest paid on the ESOP debt was approximately $1.6 million in 1996 and dividends used for debt services were approximately $2.2 million. As of July 1, 1996 Illinova amended the Automatic Reinvestment and Stock Purchase Plan and the Employees' Stock Ownership Plan. These plans were replaced with the Illinova Investment Plus Plan for which 5,000,000 shares of common stock were designated for issuance. Illinova is responsible for administering the Illinova Investment Plus Plan. The purpose of the Illinova Investment Plus Plan is to provide investors in Illinova with a convenient way to purchase shares of common stock and reinvest all or a portion of the cash dividends paid on eligible securities in additional shares of common stock. The Illinova Investment Plus Plan allows purchases of common stock on the open market, as well as purchases of new issue shares directly from Illinova. All accounts and all elections, notices, instructions and authorizations under the Automatic Reinvestment and Stock Purchase Plan and the Employees' Stock Ownership Plan automatically will continue under the Illinova Investment Plus Plan, and participants in the Automatic Reinvestment and Stock Purchase Plan and the Employees' Stock Ownership Plan will continue as participants in the Illinova Investment Plus Plan. In 1992, the Board of Directors adopted and the shareholders approved a Long- Term Incentive Compensation Plan (the Plan) for officers or employee members of the Board, but excluding directors who are not officers or employees. Restricted stock, incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalents and other stock-based awards may be granted under the plan, for up to 1,500,000 sha90.3 $ 148.1 $ 158.2 Other information - Depreciation $ 164.0 $ 22.5 $ 186.5 $ 161.4 $ 21.6 $
- -------------------------------------------------------------------------- Year Options Grant Year Expiration Options Granted Granted Price Exercisable Date Exercised - --------------------------------------------------------------------------- 1992 62,000 $ 233/8 1996 6/10/01 38,000 1993 73,500 $ 241/4 1997 6/9/02 - 1994 82,650 $ 207/8 1997 6/8/03 - 1995 69,300 $ 247/8 1998 6/14/04 - 1996 80,500 $ 293/4 1999 2/7/05 - ============================================================================
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), effective for fiscal years beginning after December 15, 1995. If the accounting provisions of FAS 123 had been adopted as of the beginning of 1996, the effect on 1996 net earnings would have been immaterial. Further, based on current and anticipated use of stock options, it is not envisioned that the impact of FAS 123 accounting provisions would be material in any future period. Illinova continues to account for its stock options in accordance with Accounting Principle Board Opinion No. 25. The provisions of Supplemental Indentures to IP's General Mortgage Indenture and Deed of Trust contain certain restrictions with respect to the declaration and payment of dividends. IP was not limited by any of these restrictions at December 31, 1996. Under the Restated Articles of Incorporation, common stock dividends are subject to the preferential rights of the holders of preferred and preference stock. Note 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 1996, 1995 and 1994, include the following components: Years Ended December 31, - ------------------------------------------------------------------------------ (Millions of Dollars) 1996 1995 1994 - ------------------------------------------------------------------------------ Service cost on benefits earned during the year $ 10.2 $ 10.4 $ 11.9 Interest cost on projected benefit obligation 26.8 23.6 21.8 Return on plan assets (42.2) (58.3) (7.9) Net amortization and deferral 9.4 29.6 (19.2) Effect of enhanced retirement program - 15.7 - - -------------------------------------------------------------------------------- Net periodic pension cost $ 4.2 $ 21.0 $ 6.6 ================================================================================
The estimated funded status of the plans at December 31, 1996 and 1995, using discount rates of 8.0% and 7.75%, respectively, and future compensation increases of 4.5% was as follows: Balances as of December 31, - ----------------------------------------------------------------------------- (Millions of Dollars) 1996 1995 - ----------------------------------------------------------------------------- Acturial present value of: Vested benefit obligation $ (291.7) $ (276.8) - ----------------------------------------------------------------------------- Accumulated benefit obligation (312.5) (297.5) - ----------------------------------------------------------------------------- Projected benefit obligation (361.5) (343.6) Plan assets at fair value 357.2 331.5 - ----------------------------------------------------------------------------- Funded Status (4.3) (12.1) Unrecognized net (gain)/loss (13.8) (5.1) Unrecognized net asset at transition (30.3) (34.6) Unrecognized prior service cost 19.3 21.2 - ----------------------------------------------------------------------------- Accrued pension cost included in accounts payable $ (29.1) $ (30.6) =============================================================================
The plan's assets consist primarily of common stocks, fixed income securities, cash equivalents and real estate. The acturial present value of accumulated plan benefits at January 1, 1996 and 1995, were $361 million and $258 million, respectively, including vested benefits of $337 million and $239 million, respectively. The pension cost for 1996, 1995 and 1994 was calculated using a discount rate of 7.75%, 8.75% and 7.75%, respectively; future compensation increases of 4.5% for 1996, 1995 and 1994; and a return on assets of 9.5% for 1996, 9.0% for 1995 and 1994. The unrecognized net asset at transition and unrecognized prior service cost are amortized on a straight-line basis over the average remaining service period of employees who are expected to receive benefits under the plan. IP made cash contributions of $6 million in 1996, $2 million and $10 million in 1994. IP 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. Post- retirement benefits, a portion of which have been capitalized, for 1996 and 1995 included the following components: Years Ended December 31, - ---------------------------------------------------------------------------- (Millions of Dollars) 1996 1995 - ---------------------------------------------------------------------------- Service cost on benefits earned during the year $ 2.2 $ 2.1 Interest cost on projected benefit obligation 6.1 5.5 Return on plan assets (5.9) (4.7) Amortization of unrecognized transition obligation 6.4 6.3 Effect of enhanced retirement program - 9.5 - --------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 8.8 $ 18.7 ===========================================================================
The net periodic postretirement benefit cost in the preceding table includes amortization of the previously unrecognized accumulated postretirement benefit plan obligation, which was $44.2 million and $52.3 million as of January 1, 1996 and 1995, respectively, over 20 years on a straight-line basis. IP has established two separate trusts for those retirees who were subject to a collectively bargained agreement and all other retirees to fund retiree health care and life insurance benefits. IP's funding policy is to contribute annually an amount at least equal to the revenues collected for the amount of postretirement benefit costs allowed in rates. The plan assets consist of common stocks and fixed income securities at December 31, 1996 and 1995. The estimated funded status of the plans at December 31, 1996 and 1995, using weighted average discount rates of 8.0% and 7.75%, respectively, and a return on assets of 9.0% was as follows: Balances as of December 31, - ---------------------------------------------------------------------------- (Millions of Dollars) 1996 1995 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees $ (49.6) $ (54.5) Other fully eligible participants (3.5) (3.0) Other active plan participants (28.6) (27.5) - ----------------------------------------------------------------------------- Total benefit obligation (81.7) (85.0) Plan assets at fair value 34.4 25.6 - ----------------------------------------------------------------------------- Funded status (47.3) (59.4) Unrecognized transition obligation 41.5 44.2 Unrecognized net (gain)/loss (9.2) - - ----------------------------------------------------------------------------- Accrued postretirement benefit cost included in accounts payable $ (15.0) $ (15.2) =============================================================================
Note 13 - Segments of Business (Millions of dollars) - ------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Total Total Total Electric Gas Corporation Electric Gas Corporation Electric Gas Corporation - ------------------------------------------------------------------------------------------------------------------------------- Operation information - Operating revenues $ 1,340.5 $ 348.2 $ 1,688.7 $ 1,368.9 $ 272.5 1,641.4 $ 1,287.5 $ 302.0 $ 1,589.5 Operating expenses, excluding provision for income taxes 886.2 300.5 1,186.7 946.2 245.0 1,191.2 876.1 274.7 1,150.8 - ------------------------------------------------------------------------------------------------------------------------------- Pre-tax operating income 454.3 47.7 502.0 422.7 27.5 450.2 411.4 27.3 438.7 Allowance for funds used during construction (AFUDC) 6.3 .2 6.5 5.5 .5 6.0 8.9 .4 9.3 - ------------------------------------------------------------------------------------------------------------------------------- Pre-tax operating income, including AFUDC $ 460.6 $ 47.9 $ 508.5 $ 428.2 $28.0 $ 456.2 $ 420.3 $ 27.7 $ 448.0 - ----------------------------------------------- ------------------ ------------------- Other deductions, net 34.2 18.9 17.5 Interest charges 133.0 148.0 143.9 Provision for income taxes 128.0 114.0 109.9 Preferred dividend require- ments of subsidiary 22.3 23.7 24.9 - ------------------------------------------------------------------------------------------------------------------------------ Net income 191.0 151.6 151.8 Carrying value over (under) consideration paid for redeemed preferred stock of subsidiary (.7) (3.5) 6.4 - ------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock 190.3 $ 148.1 $ 158.2 =============================================================================================================================== Other information - Depreciation $ 164.0 $ 22.5 $ 186.5 $ 161.4 $ 21.6 $ 183.0 $ 156.1 $ 21.1 $ 177.2 - ------------------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 164.0 $ 23.3 $ 187.3 $ 185.7 $ 23.6 $ 209.3 $ 173.1 $ 20.6 $ 193.7 - ------------------------------------------------------------------------------------------------------------------------------- Investment information - Identifiable assets* $ 4,578.1 $ 481.9 $ 5,060.0 $4,580.4 $ 446.3 $ 5,026.7 $ 4,589.0 $ 442.6 5,031.6 ------------------------------------------ --------------------- -------------------- Nonutility plant and other investments 132.4 65.5 37.2 Assets utilized for overall operations 520.4 517.6 507.9 - ------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 5,712.8 $ 5,609.8 $ 5,576.7 =============================================================================================================================== *Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs and prepaid and deferred energy costs. Note 14 - Fair Value of Financial Instruments
1996 1995 - --------------------------------------------------------------------------- Carrying Fair Carrying Fair (Millions of dollars) Value Value Value Value - ---------------------------------------------------------------------------- Nuclear decommissioning trust funds $ 41.4 $ 41.4 $ 32.7 $ 32.7 Cash and cash equivalents 24.6 24.6 11.3 11.3 Mandatorily redeemable preferred stock of subsidiary 197.0 199.3 97.0 108.2 Long-term debt of subsidiary 1,587.7 1,629.3 1,739.2 1,855.8 Notes payable 387.0 387.0 359.6 359.6 ============================================================================
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 1996 1996 1996 1996 - ----------------------------------------------------------------------------------------------------------------- Operating revenues $ 446.7 $ 365.7 $ 458.4 $ 417.9 Operating income 88.1 74.9 133.3 65.1 Net income 43.3 36.7 91.0 20.0 Net income applicable to common stock 43.3 36.2 90.7 20.1 Earnings per common share $ .57 $ .48 $ 1.20 $ .26 Common stock prices and dividends High $ 30 3/8 $ 29 $ 29 1/4 $ 28 5/8 Low $ 27 $ 24 5/8 $ 25 1/4 $ 26 1/4 Dividends declared $ .28 $ .28 $ .28 $ .31 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 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 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 38,251 registered holders of common stock at January 10, 1997.
ILLINOVA CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA* - --------------------------------------------------------------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 1993 1992 1986 - --------------------------------------------------------------------------------------------------------------------------- Operating revenues Electric $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 1,135.6 $ 1,117.9 $ 814.1 Electric interchange 137.6 116.3 110.0 130.8 73.0 76.6 Gas 348.2 272.5 302.0 314.8 288.6 369.7 - --------------------------------------------------------------------------------------------------------------------------- Total operating revenues $ 1,688.7 $ 1,641.4 $ 1,589.5 $ 1,581.2 $ 1,479.5 $ 1,260.4 - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 191.0 $ 151.6 $ 151.8 $ (81.9) $ 93.2 $ 256.5 Effective income tax rate 40.2% 42.9% 42.0% (39.8)% 46.0% 22.7% - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ 190.3 $ 148.1 $ 158.2 $ (81.9) $ 93.2 $ 256.5 Earnings (loss) per common share $ 2.51 $ 1.96 $ 2.09 $ (1.08) $ 1.23 $ 3.98 Cash dividends declared per common share $ 1.15 $ 1.03 $ .65 $ .40 $ 1.40 $ 2.64 Dividend payout ratio (declared) 45.5% 52.3% 30.7% N/A 112.9% 66.7% Book value per common share $ 21.62 $ 20.19 $ 19.17 $ 17.46 $ 18.81 $ 25.79 Price range of common shares High $ 30 3/8 $ 30 $ 22 5/8 $ 25 7/8 $ 25 1/8 $ 32 Low $ 24 5/8 21 1/4 $ 18 1/8 $ 20 1/8 $ 19 1/4 $ 23 1/8 Weighted average number of common shares outstanding during the period (thousands) 75,682 75,644 75,644 75,644 75,644 64,503 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 5,712.8 $ 5,609.8 $ 5,576.7 $ 5,423.5 $ 5,331.7 $ 5,622.8 - ----------------------------------------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 1,636.2 $ 1,527.0 $ 1,450.2 $ 1,321.0 $ 1,422.7 $ 1,691.9 Preferred stock of subsidiary 96.2 125.6 224.7 303.7 303.1 315.2 Mandatorily redeemable preferred stock of subsidiary 197.0 97.0 133.0 48.0 100.0 196.0 Long-term debt of subsidiary 1,636.4 1,739.3 1,946.1 1,926.3 2,017.4 2,241.0 - ----------------------------------------------------------------------------------------------------------------------------- Total capitalization $ 3,565.8 $ 3,488.9 $ 3,754.0 $ 3,599.0 $ 3,843.2 $ 4,444.1 - ----------------------------------------------------------------------------------------------------------------------------- Embedded cost of long-term debt 8.0% 7.9% 7.6% 7.5% 8.3% 9.1% - ------------------------------------------------------------------------------------------------------------------------------ Retained earnings (deficit) $ 233.0 $ 129.6 $ 58.8 $ (64.6) $ 41.0 $ 481.2 - ------------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 187.3 $ 209.3 $ 193.7 $ 277.7 $ 244.4 $ 710.1 Cash flows from operations $ 407.4 $ 413.2 $ 268.6 $ 369.7 $ 344.8 $ 212.3 AFUDC as a percent of earnings applicable to common stock 3.4% 4.1% 5.9% N/A 5.6% 85.5% Return on average common equity 12.0% 9.9% 11.4% (6.0)% 6.5% 15.9% Ratio of earnings to fixed charges 3.09 2.56 2.56 .66 1.87 2.57 - -------------------------------------------------------------------------------------------------------------------------------
* 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 1996 1995 1994 1993 1992 1986 - ------------------------------------------------------------------------------------------------------------ Electric Sales in KWH (Millions) Residential 4,782 4,754 4,537 4,546 4,138 4,198 Commercial 3,894 3,804 3,517 3,246 3,055 2,821 Industrial 8,493 8,670 8,685 8,120 8,083 7,341 Other 367 367 536 337 466 875 - ------------------------------------------------------------------------------------------------------------- Sales to ultimate consumers 17,536 17,595 17,275 16,249 15,742 15,235 Interchange 5,454 4,444 4,837 6,015 2,807 2,726 Wheeling 928 642 622 569 402 - - ------------------------------------------------------------------------------------------------------------- Total electric sales 23,918 22,681 22,734 22,833 18,951 17,961 - ------------------------------------------------------------------------------------------------------------- Electric Revenues (Millions) Residential $ 483 $ 500 $ 471 $ 463 $ 435 $ 293 Commercial 318 321 295 269 263 187 Industrial 360 392 378 360 381 290 Other 38 37 30 40 38 44 - ------------------------------------------------------------------------------------------------------------ Revenues from ultimate consumers 1,199 1,250 1,174 1,132 1,117 814 Interchange 138 116 110 131 73 77 Wheeling 4 3 3 3 1 - - ------------------------------------------------------------------------------------------------------------ Total electric revenues $ 1,341 $ 1,369 $ 1,287 $ 1,266 $ 1,191 891 - ------------------------------------------------------------------------------------------------------------ Gas Sales in Therms (Millions) Residential 427 356 359 371 339 357 Commercial 177 144 144 148 138 161 Industrial 99 88 81 78 136 198 - ------------------------------------------------------------------------------------------------------------ Sales to ultimate consumers 703 588 584 597 613 716 Transportation of customer-owned gas 251 273 262 229 204 253 - ------------------------------------------------------------------------------------------------------------ Total gas sold and transported 954 861 846 826 817 969 Interdepartmental sales 9 21 5 7 12 1 - ------------------------------------------------------------------------------------------------------------- Total gas delivered 963 882 851 833 829 970 - ------------------------------------------------------------------------------------------------------------- Gas Revenues (Millions) Residential $ 216 $ 173 $ 192 $ 200 $ 181 $ 206 Commercial 79 60 66 68 61 78 Industrial 40 24 31 34 37 73 - ------------------------------------------------------------------------------------------------------------- Revenues from ultimate consumers 335 257 289 302 279 357 Transportation of customer-owned gas 7 8 9 8 7 11 Miscellaneous 6 7 4 5 3 2 - ------------------------------------------------------------------------------------------------------------ Total gas revenues $ 348 $ 272 $ 302 $ 315 $ 289 $ 370 - ------------------------------------------------------------------------------------------------------------ System peak demand (native load) in kw (thousands) 3,492 3,667 3,395 3,415 3,109 3,176 Firm peak demand (native load) in kw (thousands) 3,381 3,576 3,232 3,254 2,925 2,949 Net generating capability in kw (thousands) 4,148 3,862 4,121 4,045 4,052 3,397 - ------------------------------------------------------------------------------------------------------------- Electric customers (end of year) 549,957 529,966 553,869 554,270 549,391 540,595 Gas customers (end of year) 389,223 374,299 388,170 394,379 386,261 383,201 Employees (end of year) 3,635 3,559 4,350 4,540 4,624 4,593 - ------------------------------------------------------------------------------------------------------------ Illinova 500 South 27th Street, Decatur, Illinois 62525 http://www.illinova.com
EX-13.2 8 1996 Information Statement and Annual Report to Shareholders First Notice of Annual Meeting of Shareholders Information Statement Table of Contents Notice of Annual Meeting . . . . . . . . . . . . . . . . . . . . . . . . 2 Information Statement . . . . . . . . . . . . . . . . . . . . . . . . . 3 Appendix: 1996 Annual Report to Shareholders . . . . . . . . . . . . . . A-1 ----------------------------------- / / / / / / / / / Map to Location of Annual / / Shareholders Meeting / / / / / / / ------------------------------------ To the Shareholders of Illinois Power: Notice is Hereby Given that the Annual Meeting of Shareholders of Illinois Power Company ("Illinois Power") will be held at 10 a.m. Wednesday, April 9, 1997, at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, for the following purposes: (1) To elect the Board of Directors for the ensuing year. (2) To transact any other business which may properly come before the meeting or any adjournment. Shareholders of record at the close of business on February 10, 1997, will be entitled to notice of and to vote at the Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, Vice Presiden, General Counsel and Corporate Secretary Decatur, Illinois March 3, 1997 IMPORTANT Only shareholders of Illinois Power are entitled to attend the Annual Meeting. Shareholders will be admitted on verification of record share ownership at the admission desk. Shareholders who own shares through banks, brokerage firms, nominees or other account custodians must present proof of beneficial share ownership (such as a brokerage account statement) at the admission desk. Information Statement (pursuanat to Section 14(C) of the Securities Exchange Act of 1934) March 3, 1997 (Date first sent or given to security holders) We are not asking you for a proxy and you are requested not to send us a proxy. This Information Statement is furnished in connection with the Annual Meeting of Shareholders of Illinois Power. Annual Meeting will be held at 10:00 a.m. Wednesday, April 9, 1997, at Shilling Community Education Center, Richland Community College, One College Park, Decatur, Illinois 62521, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders. On February 10, 1997 ("Record Date"). Illinova Corporation ("Illinova") beneficially owned all of the 72,233,040 shares of Illinois Power Common Stock then outstanding and there were 1,919,900 shares of Illinois Power Preferred Stock then outstanding, none of which was held by Illinova. Voting Rights Shareholders of record at the close of business on the Record Date will be entitled to receive notice of and to vote at the Annual Meeting. Shareholders who are present at the Annual Meeting will be entitled to one vote for each share of Illinois Power Stock which they held of record at the close of business on the Record Date. When voting for candidates nominated to serve as directors, all shareholders will be entitled to 10 votes (the number of directors to be elected) for each of their shares and may cast all of their votes for any one candidate whose name has been placed in nomination prior to the voting or distribute their votes among two or more such candidates in such proportions as they may determine. In voting on other matters presented for consideration at the Annual Meeting, each shareholder will be entitled to one vote for each share of Stock held of record at the close of business on the Record Date. Annual Report and Information Statement Accompanying this Information Statement, which includes Consolidated Financial Statements, is a Notice of Annual Meeting of Shareholders and the Summary Annual Report to Shareholders covering operations of Illinova for the year 1996. This Information Statement and accompanying documents are first being mailed to shareholders on or about March 3, 1997. Board of Directors Information Regarding the Board of Directors The Board of Directors held six Board meetings in 1996. All directors attended at least 75 percent of the aggregate meetings of the Board and Committees of which they were members during 1996. The Board has four standing committees: the Audit Committee, the Finance Committee, the Compensation and Nominating Committee and the Nuclear Operations Committee. The duties and members of the standing committees are: Audit Committee (1) Review with the Chairman, President and Chief Executive Officer and the independent accountants the scope and adequacy of Illinois Power's system of internal controls; (2) review the scope and results of the annual examination performed by the independent accountants; (3) review the activities of Illinois Power's internal auditors; (4) report its findings to the Board and provide a line of communication between the Board and both the internal auditors and the independent accountants; and (5) recommend to the Board the appointment of the independent accountants and approval of the services performed by the independent accountants, considering their independence with regard thereto. The Audit Committee met three times during 1996. This Committee consists of the following non-employee directors ("Outside Directors"): Robert M. Powers, Chairman, Richard R. Berry, C. Steven McMillan, Walter M. Vannoy, and Marilou von Ferstel. Finance Committee (1) Review management's capital and operations and maintenance expenditure budgets, financial forecasts and financing program, and make recommendations to the Board regarding the approval of such budgets and plans; (2) review Illinois Power's banking relationships, short-term borrowing arrangements, dividend policies, arrangements with the transfer agent and registrar, investment objectives and the performance of Illinois Power's pension and other trust funds, evaluate fund managers, and make recommendations to the Board concerning such matters; (3) review Illinois Power's risk management programs, including insurance coverage, and make recommendations to the Board; and (4) act in an advisory capacity to management, the Board of Directors, and the Chairman, President and Chief Executive Officer on other financial matters as they may arise. The Finance Committee met three times during 1996. This Committee consists of the following members of the Board: Walter D. Scott, Chairman, Richard R. Berry, Larry D. Haab, C. Steven McMillan, Robert M. Powers, and Marilou von Ferstel. Compensation and Nominating Committee (1) Review performance and recommend salaries plus other forms of compensation of elected Illinois Power officers and the Board of Directors; (2) review Illinois Power's benefit plans for elected Illinova officers and make recommendations to the Board regarding any changes deemed necessary; (3) review with the Chairman, President and Chief Executive Officer any organizational or other personnel matters; and (4) recommend to the Board nominees to stand for election as director to fill vacancies in the Board of Directors as they occur. The Compensation and Nominating Committee will consider shareholders' recommendations for nominees for director made pursuant to timely notice in writing addressed to the Chairman of the Committee at the executive offices of Illinois Power, together with a full description of the qualifications and business and professional experience of the proposed nominees and a statement of the nominees' willingness to serve. To be timely, the notice shall be delivered to or mailed and received at the executive offices of Illinois Power not less than 90 nor more than 120 days prior to the Annual Meeting. The Compensation and Nominating Committee met four times during 1996. This Committee consists of the following Outside Directors: Donald S. Perkins, Chairman, Robert M. Powers, Walter D. Scott, Ronald L. Thompson, Marilou von Ferstel, and John D. Zeglis. Nuclear Operations Committee (1) Review the safety, reliability and quality of nuclear operations; (2) review the effectiveness of the management of nuclear operations; (3) review the strategic plan of nuclear operations; (4) review various nuclear reports; and (5) report its findings to the Board. The Nuclear Operations Committee met three times during 1996. This Committee consists of the following members of the Board: Walter M. Vannoy, Chairman, Richard R. Berry, Larry D. Haab, and Robert M. Powers. Board Compensation The Outside Directors of Illinois Power, all of whom also serve on the Board of Illinova, receive a total retainer fee of $18,000 per year for their service on these boards. Outside Directors who also chair Board Committees receive an additional $2,000 per year retainer. Outside Directors receive a grant of 650 shares of Illinova Common Stock on the date of each Annual Shareholders Meeting, representing payment in lieu of attendance-based fees for all Board and Committee meetings to be held during the subsequent one-year period. Outside Directors elected to the Board between Annual Shareholders Meetings are paid $850 for each Board and Committee meeting attended prior to the first Annual Shareholders Meeting after their election to the Board. Illinova had a Retirement Plan for Outside Directors. Under this plan, each Outside Director who attained age 65 and served on the Board for a period of 60 or more consecutive months was eligible for annual retirement benefits at the rate of the annual retainer fee in effect when the director retired. In 1996, the Board of Directors adopted a Comprehensive Deferred Stock Plan for Outside Directors, replacing the Retirement Plan. Each former Outside Director whose right to receive the retirement benefit had vested continues to receive such benefits in accordance with the term of the Retirement Plan. All Outside Directors serving at the time this new plan was adopted were granted a lump sum amount based on the net present value of these benefits to them, were they to have retired under the Retirement Plan, based on the number of years they have served on the Board but not to exceed 10. This dollar amount was converted into stock units, based on the then market value of Illinova Common Stock, and placed into an account. The value of these stock units is to be paid out to the director in cash on termination of service, based on the then market value of Illinova Common Stock, plus dividend equivalents, in a lump sum or installments. In addition, each Outside Director receives an annual award of stock units having a value of $6,000, to be paid to the Outside Director in cash on retirement, at once or in installments as the Director may elect, with the amount of such payment determined by multiplying the number of stock units in the account times the then market value of Illinova Common Stock, and adding the dividend equivalents attributable to such stock units. Pursuant to Illinova's Deferred Compensation Plan for Certain Directors, Outside Directors may elect to defer all or any portion of their fees and stock grants until termination of their services as directors. Such deferred amounts are converted into stock units representing shares of Illinova Common Stock with the value of each stock unit based on the last reported sales price of such stock. Additional credits are made to the participating director's account in dollar amounts equal to the dividends paid on the Common Stock which the director would have received if the director had been the record owner of the shares represented by stock units, and are converted into additional stock units. On termination of the participating directors' services as directors, payment of their deferred fees and stock grants is made in shares of Illinova Common Stock in an amount equal to the aggregate number of stock units credited to their accounts. Such payment is made in such number of annual installments as Illinova may determine beginning in the year following the year of termination. Election of Directors Illinois Power's entire Board of Directors is elected at each Annual Meeting of Shareholders. Directors hold office until the next Annual Meeting of Shareholders or until their successors are elected and qualified. At the Annual Meeting a vote will be taken on a proposal to elect the 10 directors nominated by Illinois Power's Board of Directors. The names and certain additional information concerning each of the director nominees is set forth on the following pages. If any nominee should become unable to serve as a director, another nominee may be selected by the current Board of Directors. Name of Director Nominee, Age, Year in Which First Business Experience and Elected a Director Other Information of Illinova Richard R. Berry, 65 1988 - ---------- / / From June 1983 until retirement in February 1990, Mr. Berry was / / Executive Vice President and director of Olin Corporation, Stamford, / Picture/ Conn., a diversified manufacturer concentrated in chemicals, metals / / and aerospace/defense products. - ---------- Larry D. Haab, 59 1986 - ----------- / / Chairman, President and Chief Executive Officer of Illinova since / / December 1993, and of Illinois Power since June 1991, and an / Picture / employee of Illinois Power since 1965. He is a director of First / / Decatur Bancshares, Inc.; The First National Bank of Decatur; and - ----------- Firstech, Incorporated. C. Steven McMillan, 51 1996 - ----------- / / Executive Vice President and Director of Sara Lee Corporation, / / Chicago, Ill., a global packaged food and consumer products / Picture / company, since 1993. He was Senior Vice President-Strategy / / Development from 1986 to 1993. He is Chairman of the Board of - ----------- Electrolux Corporation. Robert M. Powers, 65 1984 - ----------- / / From 1980 until retirement in December 1988, Mr. Powers was / / President and Chief Executive Officer of A. E. Staley / Picture / Manufacturing Company, Decatur, Ill., a processor of grain and / / oil seeds. He is a director of A. E. Staley Manufacturing Company. - ----------- Sheli Z. Rosenberg, 55 - ------------ / / President and Chief Executive Officer since 1994 and General / / Counsel 1980 to 1994 of Equity Group Investments, Inc., / Picture / Chicago, Ill., a privately held business conglomerate holding / / controlling interests in 10 publicly traded corporations involved - ------------ in basic manufacturing, radio stations, retail, insurance, and real estate. She is a director of American Classic Voyages Company; REVCO D.S., Inc.; Quality Food Centers, Inc.; Jacor Communications, Inc.; Anixter Corporation; Capsure Holdings Corporation; Falcon Building Products; and Equity Residential Properties Trust. Walter D. Scott, 65 1990 - ------------- / / Professor of Management and Senior Austin Fellow, J. L. Kellogg / / Graduate School of Management, Northwestern University, / Picture / Evanston, Ill., since 1988. He was Chairman of GrandMet USA / / from 1984 to 1986 and President and Chief Executive Officer of - ------------- IDS Financial Services from 1980 to 1984. He is a director of Chicago Title and Trust Company, Chicago Title Insurance Company, and Intermatic Incorporated. Ronald L. Thompson, 47 1991 - ------------- / / Chairman and Chief Executive Officer of Midwest Stamping / / and Manufacturing Co., Bowling Green, Ohio, a manufacturer / Picture / of automotive parts, since 1993. He was President and / / Chief Executive Officer and a director of The GR Group, Inc., - ------------- St. Louis, Mo., from 1980 to 1993. He is a director of McDonnell Douglas Corporation, Teachers Insurance and Annuity Association, and Ryerson Tull. Walter M. Vannoy, 69 1990 - -------------- / / Chairman until retirement in May 1995 and Chief Executive / / Officer from May 1994 until January 1995 of Figgie / Picture / International, Inc., Willoughby, Ohio, a diversified / / operating company serving consumer, industrial, technical, - -------------- and service markets world-wide. From 1980 to 1988 he was President and Chief Operating Officer, Babcock and Wilcox, and Vice Chairman of McDermott International. He is a director of Figgie International, Inc. Marilou von Ferstel, 59 1990 - -------------- / / Executive Vice President and General Manager of Ogilvy / / Adams & Rinehart, Inc., a public relations firm in Chicago, / Picture / Ill., since June 1990. She was Managing Director and Senior / / Vice President of Hill and Knowlton, Chicago, Ill., from 1981 - -------------- to 1990. She is a director of Walgreen Company. John D. Zeglis, 49 1993 - -------------- / / Senior Executive Vice President and General Counsel of / / AT&T, Basking Ridge, N.J., a diversified communications / Picture / company, since 1995. He was Senior Vice President-General / / Counsel and Government Affairs from 1989 to 1995. He is a - -------------- director of the Helmerich & Payne Corporation. Security Ownership of Management and Certain Beneficial Owners The following table shows shares of stock beneficially owned as of January 31, 1997, by each director nominee and the executive officers named in the Summary Compensation Table. To the best of Illinova's knowledge, no owner holds more than 5 percent of Illinova Common Stock. Number of Shares Name of Class Beneficially Percent Beneficial Owner of Stock Owned (1) of Class - ------------------------------------------------------------------------------ Richard R. Berry Common 4,390 (2) Larry D. Haab Common 10,725 (2) C. Steven McMillan Common 650 (2) Robert M. Powers Common 7,900 (2) Sheli Z. Rosenberg Common 0 (2) Walter D. Scott Common 4,500 (2) Ronald L. Thompson Common 4,338 (2) Walter M. Vannoy Common 4,000 (2) Marilou von Ferstel Common 4,907 (2) John D. Zeglis Common 3,154 (2) Paul L. Lang Common 3,162 (2) Larry F. Altenbaumer Common 4,644 (2) John G. Cook Common 1,862 (2) Wilfred Connell Common 1,630 (2)
(1) The nature of beneficial ownership for shares shown is sole voting and/or investment power. (2) No director or executive officer owns any other equity securities of Illinova. No director or executive officer owns as much as 1% of the Common Stock. All directors and executive officers of both Illinova and Illinois Power Company as a group own 64,658 shares of Common Stock (less than 1%). (3) This number includes 1105 stock units under the Directors' Deferred Compensation Plan. (4) This number includes 664 stock units under the Directors' Deferred Compensation Plan. Executive Compensation The following table sets forth a summary of the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of Illinois Power Company for the years indicated. The compensation shown includes all compensation paid for service to Illinois Power, its parent and subsidiaries. Summary Compensation Table Long-Term Compensation Annual Compensation Awards --------------------------------- ----------------------------- Other Restricted Securities All Other Bonus Annual Stock Awards Underlying Compensation Name and Principal Position Year Salary (1) Compensation (2) Options (3) - ------------------------------------------------------------------------------------------------------------------------------ Larry D. Haab 1996 $ 493,709 $ 69,267 $ 15,973 $ 69,267 22,000 shs. $ 2,615 Chairman, President and 1995 472,250 91,144 19,088 91,144 20,000 shs. 2,550 Chief Executive Officer of 1994 451,375 42,881 15,783 42,881 20,900 shs. 360 Illinova and Illinois Power Paul L. Lang 1996 $ 233,450 $ 19,747 $ 8,863 $ 19,747 6,500 shs. $ 2,595 Senior Vice President 1995 222,812 23,841 8,265 23,841 6,500 shs. 2,510 of Illinois Power 1994 213,562 20,289 8,672 20,289 6,800 shs. 440 Larry F. Altenbaumer 1996 $ 222,374 $ 19,832 $ 8,459 $ 19,832 7,500 shs. $ 1,976 Chief Financial Officer, 1995 204,937 20,391 7,686 20,391 6,500 shs. 2,378 Treasurer and Controller 1994 196,562 18,674 8,975 18,674 6,800 shs. 400 of Illinova, and Senior Vice President and Chief Financial Officer of Illinois Power John G. Cook 1996 $ 196,474 $ 16,293 $ 7,409 $ 16,293 6,500 shs. $ 2,575 Senior Vice President 1995 179,069 16,620 6,930 16,620 4,500 shs. 2,530 of Illinois Power 1994 163,708 15,553 7,068 15,553 4,400 shs. 400 Wilfred Connell 1996 $ 185,950 $ 9,832 $ 7,373 $ 9,832 4,500 shs. $ 2,559 Vice President 1995 172,975 16,087 7,230 16,087 3,900 shs. 2,402 of Illinois Power 1994 165,562 15,729 7,705 15,729 4,400 shs. 480
(1) The amounts shown in this column are the cash award portion of grants made to these individuals under the Executive Incentive Compensation Plan ("Compensation Plan") for 1996, including amounts deferred under the Executive Deferred Compensation Plan. See the Compensation Plan description in footnote (2) below. (2) This table sets forth stock unit awards for 1996 under the Compensation Plan. One-half of each year's award under this plan is converted into stock units representing shares of Illinova Common Stock based on the closing price of Common Stock on the last trading day of the award year. The other one-half of the award is cash and is included under Bonus in the Summary Compensation Table. Stock units awarded in a given year, together with cash representing the accumulated dividend equivalents on those stock units, become fully vested after a three-year holding period. Stock units are converted into cash based on the closing price of Common Stock on the first trading day of the distribution year. Participants (or beneficiaries of deceased participants) whose employment is terminated by retirement on or after age 55, disability, or death receive the present value of all unpaid awards on the date of such termination. Participants whose employment is terminated for reasons other than retirement, disability, or death forfeit all unvested awards. In the event of a termination of employment within two years after a change in control of Illinova, without good cause or by any participant with good reason, all awards of the participant become fully vested and payable. As of December 31, 1996, named executive officers were credited with the following total aggregate number of unvested stock units under the Compensation Plan since its inception, valued on the basis of the closing proce of Common Stock on December 31, 1996: Mr. Haab, 7,085 units valued at $214,633; Mr. Lang, 2,550 units valued at $70,123; Mr. Altenbaumer, 2,353 units valued at $64,718; Mr. Cook, 1,939 units valued at $53,330; Mr. Connell, 1,695 units valued at $46,600. Although stock units have been rounded, valuation is based on total stock units, including partial shares. (3) The amounts shown in this column are Illinois Power's contributions under the Incentive Savings Plan (including the market value of shares of Illinova Common Stock at the time of allocation). The following tables summarize grants during 1996 of stock options under Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards outstanding at year end for the individuals named in the Summary Compensation Table. Option Grants In 1996 Individual Grants -------------------------------------------------------------- Number of Securities % of Total Options Underlying Options Granted to Employees Exercise or Base Grant Date Granted (1) in 1996 Price Per Share (1) Expiration Date Present Value (2) ---------------------------------------------------------------------------------------------------------- Larry D. Haab 22,000 27% $29.75 2/7/2006 $ 125,400 Paul L. Lang 6,500 8% 29.75 2/7/2006 37,050 Larry F. Altenbaumer 7,500 9% 29.75 2/7/2006 42,750 John G. Cook 6,500 8% 29.75 2/7/2006 37,050 Wilfred Connell 4,500 6% 29.75 2/7/2006 26,650
(1) Each option becomes exercisable on February 7, 1999. In addition to the specified expiration date, the grant expires on the first anniversary of the recipient's death and/or the 90th day following retirement, and is not exercisable in the event a recipient's employment terminates. In the event of certain change-in-control circumstances, the Compensation and Nominating Committee may declare the option immediately exercisable. The exercise price of each option is equal to the fair market value of the Common Stock on the date of the grant. Recipients shall also receive, on or shortly after February 7, 1999, a target performance award, determined by calculating the difference between the return earned by Illinova on its invested capital and its cost of capital (the "spread"), then comparing this spread to that of a peer group and reducing or increasing the target award depending on Illinova's relative performance, but not reducing the payment below zero. The target award is equal to one-half of the mid-point of compensation for each officer's salary grade (a market-based number) times a percentage, determined by the Compensation and Nominating Committee. In 1996 those percentages ranged between 15 and 35 percent. At the discretion of the Board of Directors, the foregoing payment may be made in the form of Illinova Common Stock of equivalent value based on the average New York Stock Exchange price of the stock during February, 1999, or in cash. (2) The Grant Date Present Value has been calculated using the Black-Scholes option pricing model. Disclosure of the Grant Date Present Value, or the potential realizable value of option grants assuming 5% and 10% annualized growth rates, is mandated by regulation; however, Illinova does not necessarily view the Black-Scholes pricing methodology, or any other present methodology, as a valid or accurate means of valuing stock option grants. The calculation was based on the following assumptions: (i) As of the grant date, Illinova's calculated Black-Scholes ratio was .2036. After discounting for risk of forfeiture at three percent per year over Illinova's three-year vesting schedule, the ratio is reduced to .1914; (ii) An annual dividend yield on Illinova Common Stock of 3.84%; (iii) A risk-free interest rate of 5.87%, based on the yield of a zero-coupon government bond maturing at the end of the option term; and (iv) Stock volatility of 17.34%. 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 16,000 shs./82,900 shs. $66,000/$255,963 Paul L. Lang 5,000 shs./25,800 shs. $20,625/$81,613 Larry F. Altenbaumer 5,000 shs./26,800 shs. $20,625/$81,613 John G. Cook 2,500 shs./18,400 shs. $10,313/$50,713 Wilfred Connell 3,000 shs./17,300 shs. $12,375/$54,013
Pension Benefits Illinois Power maintains a Retirement Income Plan for Salaried Employees (the "Retirement Plan") providing pension benefits for all eligible salaried employees. In addition to the Retirement Plan, Illinois Power also maintains a nonqualified Supplemental Retirement Income Plan for Salaried Employees (the "Supplemental Plan") that covers all elected officers eligible to participate in the Retirement Plan and provides for payments from general funds of Illinois Power of any monthly retirement income not payable under the Retirement Plan because of benefit limits imposed by law or because of certain Retirement Plan rules limiting the amount of credited service accrued by a participant. The following table shows the estimated annual pension benefits on a straight life annuity basis payable upon retirement based on specified annual average earnings and years of credited service classifications, assuming continuation of the Retirement Plan and Supplemental Plan and employment until age 65. This table does not show, but any actual pension benefit payments would be subject to, the Social Security offset. 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, 1996, for purposes of both the Retirement Plan and the Supplemental Plan, Messrs. Haab, Lang, Altenbaumer, Cook and Connell had completed 31, 10, 24, 21 and 13 years of credited service, respectively. Employee Retention Agreements Illinova has entered into Employee Retention Agreements with each of its executive officers and officers of its subsidiaries. Under each agreement, the officer would be entitled to receive a lump sum cash payment if his or her employment were terminated by Illinova without good cause or voluntarily by the officer for good reason within two years following a change in control of Illinova (as defined in the Agreement). The amount of the lump sum payment would be equal to (1) 36 months' salary at the greater of the officer's salary rate in effect on the date the change in control occurred or the salary rate in effect on the date the officer's employment with Illinova terminated; plus (2) three times the latest bonus earned by the officer during the three calendar years preceding termination of employment. Under the agreement, the officer would continue, after any such termination of employment, to participate in and receive benefits under other benefit plans of Illinova. Such coverage would continue for 36 months following termination of employment, or, if earlier, until the officer reached age 65 or was employed by another employer; provided that, if the officer was 50 years of age or older at the time of such termination, then coverage under health, life insurance and similar welfare plans would continue until the officer became 55 years of age, at which time he or she would be eligible to receive the benefits extended to the employees of Illinova who elect early retirement. Compensation and Nominating Committee Report on Officer Compensation The six-member Compensation and Nominating Committee of the Board of Directors (the "Committee") is composed entirely of Outside Directors. The Committee's role includes a review of the performance of the elected officers and the establishment of specific officer salaries subject to Board approval. The Committee establishes performance goals for the officers under the Compensation Plan, approves payments made pursuant to the Compensation Plan and recommends grants under the Long-Term Incentive Compensation Plan approved by the shareholders in 1992. The Committee also reviews other forms of compensation and benefits making recommendations to the Board on changes whenever appropriate. The Committee carries out these responsibilities with assistance from an executive compensation consulting firm and with input from the Chief Executive Officer and management as it deems appropriate. Officer Compensation Philosophy Illinova's compensation philosophy reflects a commitment to compensate officers competitively with other companies in the electric and gas utility industry while rewarding executives for achieving levels of operational and financial excellence consistent with continuous improvement in customer satisfaction and shareholder value. Illinova's compensation policy is to provide a total compensation opportunity targeted to all utilities in the Edison Electric Institute (EEI) database. Eighty-four percent of the companies in the S & P Utilities Index are also in the EEI database. The S&P Utilities Index is used to relate Illinova's shareholder value in the following performance graphs. The S&P index covers the utility indsutry broadly including electric, gas, and telecommunication utilities. After careful consideration, the Committe has decided to maintain a separate compensation peer group limited to electric or combination electric and gas companies for reference purposes. As an additional point of reference, Illinova also looks at the pay practices of general industry (non-utility) companies. While such pay practices have not traditionally been a major driver of Illinova's compensation philosophy, this reference point may be regarded more closely in the future as the utility indsutry migrates toward deregulation and diversification. The compensation program for officers consists of base salary, annual incentive and long-term incentive components. The combination of these three elements balances short- and long-term business performance goals and aligns officer financial rewards with those of Illinova's shareholders. The compensation program is structured so that, depending on the salary level, between 25 and 45 percent of an officer's total compensation target is composed of incentive compensation. Base Salary Plan The Committee determines base salary ranges for executive officers based on competitive pay practices of similar utilities. Officer salaries correspond to approximately the average of the companies in the compensation peer group. Individual increases are based on several factors, including the officer's performance during the year, the relationship of the officer's salary to the market salary level for the position and competitive industry salary increase practices. Annual Incentive Compensation Plan Annual incentive awards are earned based on the achievement of specific annual financial and operational goals by the Illinois Power officer group as a whole and consideration of the officer's individual contribution. If payment is earned under this Plan, one-half of the bonus is payable in cash during the year following the award year, and one-half is credited to the participant in the form of Common Stock units, the number of which is determined by dividing half of the earned bonus amount by the closing price of the Common Stock on the last trading day of the award year. The officer's interest in the stock units vests at the end of the three-year period which begins the year after the award year. The officer receives this award in cash equal to (1) the closing stock price on the first trading day of the distribution year times the number of units held plus (2) dividend equivalents that would have been received if the stock had actually been issued. For Illinois Power officers, 1996 awards under the Compensation Plan are based on achievement in the performance areas: earnings per share, customer satisfaction, safety and employee teamwork, cost management and shareholder value added. Up to 25 percent of the awarded amount is based on an assessment of the individual officer's performance during the year. Awards shown under Bonus in the Summary Compensation Table for performance during 1996 were based on the following results. Earnings per share, customer satisfaction and shareholder value added were at or better than the threshold level for the award. Safety performance and cost management performance were not at threshold for the award. Long-Term Incentive Compensation Plan Awards under the LTIC Plan are based on corporate performance as well as individual officers' contribution to corporate performance subject to the review of this Committee. The Committee may grant awards in the form of stock options, stock appreciation rights, dividend equivalents, restricted stock grants or performance-based cash awards. In 1996, it was determined that awards under the LTIC plan be delivered in two components. One-half of each officer's LTIC plan award is delivered in the form of stock options granted at fair market value. The stock options granted to the officers for 1996 represent an award based on Illinova and individual performance as evaluated by the Chairman and reviewed by the Committee. The other half of the LTIC plan award is distributed to officers in cash based upon Illinova's Share- holder Value-Added (SVA) performance relative to a peer group of other utility companies, as measured in overlapping three-year periods. Since 1996 represented the first year of SVA plan's first measurement cycle, no awards are due to be paid out under the plan until 1999. CEO Compensation Larry Haab became Chairman, President, and Chief Executive Officer ("CEO") of Illinois Power on June 12, 1991, and Chairman, President and Chief Executive Officer of Illinova in December 1993. Illinova based Mr. Haab's 1996 compensation on the policies and plans described above. The Committee invokes the active participation of all non-management directors in reviewing Mr. Haab's performance before it makes recommendations regarding his compensation. The Committee is responsible for administering the processes for completing this review. The process starts early in the year when the Board of Directors works with Mr. Haab to establish his personal goals and short- and long-term strategic goals for Illinova. At the conclusion of the year Mr. Haab reviews his performance with the non-management directors. The Committee oversees this review and recommends to the Board appropriate adjustments to compensation. In setting the CEO's salary for 1996, the Committee, with the participation of all Outside Directors, determined that important goals were achieved and the results for Illinova for the year were strong. Mr. Haab's vision of the industry's evolution has led, and is continuing to lead, to appropriate redeployment of Illinova resources. The Committee concluded that in 1996 Mr. Haab's performance continued to advance Illinova toward the accomplishment of its strategic objectives. The 1996 Annual Incentive Compensation Plan award for the Chief Executive Officer was calculated consistent with the determination of awards for all other Illinois Power officers. Under the terms of the plan, one-half of the award was paid in cash and one-half was converted to 2,519 stock units which vest over a three-year period as described above. The 22,000 option shares granted to the CEO reflect the Committee's recognition of his work in directing Illinova towards its long-term objectives of outstanding customer satisfaction and sustained growth in shareholder return. Compensation and Nominating Committee Donald S. Perkins, Chairman Robert M. Powers Walter D. Scott Ronald L. Thompson Marilou von Ferstel John D. Zeglis Independent Auditors The Board of Directors of Illinois Power has selected Price Waterhouse LLP as independent auditors for the Company for 1997. A representative of that firm will be present at the Annual Meeting and available to make a statement and to respond to questions. Other Matters Illinova's 1996 Summary Annual Report to Shareholders was mailed to Illinois Power's shareholders commencing on March 3, 1997. Copies of Illinois Power's Annual Report on Form 10-K will be available to shareholders, after its filing with the Securities and Exchange Commission on or before March 31, 1997. Requests should be addressed to Investor Relations, G-21, Illinois Power Company, 500 South 27th Street, Decatur, Illinois 62525-1805. Any proposal by a shareholder to be presented at the next Annual Meeting must be received at Illinois Power's executive offices not later than November 3, 1997. Other Business Management does not know of any matter which will be presented for consideration at the Annual Meeting other than the matters described in the accompanying Notice of Annual Meeting. By Order of the Board of Directors, Leah Manning Stetzner, Vice President, General Counsel and Corporate Secretary Decatur, Illinois March 3, 1997 Appendix: 1996 Annual Report to Shareholders Table of Contents Management's Discussion and Analysis . . . . . . . . . . . . . . . . . . A-2 Responsibility for Information . . . . . . . . . . . . . . . . . . . . . A-10 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . A-10 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . A-11 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . A-12 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . A-13 Consolidated Statements of Retained Earnings . . . . . . . . . . . . . . A-13 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . A-14 Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . A-32 Selected Statistics . . . . . . . . . . . . .. . . . . . . . . . . . . . A-33 Management's Discussion and Analysis In this report, we refer to the Consolidated Financial Statements, related Notes to Consolidated Financial Statements, Selected Consolidated Financial Data and Selected Statistics for information concerning consolidated financial position and results of operations. A discussion of the factors having significant impact upon consolidated financial position and results of operations since January 1, 1994, is below. Illinois Power Company (IP) is a subsidiary of Illinova Corporation (Illinova), a holding company. Illinova was officially formed on May 27, 1994, with the filing of documents with the Illinois Secreatry of State. Illinova became the parent of IP through a merger pursuant to a share-for-share conversion of IP common stock into Illinova common stock. Illinova Generating Company, Illinova Power Marketing, Inc., Illinova Energy Partners, Inc. and Illinova Insurance Company are also wholly owned subsidiaries of Illinova. IP is the primary business and subsidiary of Illinova, and is engaged in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the State of Illinois. Open Access and Wheeling On March 29, 1995, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) initiating the process of mandating non-discriminatory open access to public utility transmission services at cost-based rates. Transmission of electricity for a reseller or redistributor of energy is called wholesale wheeling. Transmission of electricity for end- use customers is known as retail wheeling. On April 24, 1996, FERC issued Orders 888 and 889 which established the Final Rule resulting from the NOPR. The Orders became effective July 9, 1996. The Rule requires that all public utilities under FERC jurisdiction that own transmission facilities file Open Access Transmission Tariffs (OATTs) in compliance with Pro Forma Tariffs attached to the Order. FERC also requires that all wholesale sales made by a utility provide for transmission of the power under the terms and conditions of the OATTs. Public utilities serving customers at retail are not required, at this time, to use the OATTs to serve retail customers. The Orders do not require that retail customers be given access to alternate energy suppliers or be found eligible as customers under the OATTs. IP made a compliance filing as required on July 9, 1996, which has been accepted by FERC. While the move to open-access transmission service will likely increase the level of competition in the wholesale energy market, it is not expected to have a significant financial impact. Competition On November 21, 1996, IP and its partners in the Illinois Coalition for Responsible Electricity Choice announced a legislative proposal which would begin transformation of the Illinois electric industry from a highly regulated monopoly to a competitive, customer-choice environment. The proposal, which was introduced in the Illinois House of Representatives on January 29, 1997, would allow for a managed transition to direct access for all consumers by the year 2005. The plan would balance the need to ensure the financial stability of current utility providers with the timing of customer choice. Other parties have introduced plans that would not provide for this balance, and would allow full competition by as early as 1998. The Joint Committee on Electric Utility Regulatory Reform of the Illinois General Assembly deliberated the issue of regulatory reform for 18 months. Their report, issued December 4, 1996, stated that the Committee was unable to reach consensus on a legislative proposal. It is reasonable to assume that significant change will be made to the state laws governing IP's electric operations, but impossible to predict what these changes will be. IP received approval from the Illinois Commerce Commission (ICC) on March 13, 1996, and from FERC on April 24, 1996, to conduct an open access experiment beginning in 1996 and ending on December 31, 1999. The experiment allows certain industrial customers to purchase electricity and related services from other sources. On April 25, 1996, the first of the 21 eligible customers began buying part of their electricity from a supplier other than IP. Currently, 16 customers are participating in the experiment. The experiment has demonstrated some of the immediate advantages competition brings to customers, such as lower prices and innovative service offerings. It has also provided evidence of some of the challenges the industry faces as it moves toward customer choice. Challenges include dispatching small amounts of electricity such as one or two megawatt hours (MWHs), and the absence of requisite technology to dispatch fractional MWHs. In 1996, the experiment cost IP approximately $3.2 million in lost revenue net of avoided fuel cost and variable operating expenses. This loss was partially offset by selling the surplus energy and capacity on the open market and by $.9 million in transmission service charges. The issue of competition is one that raises both risks and opportunities. At this time, the ultimate effect of competition on Illinova's consolidated financial position and results of operations is uncertain. See "Note 1 - Summary of Significant Accounting Policies" of the "Notes to Consolidated Financial Statements" for additional discussion of the effects of regulation. Regulatory Matters On September 6, 1996, a leaking seal in one of two reactor recirculation pumps caused IP to shut down Clinton Power Station (Clinton). While a plant shutdown to correct this problem would not be a major concern in itself, the event was significant because of broader issues which surfaced during subsequent internal investigations, involving operating philosophies, procedure compliance issues, degree of management oversight, and tolerance of equipment problems. This event prompted two special team inspections by the Nuclear Regulatory Commission (NRC). The first inspection covered the events associated with the leaking pump seal and the shutdown, while the second focused more broadly on operations at Clinton. In a public meeting held on October 4, 1996, the NRC discussed its findings, expressing concern over both the handling of the pump seal problem and general plant operating philosophies. It also commended subsequent actions taken by IP to address the issues raised. IP decided not to restart Clinton prior to the start of the scheduled refueling outage on October 13, 1996. An action plan was developed to address the operational weaknesses identified by IP. Work began to correct the items in the action plan while the refueling outage progressed. On November 19, 1996, the NRC issued a formal report of its two teams' inspections. IP agreed with the majority of the report's findings. The concerns of the NRC that had not already been addressed were incorporated into IP's action plan. On January 29, 1997, the NRC informed IP that it viewed Clinton as having a declining safety performance trend. The NRC did not, however, place Clinton on its "watch list." The NRC acknowledged that IP has allocated additional resources to correct deficiencies and noted recent conservative decisions made by management that have impacted the length of the refueling outage schedule. The NRC held an enforcement conference with IP on February 4, 1997, to discuss the event and other issues identified during assessments and inspections. The plant will remain shut down until IP management is satisfied that all safety concerns have been addressed. The operation and maintenance expense of the outage, including the scheduled refueling outage, is estimated at $30 million. The refueling outage was budgeted at $18 million. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement and severance programs. During the fourth quarter of 1995, 727 employees accepted enhanced retirement or severance under these programs. The combined enhanced retirement and severance programs generated a pretax charge of $38 million against fourth quarter 1995 earnings. Consolidated Results of Operations Overview Earnings applicable to common stock were $206 million for 1996, $156 million for 1995 and $162 million for 1994. The increase in 1996 net income over 1995 was due primarily to the one-time charge in 1995 for the enhanced retirement and severance programs, lower operations expense due to the employment decrease, and lower financing costs. The 1995 results include $(22.8) million net-of-tax for the enhanced retirement and severance programs and $(3.5) million for the carrying amount under consideration paid for preferred stock redeemed in December 1995. The 1995 earnings as compared to 1994 also reflect increased electric sales due to unseasonably warm summer weather; partially offset by increased operating and maintenance expenses due to the Clinton refueling and maintenance outage. The 1994 results include $6.4 million for the carrying amount over consideration paid for preferred stock redeemed in December 1994 and reflect an increase in gas rates as a result of IP's 1994 gas rate order. The 1994 earnings also reflect increased electric sales, lower operating and maintenance expenses due to cost management efforts, no Clinton refueling and maintenance outage, and lower financing costs as compared to 1993. The ICC and FERC determine IP's rates for electric service at the retail and wholesale levels, respectively, and the ICC determines IP's rates for gas service. These rates are designed to recover the cost of service and allow shareholders the opportunity to earn a fair rate of return. Future electric and natural gas sales, including interchange sales, will continue to be affected by an increasingly competitive marketplace, changes in the regulatory environment, increased transmission access, weather conditions, competing fuel sources, interchange market conditions, plant availability, fuel cost recoveries, customer conservation efforts and the overall economy. Operating Revenues (Millions of dollars) 1996 $1,688.7 1995 $1,641.4 1994 $1,589.5 1993 $1,581.2 1992 $1,479.5
Electric Operations For the years 1994 through 1996, electric revenues including interchange increased 4.1% and the gross electric margin increased 6.1% as follows: - --------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - --------------------------------------------------------------------- Electric revenues $ 1,202.9 $ 1,252.6 $ 1,177.5 Interchange revenues 137.6 116.3 110.0 Fuel cost & power purchased (313.3) (333.4) (319.2) - ---------------------------------------------------------------------- Electric margin $ 1,027.2 $ 1,035.5 $ 968.3
The components of annual changes in electric revenues were: - ---------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - ---------------------------------------------------------------------- Price $ (7.2) $ 13.3 $ (23.2) Volume and other 6.4 42.7 44.1 Fuel cost recoveries (48.9) 19.1 21.0 - ---------------------------------------------------------------------- Revenue increase (decrease) $ (49.7) $ 75.1 $ 41.9
1996 Electric revenues excluding interchange sales decreased 4.0%, primarily due to reduction in revenues under the Uniform Fuel Adjustment Clause (UFAC). Volume changes by customer class were insignificant, as kilowatt-hour sales Major Sources of Electric Energy (Millions of megawatt-hours) 1996 1995 1994 Fossil 16.3 14.5 13.2 Nuclear 4.6 5.3 6.4 Purchases 3.4 3.2 3.1
to ultimate consumers (excluding interchange sales and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of higher plant availability in the first half of the year. 1995 The 6.4% increase in electric revenues was primarily due to a 1.9% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher residential sales (4.8%) and higher commercial sales (8.2%) due to an improving economy and warmer summer temperatures compared to 1994. Industrial sales remained essentially unchanged from 1994. Interchange revenues increased $6.3 million (5.8%) as a result of increased sales opportunities. 1994 The 3.7% increase in electric revenues was primarily due to a 6.3% increase in kilowatt-hour sales to ultimate consumers (excluding interchange sales and wheeling). Volume increases resulted from higher commercial sales (8.3%) and higher industrial sales (7.0%) due to an improving economy. Residential sales remained essentially unchanged from 1993 primarily due to milder temperatures in 1994 as compared to 1993. Interchange sales decreased 19.6% from 1993 levels primarily due to unusually large sales opportunities in 1993. The cost of meeting IP's system requirements was reflected in fuel costs for electric plants and power purchased. Changes in these costs are detailed below: - ---------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 Fuel for electric plants Volume and other $ 15.4 $ 9.8 $ 13.8 Price (12.0) (35.5) (14.3) Emission allowances .8 18.5 - Fuel cost recoveries (30.0) 14.5 32.0 - ----------------------------------------------------------------------- (25.8) 7.3 31.5 Power purchased 5.7 6.9 (25.9) - ----------------------------------------------------------------------- Total increase (decrease) $ (20.1) $ 14.2 $ 5.6 - ----------------------------------------------------------------------- Weighted average system generating fuel cost ($/MWH) $ 11.01 $ 11.41 $ 12.72 - ------------------------------------------------------------------------
System load requirements, generating unit availability, fuel prices, purchased power prices, resale of energy to other utilities, emission allowance purchases and fuel cost recovery through UFAC caused changes in these costs. Changes in factors affecting the cost of fuel for electric generation are below: - ----------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------- Increase in generation 5.4% .7% 8.2% Generation mix Coal and other 78% 73% 67% Nuclear 22% 27% 33% - -----------------------------------------------------
1996 The cost of fuel decreased 9.4% and electric generation increased 5.4%. The decrease in fuel cost was primarily attributable to the effects of the UFAC, as well as a favorable price variance. These factors were partially offset by an increase in fuel cost due to the increase in generation. Power purchased increased $5.7 million primarily due to the extended Clinton outage. Clinton's equivalent availability and generation were lower than in 1995 due to that outage. Fuel Cost Per Million Btu (Percent of generation) Coal $1.28 76% Nuclear $ .81 22% Other $1.68 2%
1995 The cost of fuel increased 2.8% and electric generation increased .7%. The increase in fuel cost was attributable to the effects of the UFAC, the increase in higher-cost fossil generation and the cost of emission allowances. Clinton's equivalent availability and generation were lower in 1995 as compared to 1994 due to the scheduled refueling and maintenance outage. Clinton returned to service April 29, 1995, after completing its fifth refueling and maintenance outage, which began March 12, 1995. Power purchased increased $6.9 million. 1994 The cost of fuel increased 13.4% and electric generation increased 8.2%. The increase in fuel cost was attributable to the effects of the UFAC, partially offset by a decrease in fossil generation and an increase in lower- cost nuclear generation. Clinton's equivalent availability and generation were higher in 1994 as compared to 1993 due to no refueling and maintenance outage. Power purchased for the period decreased $25.9 million. Unusually large interchange sales opportunities during 1993, which did not recur in 1994, were the primary cause of the decrease in purchased power. Gas Operations For the years 1994 through 1996, gas revenues including transportation increased 15.3%, while the gross margin on gas revenues increased 12.4% as follows: - -------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - -------------------------------------------------------- Gas revenues $ 341.4 $ 264.5 $ 293.2 Gas cost (202.6) (138.8) (172.4) Transportation revenues 6.8 8.0 8.8 - --------------------------------------------------------- Gas margin $ 145.6 $ 133.7 $ 129.6 - --------------------------------------------------------- (Millions of therms) Therms sold 703 588 584 Therms transported 251 273 262 - ---------------------------------------------------------- Total consumption 954 861 846 - ----------------------------------------------------------
Changes in the cost of gas purchased for resale were: - ------------------------------------------------------------------------ (Millions of dollars) 1996 1995 1994 Gas purchased for resale Cost (excluding take-or-pay) $ 48.6 $ (43.1) $ (6.4) Take-or-pay costs .4 (.4) 2.8 Volume 8.5 25.3 (13.6) Gas cost recoveries 6.3 (15.4) 2.3 - -------------------------------------------------------------------------- Total increase (decrease) $ 63.8 $ (33.6) $ (14.9) - -------------------------------------------------------------------------- Average cost per therm delivered 26.7 cents 20.1 cents 26.1 cents - ---------------------------------------------------------------------------
The 1996 increase in gas costs was primarily due to higher prices from suppliers and the effects of the Uniform Gas Adjustment Clause (UGAC). The 1995 decrease in the cost of gas purchased was due to lower gas prices caused by unusually warm winter weather nationwide. The 1994 decrease in the cost of gas purchased was primarily due to lower gas prices, the expanded use of additional gas storage and a decrease in therms purchased. Also contributing to the higher gas margins in 1995 and 1994 was the 6.1% increase in gas base rates approved by the ICC in April 1994. Other Expenses A comparison of significant increases (decreases) in other operating expenses, maintenance and depreciation for the last three years is presented in the following table: - ---------------------------------------------------------- (Millions of dollars) 1996 1995 1994 Other operating expenses $ (9.8) $ (.3) $ (9.2) Maintenance (.3) 10.4 (11.2) Depreciation and amortization 3.5 7.2 6.4 - -----------------------------------------------------------
The decrease in operating expenses for 1996 is due primarily to the savings from the enhanced retirement and severance program, partially offset by the costs of the extended Clinton outage and increased amortization of Manufactured Gas Plant (MGP) site expenses. The ICC approved tariff riders in March 1996 that resulted in the current recognition of MGP site remediation costs in operating expenses. The 1996 increase amounted to $5.5 million. This increase is offset by increased revenues collected under the riders. The increase in maintenance expense for 1995 is primarily due to the refueling and maintenance outage at Clinton. The decrease in operating and maintenance expenses for 1994 is due to re-engineering efforts, improved operating efficiencies at IP's fossil plants and at Clinton, and no refueling and maintenance outage at Clinton. The increases in depreciation for each of the three years were due to increases in utility plant balances. The 1994 increase in depreciation expense is partially offset by the decrease in deferred Clinton costs as a result of a September 1993 write-off of disallowed Clinton post-construction costs. Operating and Maintenance Expenses (Millions of Dollars) 1996 $349.6 1995 $359.7 1994 $349.6 1993 $370.0 1992 $373.4
Other Income and Deductions The 1996 increase in Miscellaneous-net deductions was due primarily to increased losses for the subsidiary companies other than IP, partially offset by an increase in the credit for allocated income taxes. The 1995 change in Miscellaneous-net deductions was negligible. The 1994 increase in deductions was primarily due to the change in allocated taxes. Interest Charges Interest charges decreased $15.0 million in 1996, $4.1 million in 1995 and decreased $21.0 million in 1994. The 1996 decrease was due to lower short-term interest rates and the impact of refinancing efforts and capitalization reduction during 1996. The 1995 increase was due to increased short-term borrowings at higher interest rates. The 1994 decrease was primarily due to refinancing with lower cost debt and the retirement of debt in 1994 and 1993. Inflation Inflation, as measured by the Consumer Price Index, was 3.3%, 2.5% and 2.5% in 1996, 1995 and 1994, respectively. IP recovers historical rather than current plant costs in rates. Liquidity and Capital Resources Soyland Power Cooperative Negotiations IP and Soyland Power Cooperative (Soyland) have entered into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP, contingent on approval by the NRC. The NRC is expected to act on IP's request during the first quarter of 1997. IP and Soyland have renegotiated the existing Power Coordination Agreement. This agreement is expected to result in a reduction of rates for Soyland while IP will be assured a long-term sales agreement for 10 to 20 years. IP is expected to file a request for approval of this agreement with FERC by the end of February 1997. 1994 Gas Rate Order On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. For customers, the increase is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Concurrent with the gas rate increase, IP's gas utility plant composite depreciation rate decreased to 3.4%. Dividends On December 11, 1996, Illinova increased the quarterly common stock dividend by 11%, declaring the common stock dividend for the first quarter of 1997, payable February 1, 1997 to shareholders of record as of January 10, 1997. On December 13, 1995, IP increased the quarterly common stock dividend 12%, declaring the common stock dividend for the first quarter of 1996. On October 12, 1994, IP increased the quarterly common stock dividend 25%, declaring the common stock dividend for the first quarter of 1995. Capital Resources and Requirements IP needs cash for operating expenses, interest and dividend payments, debt and certain preferred stock retirements and construction programs. To meet these needs, IP has used internally generated funds and external financings, including the issuance of preferred stock, debt and revolving lines of credit. The timing and amount of external financings depend primarily on economic and financial market conditions, cash needs and capitalization ratio objectives. Cash flows from operations during 1996 provided sufficient working capital to meet ongoing operating requirements, to service existing common and preferred stock dividends and debt requirements, and to meet all of IP's construction requirements. Additionally, IP expects that future cash flows will enable it to meet future operating requirements and continue to service its existing debt, preferred and common stock dividends, sinking fund requirements and all of its anticipated construction requirements. To a significant degree, the availability and cost of external financing depend on the financial health of the company seeking those funds. Security ratings are an indication of a company's financial position and may affect the cost of securities, as well as the willingness of investors to invest in these securities. The current ratings of IP's securities by three principal securities rating agencies are as follows: - ------------------------------------------------------------------------- Standard Duff & Moody's & Poor's Phelps - ------------------------------------------------------------------------- IP first/new mortgage bonds Baa1 BBB BBB+ IP preferred stock baa2 BBB- BBB- IP commercial paper P-2 A-2 D-2 - -------------------------------------------------------------------------
Under current market conditions, these ratings would afford IP the ability to issue additional securities through external financing. IP has adequate short-term and intermediate-term bank borrowing capacity. Based on its 1993 revised standards for review of utility business and financial risks, Standard & Poor's (S&P) placed IP, along with approximately one-third of the industry, in a "somewhat below average" category. In April 1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. In August 1995, S&P revised its ratings outlook from stable to positive. In February 1996, Moody's also revised its ratings outlook from stable to positive. Moody's upgraded IP's securities on July 1, 1996. The rating for mortgage bonds was raised from Baa2 to Baa1, while preferred stock ratings went from baa3 to baa2. In March 1996, the Duff & Phelps credit rating company established credit ratings for IP's fixed income securities, as shown on the preceding page. The agency has indicated that it expects IP's ratings to remain stable, reflecting a modestly strengthening financial profile characterized by good cash flow and an average business risk profile. In 1996, IP repurchased 714,811 shares of its common stock from Illinova. Under Illinois law, such shares may be held as treasury stock and treated as authorized but unissued, or may be cancelled by resolution of the Board of Directors. IP holds 3,410,897 shares of common stock as treasury stock and deducts it from common equity at the cost of the shares. For the years 1996, 1995 and 1994, changes in long-term debt and preferred stock outstanding, including normal maturities and elective redemptions, were as follows: - -------------------------------------------------------- (Millions of dollars) 1996 1995 1994 - --------------------------------------------------------- Bonds $ (132) $ (5) $ (10) Other long-term debt (22) - (100) Preferred stock 71 (135) 6 - --------------------------------------------------------- Total decrease $ (83) $ (140) $ (104) - ---------------------------------------------------------
The amounts shown in the preceding table for debt retirements do not include all mortgage sinking fund requirements. IP has generally met these requirements by pledging property additions as permitted under IP's 1943 Mortgage and Deed of Trust. For additional information, see "Note 8 - Long- Term Debt of Subsidiary" and "Note 9 - Preferred Stock of Subsidiary" of the "Notes to Consolidated Financial Statements." During 1996, IP redeemed $2.2 million of Adjustable Rate Series A serial preferred stock, $20.5 million (all of the remaining) Adjustable Rate Series B serial preferred stock and $6.7 million of 7.75% serial preferred stock. During the year, IP also retired $62.9 million of 8.75% First Mortgage Bonds due 2021, $6.0 million of 8% New Mortgage Bonds due 2023 and $23 million of 7.5% New Mortgage Bonds due 2025. The $40 million of 5.85% First Mortgage Bonds matured and were retired. In addition, $21.5 million of medium-term notes matured and were retired. In February 1995, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock. In May 1995, IP redeemed the remaining $24 million of 8.00% mandatorily redeemable serial preferred stock. In March 1995, IP redeemed $.2 million of 7.56% serial preferred stock and $3 million of 8.24% serial preferred stock. In August 1995, IP purchased $5 million of 8.75% First Mortgage Bonds. In December 1995, IP redeemed $34.7 million of 8.00% serial preferred stock, $33.6 million of 7.56% serial preferred stock and $27 million of 8.24% serial preferred stock. In February 1994, IP redeemed $12 million of 8.00% mandatorily redeemable serial preferred stock and issued $35.6 million of First Mortgage Bonds, 5.7% Series due 2024 (Pollution Control Series K). In May 1994, IP retired $35.6 million of First Mortgage Bonds, 11 5/8% Series due 2014 (Pollution Control Series D) with the proceeds of the debt issuance. In August 1994, IP retired $100 million of 8 1/2% debt securities. Illinois Power Financing I (IPFI) is a statutory business trust in which IP serves as sponsor. IPFI issued $100 million of trust originated preferred securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. The TOPrS were issued by IPFI, which invested the proceeds in an equivalent amount of IP subordinated debentures due in 2045. The proceeds were used by IP to repay short-term indebtedness on varying dates on or before March 1, 1996. IP incurred the indebtedness in December 1995 to redeem $95.3 million (principal value) of higher-cost outstanding preferred stock of IP. Illinois Power Capital, L.P. (IP Capital) is a limited partnership in which IP serves as a general partner. IP Capital issued $97 million of tax- advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after- tax rate) in October 1994. The proceeds were loaned to IP and were used to redeem $97 million (principal value) of higher-cost outstanding preferred stock of IP. In December 1994, IP issued $84.1 million of First Mortgage Bonds, 7.4% Series due 2024 (Pollution Control Series L). In March 1995, the proceeds of the debt issuance were used to retire $84.1 million of First Mortgage Bonds, 103/4% Series due 2015 (Pollution Control Series E). In 1992, IP executed a new general obligation mortgage (New Mortgage) to replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both mortgages are secured by liens on substantially all of IP's properties. A corresponding issue of First Mortgage bonds, under the First Mortgage, secures any bonds issued under the New Mortgage. IP anticipates that during 1997 the 1943 mortgage will be amended to be consistent with the 1992 mortgage. At December 31, 1996, based on the most restrictive earnings test contained in the First Mortgage, IP could issue approximately $1.3 billion of additional First Mortgage bonds for other than refunding purposes. Also at December 31, 1996, the unused portion of bank lines of credit was $354 million. The amount of available unsecured borrowing capacity totaled $222 million at December 31, 1996. On February 12, 1997, the Board of Directors approved a change to the Articles of Incorporation to remove the limitation on the amount of unsecured debt that IP can issue. The purpose of the change is to give IP more financial flexibility in the changing environment of a competitive marketplace. The change will be voted on by the preferred stockholders at a special meeting planned to be held in 1997. Construction expenditures for the years 1994 through 1996 were approximately $590.3 million, including $21.8 million of AFUDC. IP estimates that it will spend $200 million for construction expenditures in 1997, as detailed at right. Construction expenditures for the period 1997 through 2001 are expected to total no more than $1 billion, including $100 million for expenditures related to Phase II Clean Air Act compliance requirements. IP's capital expenditures for the years 1997 through 2001, in addition to construction expenditures, are expected to include $140 million for nuclear fuel and $300 million for mandatory debt retirement. - --------------------------------------------------------------- (Millions of dollars) 1997 - ---------------------------------------------------------------- IP construction requirements Electric generating facilities $ 77 Electric transmission and distribution facilities 65 General plant 33 Gas facilities 25 - ---------------------------------------------------------------- Total construction requirements 200 Nuclear fuel 38 Debt retirements 11 - ----------------------------------------------------------------- Total $ 249 - -----------------------------------------------------------------
See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information. Internal cash generation will meet substantially all construction and capital requirements. Environmental Matters See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of environmental matters that impact or could potentially impact IP. Tax Matters See "Note 6 - Income Taxes" of the "Notes to Consolidated Financial Statements" for a discussion of effective tax rates and other tax issues. Accounting Matters The FASB continues to review the accounting for liabilities related to closure and removal of long-lived assets, including decommissioning. See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for a discussion of decommissioning. ILLINOIS POWER COMPANY RESPONSIBILITY FOR INFORMATION The consolidated financial statements and all information in this annual report are the responsibility of management. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. In the opinion of management, the consolidated financial statements fairly reflect Illinois Power's financial position, results of operations and cash flows. Illinois Power believes that its accounting and internal accounting control systems are maintained so that these systems provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that the financial records are reliable for preparing the consolidated financial statements. The consolidated financial statements have been audited by Illinois Power's independent accountants, Price Waterhouse LLP, in accordance with generally accepted auditing standards. Such standards include the evaluation of internal accounting controls to establish a basis for developing the scope of the examination of the consolidated financial statements. In addition to the use of independent accountants, Illinois Power maintains a professional staff of internal auditors who conduct financial, procedural and special audits. To assure their independence, both Price Waterhouse LLP and the internal auditors have direct access to the Audit Committee of the Board of Directors. The Audit Committee is composed of members of the Board of Directors who are not active or retired employees of Illinois Power. The Audit Committee meets with Price Waterhouse LLP and the internal auditors and makes recommendations to the Board of Directors concerning the appointment of the independent accountants and services to be performed. Additionally, the Audit Committee meets with Price Waterhouse LLP to discuss the results of their annual audit, Illinois Power's internal accounting controls and financial reporting matters. The Audit Committee meets with the internal auditors to assess the internal audit work performed, including tests of internal accounting controls. /s/ Larry D. Haab Larry D. Haab Chairman, President and Chief Executive Officer /s/ Larry F. Altenbaumer Larry F. Altenbaumer Senior Vice President and Chief Financial Officer ILLINOIS POWER COMPANY REPORT OF INDEPENDENT ACCOUNTANTS PRICE WATERHOUSE LLP To the Board of Directors of Illinois Power Company In our opinion, the consolidated financial statements of Illinois Power Company and its subsidiaries appearing on pages A-11 through A- 31 of this report present fairly, in all material respects, the financial position of Illinois Power Company and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Illinois Power's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP St. Louis, Missouri February 7, 1997 ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME - ----------------------------------------------------------------------------------------------------------- (Millions of dollars except per share amounts) - ----------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 Operating Revenues Electric $ 1,202.9 $ 1,252.6 $ 1,177.5 Electric interchange 137.6 116.3 110.0 Gas 348.2 272.5 302.0 - ---------------------------------------------------------------------------------------------------------- Total 1,688.7 1,641.4 1,589.5 - ---------------------------------------------------------------------------------------------------------- Operating Expenses and Taxes Fuel for electric plants 248.1 273.9 266.6 Power purchased 65.2 59.5 52.6 Gas purchased for resale 202.6 138.8 172.4 Other operating expenses 249.9 259.7 260.0 Maintenance 99.7 100.0 89.6 Enhanced retirement and severance - 37.8 - Depreciation and amortization 190.0 186.5 179.3 General taxes 131.3 135.0 130.3 Income taxes 140.5 125.8 118.3 - ---------------------------------------------------------------------------------------------------------- Total 1,327.3 1,317.0 1,269.1 - ---------------------------------------------------------------------------------------------------------- Operating income 361.4 324.4 320.4 - ---------------------------------------------------------------------------------------------------------- Other Income and Deductions Allowance for equity funds used during construction - - 3.8 Miscellaneous-net ( 6.3) .3 (5.5) - ----------------------------------------------------------------------------------------------------------- Total ( 6.3) .3 (1.7) - ----------------------------------------------------------------------------------------------------------- Income before interest charges 355.1 324.7 318.7 - ----------------------------------------------------------------------------------------------------------- Interest Charges Interest expense 133.0 148.0 143.9 Allowance for borrowed funds used during construction (6.5) (6.0) (5.5) - ----------------------------------------------------------------------------------------------------------- Total 126.5 142.0 138.4 - ----------------------------------------------------------------------------------------------------------- Net income 228.6 182.7 180.3 Less - Preferred dividend requirements 22.3 23.7 24.9 Plus - Carrying amount over (under) consideration paid for redeemed preferred stock (.7) (3.5) 6.4 - ----------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 205.6 $ 155.5 $ 161.8 ===========================================================================================================
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, 1996 1995 Assets Utility Plant, At Original Cost Electric (includes construction work in progress of $212.5 million and $199.8 million, respectively) $ 6,335.4 $ 6,189.0 Gas (includes construction work in progress of $21.2 million and $10.2 million, respectively) 646.1 625.9 - ----------------------------------------------------------------------------------------------------- 6,981.5 6,814.9 Less - accumulated depreciation 2,419.7 2,251.7 - ------------------------------------------------------------------------------------------------------ 4,561.8 4,563.2 Nuclear fuel in process 5.3 5.7 Nuclear fuel under capital lease 96.4 95.2 - ------------------------------------------------------------------------------------------------------ 4,663.5 4,664.1 - ------------------------------------------------------------------------------------------------------ Investments and Other Assets 14.5 16.4 - ------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents 12.5 4.3 Accounts receivable (less allowance for doubtful accounts of $3 million) Service 138.8 129.4 Other 51.1 18.2 Accrued unbilled revenue 106.0 89.1 Materials and supplies, at average cost Fossil fuel 7.9 9.9 Gas in underground storage 27.2 18.5 Operating materials 77.1 82.7 Prepaid and refundable income taxes - 19.6 Prepayments and other 23.7 20.8 - ------------------------------------------------------------------------------------------------------- 444.3 392.5 - ------------------------------------------------------------------------------------------------------- Deferred Charges Deferred Clinton costs 103.9 107.3 Recoverable income taxes 101.3 128.7 Other 241.0 258.2 - ------------------------------------------------------------------------------------------------------- 446.2 494.2 - -------------------------------------------------------------------------------------------------------- $ 5,568.5 $5,567.2 ======================================================================================================== Capital and Liabilities Capitalization Common stock - No par value, 200,000,000 shares authorized; 75,681,937 and 75,643,937 shares outstanding, respectively, stated at $ 1,424.6 $1,424.6 Retained Earnings 245.9 129.6 Less - Capital stock expense 8.2 8.8 Less - 3,410,897 and 2,696,086 shares of common stock in treasury, respectively, at cost 86.2 67.3 - -------------------------------------------------------------------------------------------------------- Total common stock equity 1,576.1 1,478.1 Preferred stock 96.2 125.6 Mandatorily redeemable preferred stock 197.0 97.0 Long-term debt 1,636.4 1,739.3 - ------------------------------------------------------------------------------------------------------- Total capitalization 3,505.7 3,440.0 - ------------------------------------------------------------------------------------------------------- Current Liabilities Accounts payable 149.7 119.9 Notes payable 310.0 359.6 Long-term debt and lease obligations maturing within one year 47.7 95.0 Dividends declared 24.7 23.0 Taxes accrued 46.0 44.8 Interest accrued 34.3 39.0 Other 43.1 66.2 - -------------------------------------------------------------------------------------------------------- 655.5 747.5 - -------------------------------------------------------------------------------------------------------- Deferred Credits Accumulated deferred income taxes 1,048.0 1,019.1 Accumulated deferred investment tax credits 215.5 222.8 Other 143.8 137.8 - -------------------------------------------------------------------------------------------------------- 1,407.3 1,379.7 - ------------------------------------------------------------------------------------------------------- $ 5,568.5 $5,567.2 (Commitments and Contingencies Note 3) See notes to consolidated financial statements which are an integral part of these statements.
ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------------------------------------------------- (Millions of dollars) - ---------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 Cash Flows from Operating Activities Net income $ 228.6 $ 182.7 $ 180.3 Items not requiring (providing) cash - Depreciation and amortization 195.3 190.0 182.3 Allowance for funds used during construction (6.5) (6.0) (9.3) Deferred income taxes 64.2 42.0 38.9 Enhanced retirement and severance - 37.8 - Changes in assets and liabilities - Accounts and notes receivable (35.2) 38.7 (40.2) Accrued unbilled revenue (16.9) (10.2) (29.9) Materials and supplies (1.2) 22.8 ( 2.3) Accounts payable 29.8 (14.0) (19.7) Interest accrued and other, net (14.8) (10.1) (19.9) - ----------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 443.3 473.7 280.2 - ----------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Construction expenditures (187.3) (209.3) (193.7) Allowance for funds used during construction 6.5 6.0 9.3 Other investing activities 5.0 (7.5) (2.4) - ----------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (175.8) (210.8) (186.8) - ----------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Dividends on common stock and preferred stock (107.9) (100.5) ( 86.6) Redemptions - Short-term debt (355.8) (213.6) (258.2) Long-term debt (153.7) (5.2) (230.0) Preferred stock (29.5) (134.5) (91.0) Common Stock (18.9) (67.3) - Issuances - Short-term debt 306.2 209.5 404.7 Long-term debt - - 119.8 Preferred stock 100.0 - 97.0 Premium paid on redemption of long-term debt - - (2.8) Other financing activities .3 5.1 (7.7) - ------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (259.3) (306.5) ( 54.8) - ------------------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents 8.2 (43.6) 38.6 Cash and cash equivalents at beginning of year 4.3 47.9 9.3 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 12.5 $ 4.3 $ 47.9 ===================================================================================================================
ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS - -------------------------------------------------------------------------------------------------------------------------- (Millions of dollars) - --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31, 1996 1995 1994 Balance (deficit) at beginning of year $ 129.6 $ 51.5 $(71.0) Net income before dividends 228.6 182.7 180.3 - ---------------------------------------------------------------------------------------------------------------------------- 358.2 233.8 109.3 - ---------------------------------------------------------------------------------------------------------------------------- Less - Dividends - Preferred stock 22.6 23.6 11.1 Common stock 86.6 77.1 53.5 Investment transfer to Illinova 2.4 - - Plus - Carrying amount over (under) consideration paid for redeemed preferred stock (.7) (3.5) 6.4 - ------------------------------------------------------------------------------------------------------------------------------ (112.3) (104.2) (58.2) - ------------------------------------------------------------------------------------------------------------------------------ Balance at end of year $ 245.9 $129.6 $ 51.1 ==============================================================================================================================
See notes to consolidated financial statements which are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Summary of Significant Accounting Policies Principles of Consolidation Illinois Power Company (IP) is a subsidiary of Illinova Corporation (Illinova), a holding company. Illinova was officially formed on May 27, 1994, with the filing of documents with the Illinois Secretary of State. Illinova became the parent of IP through a merger pursuant to a share-for-share conversion of IP common stock into Illinova common stock. On June 8, 1994, Illinova Generating Company (formerly, IP Group, Inc.), originally a subsidiary of IP, was transferred to Illinova, establishing Illinova Generating Company as a wholly owned subsidiary of Illinova. The transfer of Illinova Generating Company and other equity to Illinova is reflected in the 1994 Consolidated Statement of Retained Earnings as a component of common stock dividend. IP is the primary business and subsidiary of Illinova, and is engaged in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the state of Illinois. The consolidated financial statements include the accounts of IP, a combination electric and gas utility, Illinois Power Capital, L.P. and Illinois Power Financing I. See "Note 9 - Preferred Stock" of the "Notes to Consolidated Financial Statements" for additional information. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. Regulation IP is subject to regulation by the Illinois Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC) and, accordingly, prepares its consolidated financial statements based on the concepts of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71), which requires that the effects of the ratemaking process be recorded. Such effects primarily concern the time at which various items enter the determination of net income in order to follow the principle of matching costs and revenues. Accordingly, IP records various regulatory assets and liabilities to reflect the actions of regulators. It is reasonable to assume that significant changes will be made to state laws governing IP's electric operations, but impossible to predict what those changes will be. Management believes that IP currently meets the criteria for continued application of FAS 71, but will continue to evaluate significant changes in the regulatory and competitive environment to assess IP's overall compliance with such criteria. These criteria include: 1) whether rates set by regulators are designed to cover the specific costs of providing regulated services and products to customers and 2) whether regulators continue to establish rates based on cost. In the event that management determines that IP no longer meets the criteria for application of FAS71, an extraordinary non-cash charge to income would be recorded in order to remove the effects of the actions of regulators from the consolidated financial statements. The discontinuation of application of FAS71 would likely have a material adverse effect on IP's consolidated financial position and results of operations. IP's principal accounting policies are: Regulatory Assets Regulatory assets represent probable future revenues to IP associated with certain costs that are expected to be recovered from customers through the ratemaking process. Significant regulatory assets are as follows: - ------------------------------------------------------------------- (Millions of dollars) 1996 - ------------------------------------------------------------------- Deferred Clinton Power Station (Clinton) post-construction costs $ 103.9 Recoverable income taxes $ 101.3 Unamortized losses on reacquired debt $ 87.7 Manufactured-gas plant site cleanup costs $ 69.1 - -------------------------------------------------------------------
Utility Plant The cost of additions to utility plant and replacements for retired property units is capitalized. Cost includes labor, materials, and an allocation of general and administrative costs, plus an allowance for funds used during construction (AFUDC) as described below. Maintenance and repairs, including replacement of minor items of property, are charged to maintenance expense as incurred. When depreciable property units are retired, the original cost and dismantling charges, less salvage value, are charged to accumulated depreciation. Allowance for Funds Used During Construction The FERC Uniform System of Accounts defines AFUDC as the net costs for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. In 1996, 1995 and 1994, the pre-tax rate used for all construction projects was 5.8%, 6.5% and 7.0%, respectively. Although cash is not currently realized from the allowance, it is realized under the ratemaking process over the service life of the related property through increased revenues resulting from a higher rate base and higher depreciation expense. Depreciation For financial statement purposes, IP depreciates the various classes of depreciable property over their estimated useful lives by applying composite rates on a straight-line basis. In 1996, 1995 and 1994, provisions for depreciation were 2.8% of the average depreciable cost for Clinton. Provisions for depreciation for all other electric plant were 2.6% in 1996, 1995 and 1994. Provisions for depreciation of gas utility plant, as a percentage of the average depreciable cost, were 3.9% in 1996, 1995 and 1994. Amortization of Nuclear Fuel IP leases nuclear fuel from Illinois Power Fuel Company (Fuel Company) under a capital lease. Amortization of nuclear fuel (including related financing costs) is determined on a unit of production basis. A provision for spent fuel disposal costs is charged to fuel expense based on kilowatt-hours generated. See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of decommissioning and nuclear fuel disposal costs. Deferred Clinton Costs In accordance with an ICC order in April 1987, IP began deferring certain Clinton post-construction operating and financing costs until rates to reflect such costs became effective (April 1989). After issuance of the March 1989 ICC rate order, deferral of Clinton post- construction costs ceased and amortization of the previously deferred post- construction costs over a 37.5-year period began. Although cash is not currently realized from these deferrals, it is realized under the ratemaking process over the service life of Clinton through increased revenues, resulting from a higher rate base and higher amortization expense. Unamortized Debt Discount, Premium and Expense Discount, premium and expense associated with long-term debt are amortized over the lives of the related issues. Costs related to refunded debt are amortized over the lives of the related new debt issues or the remaining life of the old debt if no new debt is issued. Revenue and Energy Cost IP records revenue for services provided but not yet billed to more closely match revenues with expenses. Unbilled revenues represent the estimated amount customers will be billed for service delivered from the time meters were last read to the end of the accounting period. Operating revenues include related taxes that have been billed to customers in the amount of $68 million in 1996 and $66 million in each of the years 1995 and 1994. The cost of fuel for the generation of electricity, purchased power and gas purchased for resale is recovered from customers pursuant to the electric fuel and purchased gas adjustment clauses. Accordingly, allowable energy costs that are to be passed on to customers in a subsequent accounting period are deferred. The recovery of costs deferred under these clauses is subject to review and approval by the ICC. On April 6, 1994, the ICC approved an increase of $18.9 million, or 6.1%, in IP's gas base rates. The increase to customers is partially offset by savings from lower gas costs resulting from the expansion of the Hillsboro gas storage field. The approved authorized rate of return on rate base is 9.29%, with a rate of return on common equity of 11.24%. Income Taxes Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109), deferred tax assets and liabilities are recognized for the tax consequences of transactions that have been treated differently for financial reporting and tax return purposes, measured on the basis of the statutory tax rates. In accordance with FAS 71, a regulatory asset (recoverable income taxes) has been recorded representing the probable recovery from customers of additional deferred income taxes established under FA109. Investment tax credits used to reduce federal income taxes have been deferred and are being amortized to income over the "service life" of the property that gave rise to the credits. IP is included in Illinova's consolidated federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss. See "Note 6 - Income Taxes" of the "Notes to the Consolidated Financial Statements" for additional discussion. Preferred Dividend Requirements of Subsidiary Preferred dividend requirements reflected in the Consolidated Statements of Income are recorded on the accrual basis. Consolidated Statements of Cash Flows Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less. Capital lease obligations not affecting cash flows increased by $31 million, $19 million and $28 million during 1996, 1995 and 1994, respectively. Income taxes and interest paid are as follows: Years ended December 31, - ------------------------------------------------------------------------------ (Millions of dollars) 1996 1995 1994 Income taxes $ 65.9 $ 65.7 $ 72.1 Interest $ 147.4 $ 152.4 $ 165.9 - ------------------------------------------------------------------------------
Interest Rate Cap Generally, premiums paid for purchased interest rate cap agreements are being amortized to interest expense over the terms of the caps. Unamortized premiums are included in Current Assets, "Prepayments and other," in the Consolidated Balance Sheets. Amounts to be received under the cap agreements are recognized as a reduction in interest expense. Transactions with Illinova In addition to transfers of capital reflected in the Consolidated Statements of Retained Earnings, IP provided approximately $81 million, $34 million and $20 million in funds to Illinova for operations and investments during 1996, 1995, and 1994, respectively. Illinova is paying IP interest on these funds at a rate equal to that which Illinova would have paid had it used a currently outstanding line of credit. In addition, Illinova and IP have recorded an intercompany payable and receivable, respectively, for approximately $14.3 million, $18.4 million, and $23.5 million in 1996, 1995, and 1994, respectively, in order to recognize the effect on the Employees' Stock Ownership Plan of the conversion of IP common stock to Illinova common stock concurrent with the formation of Illinova. This was a noncash transaction. See "Note 10 - Common Stock and Retained Earnings" of the "Notes to Consolidated Financial Statements" for additional information. Note 2 - Clinton Power Station IP and Soyland Power Cooperative, Inc. (Soyland) share ownership of Clinton, with IP owning 86.8% and Soyland owning 13.2%. IP and Soyland have entered into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP contingent upon approval by the NRC. (See sub-caption "Soyland" of "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements"). Clinton was placed in service in 1987 and represents approximately 18% of IP's installed generation capacity. The investment in Clinton and its related deferred costs represented approximately 50% of Illinova's total assets at December 31, 1996. IP's 86.8% share of Clinton- related costs represented 35% of Illinova's total 1996 other operating, maintenance and depreciation expenses. Clinton's equivalent availability was 66%, 76%, and 92% for 1996, 1995, and 1994, respectively. Clinton's equivalent availability was higher in 1994 due to no refueling outage. Ownership of an operating nuclear generating unit exposes IP to significant risks, including increased and changing regulatory, safety and environmental requirements and the uncertain future cost of closing and dismantling the unit. IP expects to be allowed to continue to operate Clinton; however, if any unforeseen or unexpected developments prevent IP from doing so, Illinova and IP would be materially adversely affected. See "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information. Note 3 - Commitments and Contingencies Commitments Estimated capital requirements for IP in 1997 are $249 million. The 1997 capital expenditures for IP include $142 million for electric facilities, $25 million for gas facilities, $38 million for nuclear fuel, $33 million for general plant and $11 million for mandatory debt retirement. Construction expenditures for IP for the 1997 through 2001 period are expected to be no more than $1 billion, including $100 million of expenditures to meet Phase II Clean Air Act Compliance requirements. IP's capital expenditures for the years 1997 through 2001, in addition to the IP construction expenditures, are expected to include $140 million for nuclear fuel, $300 million for mandatory debt retirement. These expenditures reflect IP's share of Clinton (ownership share under negotiation - -- see sub-caption "Soyland" under Contingencies below). In addition, IP has substantial commitments for the purchase of coal under long-term contracts. Estimated coal contract commitments for 1997 through 2001 are $560 million (excluding price escalation provisions). Total coal purchases for 1996, 1995 and 1994 were $184 million, $168 million and $191 million, respectively. IP has contracts with various natural gas suppliers and interstate pipelines to provide natural gas supply, transportation and leased storage. Estimated committed natural gas, transportation and leased storage costs (including pipeline transition costs) for 1997 through 2001 total $92 million. Total natural gas purchased for 1996, 1995 and 1994 was $207 million, $150 million and $168 million, respectively. IP's share (ownership share under negotiation -- see sub-caption "Soyland" under Contingencies below) of estimated nuclear fuel commitments for Clinton is approximately $19 million for uranium concentrates through 2001, $5 million for conversion services through 1999 and $198 million for fabrication services through 2016. IP is committed to purchase approximately $52 million of emission allowances through 1999. IP anticipates that all of these costs will be recoverable under IP's electric fuel and purchased gas adjustment clauses. Insurance IP maintains insurance on behalf of IP and Soyland for certain losses involving the operation of Clinton. For physical damage to the plant, IP's insurance program has two layers: 1) a primary layer of $500 million provided by nuclear insurance pools; and 2) an excess coverage layer of $1.1 billion provided by an industry-owned mutual insurance company for a total coverage of $1.6 billion. In the event of an accident with an estimated cost of reactor stabilization and site decontamination exceeding $100 million, NRC regulations require that insurance proceeds be dedicated and used first to return the reactor to, and maintain it in, a safe and stable condition, and second, to decontaminate the reactor station site. The insurers also provide coverage for the shortfall in the Decommissioning Trust Fund caused by the premature decommissioning of the reactor due to an accident. In the event insurance limits are not exhausted by the above, the remaining coverage will be applied to property damage and a portion of the value of the undamaged property. In addition, while IP has no reason to anticipate a serious nuclear accident at Clinton, if such an accident should occur, the claims for property damage and other costs could materially exceed the limits of current or available insurance coverage. In the event of an extended shutdown of Clinton due to accidental property damage, IP also purchases approximately $.9 million per week of business interruption insurance coverage for its ownership share of Clinton through an industry-owned mutual insurance company. This insurance does not provide coverage until Clinton has been out of service for 21 weeks. (Ownership share under negotiation -- see sub-caption "Soyland" under Contingencies below.) All United States nuclear power station operators are subject to the Price- Anderson Act. This act currently limits public liability for a nuclear incident to $8.9 billion. Private insurance covers the first $200 million. Retrospective premium assessments against each licensed nuclear reactor in the United States provide excess coverage. Currently, the liability to these reactor operators/owners for such an assessment would be up to $79.3 million per incident, not including premium taxes which may be applicable, payable in annual installments of not more than $10 million. A Master Worker Policy covers worker tort claims alleging bodily injury, sickness or disease for workers whose initial radiation exposure occurred on or after January 1, 1988. The policy has an aggregate limit of $200 million that applies to the commercial nuclear industry as a whole. A provision provides for automatic reinstatement of policy limits up to an additional $200 million. IP may be subject to other risks that may not be insurable, or the amount of insurance carried to offset the various risks may not be sufficient to meet potential liabilities and losses. There is also no assurance that IP will be able to maintain insurance coverage at its present level. Under those circumstances, such losses or liabilities may have a substantial adverse effect on IP's financial position. Decommissioning and Nuclear Fuel Disposal Costs IP is responsible for its ownership share (ownership share under negotiation - see sub-caption "Soyland" under Contingencies below) of the costs of decommissioning Clinton and for spent nuclear fuel disposal costs. IP is collecting future decommissioning costs through its electric rates based on an ICC-approved formula that allows IP to adjust rates annually for changes in decommissioning cost estimates. Based on NRC regulations that establish a minimum funding level, IP estimates its 86.8% share (ownership share under negotiation - see sub-caption "Soyland" under Contingencies below) of Clinton decommissioning costs to be approximately $381 million (1996 dollars) or $687 million (2026 dollars, assuming a 2% inflation factor). The NRC bases the minimum only on the cost of removing radioactive plant structures. IP concluded a site-specific study in 1996 to estimate the costs of dismantlement, removal and disposal of Clinton. This study resulted in projected decommissioning costs of $473 million (1996 dollars) or $853 million (2026 dollars, assuming a 2% inflation factor) for IP. Regulatory approval for funding of this increased decommissioning cost is expected during the third quarter of 1997. External decommissioning trusts, as prescribed under Illinois law and authorized by the ICC, accumulate funds for the future decommissioning of Clinton based on the expected service life of the plant. For the years 1996, 1995 and 1994, IP contributed $3.9 million, $5.0 million and $5.5 million, respectively, to its external nuclear decommissioning trust funds. The balances in these nuclear decommissioning funds at December 31, 1996, and 1995 were $41.4 million and $32.7 million, respectively. Decommissioning funds are recorded as assets on the balance sheet. A decommissioning liability approximately equivalent to trust assets was also recorded. IP recognizes earnings and expenses from the trust fund as changes in its assets and liabilities relating to these funds. The Financial Accounting Standards Board (FASB) is reviewing the accounting for closure and removal costs of long-lived assets. Changes to current electric utility industry accounting practices for decommissioning may result in recording the estimated total cost for decommissioning as a liability and an increase to plant balances, depreciating the increased plant balances, and reporting trust fund income from the external decommissioning trusts as investment income rather than as a reduction to decommissioning expense. Based on current information, IP believes that these changes will not have an adverse effect on results of operations due to existing and anticipated future ability to recover decommissioning costs through rates. In 1992, the ICC entered an order in which it expressed concern that IP take all reasonable action to ensure that Soyland contributes its ownership share of the current or any revised estimate of decommissioning costs. The order also states that if IP becomes liable for decommissioning expenses attributable to Soyland, the ICC will then decide whether that expense should be the responsibility of IP shareholders or its customers. If Soyland were to fail to meet these or other obligations related to its ownership of Clinton, then IP could become liable for such payments. (See sub-caption "Soyland" under Contingencies below.) Under the Nuclear Waste Policy Act of 1982, the Department of Energy (DOE) is responsible for the permanent storage and disposal of spent nuclear fuel. The DOE currently charges one mill ($0.001) per net kilowatt-hour (one dollar per MWH) generated and sold for future disposal of spent fuel. IP is recovering these charges through rates. In 1996, the D.C. Circuit Court of Appeals issued an order, at the behest of nuclear-owning utilities and state regulatory agencies, confirming DOE's unconditional obligation to take responsibility for spent nuclear fuel commencing in 1998, even if it has no permanent repository at that time. Notwithstanding this decision, which the DOE did not appeal, the DOE has indicated to all nuclear utilities that it may experience delay in performance. The impact of any such delay on IP will depend on many factors, including the duration of such delay and the cost and feasibility of interim, on-site storage. Environmental Matters Clean Air Act In August 1992, IP announced that it had suspended construction of two scrubbers at the Baldwin Power Station (Baldwin). At December 31, 1996, approximately $24 million in costs for the suspended Baldwin program continue to be carried by IP as plant held for future use. To comply with the sulfur dioxide (SO2) emission reduction requirements of Phase I (1995-1999) of the 1990 Clean Air Act Amendments, IP continues to purchase emission allowances. An emission allowance is the authorization by the United States Environmental Protection Agency (U.S. EPA) to emit one ton of SO2. The ICC approved IP's Phase I Clean Air Act compliance plan in September 1993, and IP is continuing to implement that plan. IP has acquired sufficient emission allowances to meet most of its anticipated needs for 1997 and will purchase the remainder on the spot market. In 1993, the Illinois General Assembly passed and the governor signed legislation authorizing, but not requiring, the ICC to permit expenditures and revenues from emission allowance purchases and sales to be included in rates charged to customers as a cost of fuel. In December 1994, the ICC approved the recovery of emission allowance costs through the Uniform Fuel Adjustment Clause. IP's compliance plan will defer, until at least 2000, any need for scrubbers or other capital projects associated with SO2 emission reductions. Phase II (2000 and beyond) SO2 emission requirements of the Clean Air Act could require additional actions and may result in capital expenditures and the purchase of emission allowances. To comply with the Phase I nitrogen-oxide (NOx) emission reduction requirements of the acid rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin Unit 3 and Vermilion Unit 2. On November 29, 1994, the Phase I NOx rules were remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA reinstated, with some modifications, the Phase I NOx rules effective January 1, 1996. IP was positioned to comply with these revised rules without additional modifications to any of its generating plants. The U.S. EPA issued revised Phase II NOx emission limits on December 10, 1996. IP has prepared a Phase II Compliance Plan. Litigation over the scope and legality of these Phase II NOx limits precludes a precise quantification of anticipated capital cost for compliance; however, capital expenditures for IP's NOx program, which includes upgrading two air heaters at Baldwin, are expected to be $100 million prior to the year 2000. IP is monitoring the development of several emerging clean air compliance issues which could have a significant impact on its fossil-fueled generating plants. These issues include global climate change (theorized to result from emissions of "greenhouse gases" such as carbon dioxide), controls on "hazardous air pollutants," potential requirements to further reduce NOx emissions from IP plants to help achieve compliance with the air quality standards in the St. Louis and Chicago metropolitan areas and new standards for fine particulates, ozone and SO2. Compliance with potential new regulations in these areas may require significant additional expenditures after 2000. Manufactured-Gas Plant (MGP) IP's estimated liability for MGP site remediation is $69 million. This amount represents IP's current best estimate of the costs that it will incur in remediation of the 24 MGP sites for which it is responsible. Because of the unknown and unique characteristics at each site, IP cannot presently determine its ultimate liability for remediation of the sites. IP is currently recovering MGP site remediation through tariff riders approved by the ICC. Accordingly, IP has recorded a regulatory asset on its balance sheet totaling $69 million as of December 31, 1996. Management expects that cleanup costs will be fully recovered from IP's customers. To offset the burden imposed on its customers, IP has initiated litigation against a number of insurance carriers. Any settlement proceeds or damages recovered from the carriers will be credited to IP's customers through the tariff rider mechanism which the ICC previously approved. Electric and Magnetic Fields (EMF) The possibility that exposure to EMF emanating from power lines, household appliances and other electric sources may result in adverse health effects continues to be the subject of litigation and governmental, medical and media attention. Litigants have also claimed that EMF concerns justify recovery from utilities for the loss in value of real property exposed to power lines, substations and other such sources of EMF. The National Research Council (Council) of the National Academy of Sciences released a report in 1996 which concluded there is "no conclusive and consistent evidence" that exposure to residential EMF presents a health hazard. The Council's conclusion is based on a review of more than 500 studies conducted worldwide over the last 17 years. Additional research is being conducted to attempt to resolve continuing scientific uncertainties. It is too soon to tell what, if any, impact these actions may have on IP's consolidated financial position. Other Legal Proceedings IP is involved in legal or administrative proceedings before various courts and agencies with respect to matters occurring in the ordinary course of business, some of which involve substantial amounts of money. Management believes that the final disposition of these proceedings will not have a material adverse effect on the consolidated financial position or the results of operations. Accounts Receivable IP sells electric energy and natural gas to residential, commercial and industrial customers throughout Illinois. At December 31, 1996, 68%, 20% and 12% of Accounts receivable - Service were from residential, commercial and industrial customers, respectively. IP maintains reserves for potential credit losses and such losses have been within management's expectations. Contingencies Soyland IP and Soyland have entered into an agreement to transfer Soyland's 13.2% ownership of Clinton to IP contingent on approval by the NRC. The NRC is expected to act on IP's request during the first quarter of 1997. IP and Soyland have renegotiated the existing Power Coordination Agreement. This agreement is expected to result in a reduction of rates for Soyland while IP will be assured a long-term sales agreement for 10 to 20 years. IP is expected to file with FERC a request for approval of this agreement in February 1997. FERC Audit In 1996 FERC conducted an audit of IP's financial books and records for the years 1992 through 1995 and preliminarily identified a number of issues. IP responded to the issues raised. FERC has taken no action regarding disposition of these matters. At this time, the outcome of the audit cannot be determined; however, management does not expect that resolution of the audit will have a material adverse effect on IP's consolidated financial position or results of operations. IRS Audit The Internal Revenue Service is currently auditing IP's federal income tax returns for the years 1991 through 1993. At this time, the outcome of the audit cannot be determined; however, management does not expect that the results will have a material adverse effect on IP's consolidated financial position or results of operations. For a detailed discussion of income taxes, see "Note 6 - Income Taxes" of the "Notes to Consolidated Financial Statements." Note 4 - Lines of Credit and Short-Term Loans IP has total lines of credit represented by bank commitments amounting to $354 million, all of which were unused at December 31, 1996. These lines of credit are renewable in May 1997, August 1997 and May 2001. These bank commitments support the amount of commercial paper outstanding at any time, limited only by the amount of unused bank commitments, and are available to support other IP activities. IP pays facility fees up to .15% per annum on $350 million of the total lines of credit, regardless of usage. The interest rate on borrowings under these agreements is, at IP's option, based upon the lending banks' reference rate, their Certificate of Deposit rate, the borrowing rate of key banks in the London interbank market or competitive bid. IP has letters of credit totaling $206 million and pays fees up to .45% per annum on the unused amount of credit. In addition, IP and IP Fuel Company have a short-term financing option to obtain funds not to exceed $30 million. IP and IP Fuel Company pay no fees for this uncommitted facility and funding is subject to availability upon request. For the years 1996, 1995, and 1994, IP had short-term borrowings consisting of bank loans, commercial paper, extendible floating rate notes and other short- term debt outstanding at various times as follows: - ------------------------------------------------------------------------------ (Millions of dollars, except rates) 1996 1995 1994 - ------------------------------------------------------------------------------ Short-term borrowings at December 31, $ 310.0 $ 359.6 $ 238.8 Weighted average interest rate at December 31, 5.7% 6.0% 6.2% Maximum amount outstanding at any month end $ 310.0 $ 359.6 $ 238.8 Average daily borrowings outstanding during the year $ 261.9 $ 306.5 $ 165.4 Weighted average interest rate during the year 5.6% 6.2% 4.6% - ------------------------------------------------------------------------------
Interest rate cap agreements are used to reduce the potential impact of increases in interest rates on floating-rate debt. IP's three variable rate interest rate cap agreements cover up to $289 million of commercial paper. These agreements entitle IP to receive from a counterparty on a monthly basis the amount, if any, by which IP's interest payments on a nominal amount of commercial paper exceed the interest rate set by the cap. On December 31, 1996, the cap rates were set at 6.0%, 6.25% and 7.0% while the current market rate available to IP was 5.7%. Note 5 - Facilities Agreements IP and Soyland share ownership of Clinton, with IP owning 86.8% (ownership share under negotiation - see sub-caption "Soyland" of "Note 3 - Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for additional information) and Soyland owning 13.2%. Agreements between IP and Soyland provide that IP has control over construction and operation of the generating station, that the parties share electricity generated in proportion to their ownership interests and that IP will have certain obligations to provide replacement power to Soyland if IP ceases to operate or reduces output from Clinton. Under the provisions of a Power Coordination Agreement (PCA) between Soyland and IP dated October 5, 1984, as amended, IP is required to provide Soyland with 12.0% (436 megawatts) of the electrical capacity from its fossil-fueled generating plants until the agreement expires or is terminated. This is in addition to the capacity Soyland receives as an owner of Clinton. IP is compensated with capacity charges and for energy costs and variable operating expenses. IP transmits energy for Soyland through IP's transmission and subtransmission systems. Under provisions of the PCA, Soyland has the option of participating financially in major capital expenditures at the fossil-fueledplants, such as those needed for Phase II Clean Air Act compliance, to the extent of its capacity entitlement with each party bearing its own direct capital costs, or by having the costs treated as plant additions and billed to Soyland in accordance with other billing provisions of the PCA. At any time after December 31, 2004, either IP or Soyland may terminate the PCA by giving not less than seven years prior written notice to the other party. The party to whom termination notice has been given may designate an earlier effective date of termination which shall be not less than 12 months after receiving notice. See "Note 3 -- Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of the Clean Air Act. Note 6 - Income Taxes Deferred tax assets and liabilities were comprised of the following: Balances as of December 31, - ------------------------------------------------------------------------------ (Millions of dollars) 1996 1995 - ------------------------------------------------------------------------------ Deferred tax assets: - ------------------------------------------------------------------------------ Current: Misc. book/tax recognition differences $ 7.7 $ 26.1 - ------------------------------------------------------------------------------ Noncurrent: Depreciation and other property related 42.0 45.5 Alternative minimum tax 198.5 184.1 Tax credit and net operating loss carryforward 32.8 32.4 Unamortized investment tax credit 120.9 126.1 Misc. book/tax recognition differences 65.8 59.4 - ------------------------------------------------------------------------------ 460.0 447.5 - ------------------------------------------------------------------------------ Total deferred tax assets $ 467.7 473.6 ============================================================================== Deferred tax liabilities: - ------------------------------------------------------------------------------ Current: Misc. book/tax recognition differences $ 11.3 $ 6.5 - ------------------------------------------------------------------------------ Noncurrent: Depreciation and other property related 1,350.1 1,303.5 Deferred Clinton costs 58.2 60.1 Misc. book/tax recognition differences 99.7 103.0 - ------------------------------------------------------------------------------ 1,508.0 1,466.6 - ------------------------------------------------------------------------------ Total deferred tax liabilities $ 1,519.3 $ 1,473.1 ==============================================================================
Income taxes included in the Consolidated Statements of Income consist of the following components: Years Ended December 31, - ------------------------------------------------------------------------------ (Millions of dollars) 1996 1995 1994 - ------------------------------------------------------------------------------ Current taxes- Included in operating expenses and taxes $ 79.2 $ 98.6 $ 58.3 Included in other income and deductions (14.5) (20.3) - - ------------------------------------------------------------------------------ Total current taxes 64.7 78.3 58.3 - ------------------------------------------------------------------------------ Deferred taxes- Included in operating expenses and taxes Property related differences 60.4 62.2 60.0 Alternative minimum tax 1.1 2.9 (50.4) Gain/loss on reacquired debt (1.6) (1.9) - Net operating loss carryforward - (.2) 62.0 Enhanced retirement and severance 2.6 (15.0) - Misc. book/tax recognition differences 6.1 (13.9) (7.8) Internal Revenue Service interest on tax issues - - 7.5 Included in other income and deductions Property related differences 10.2 9.7 10.0 Net operating loss carryforward - - (17.4) Misc. book/tax recognition differences 1.7 2.2 1.9 - ------------------------------------------------------------------------------ Total deferred taxes 80.5 46.0 65.8 - ------------------------------------------------------------------------------- Deferred investment tax credit-net Included in operating expenses and taxes (7.3) (6.9) (11.3) Included in other income and deductions - - (.3) - ------------------------------------------------------------------------------ Total investment tax credit (7.3) (6.9) (11.6) - ------------------------------------------------------------------------------ Total income taxes $ 137.9 $ 117.4 $ 112.5 ==============================================================================
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) 1996 1995 1994 - ------------------------------------------------------------------------------ Income tax expense at the federal statutory tax rate $ 128.3 $ 105.0 $ 102.5 Increases/(decreases) in taxes resulting from- State taxes, net of federal effect 13.7 14.0 13.8 Investment tax credit amortization (7.3) (6.9) (7.8) Depreciation not normalized 9.4 7.4 4.3 Interest expenses on preferred securities (6.9) (3.7) (.9) Other-net .7 1.6 .6 - ------------------------------------------------------------------------------ Total income taxes $ 137.9 $ 117.4 $ 112.5 ==============================================================================
Combined federal and state effective income tax rates were 37.6%, 39.1% and 38.4% for the years 1996, 1995 and 1994, respectively. IP is subject to the provisions of the Alternative Minimum Tax System (AMT). As a result, IP has an AMT credit carryforward at December 31, 1996, of approximately $198.5 million. This credit can be carried forward indefinitely to offset future regular income tax liabilities in excess of the tentative minimum tax. The Internal Revenue Service is currently auditing IP's consolidated federal income tax returns for the years 1991 through 1993. At this time, the outcome of the audit cannot be determined. However, the results of the audit are not expected to have a material adverse effect on IP's consolidated financial position or results of operations. Note 7 - Capital Leases Illinois Power Fuel Company (Fuel Company), which is 50% owned by IP, was formed in 1981 for the purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to the Fuel Company's cost of fuel as consumed (including related financing and administrative costs). Billings under the lease agreement during 1996, 1995 and 1994 were $35 million, $41 million and $52 million, respectively, including financing costs of $5 million, $7 million and $7 million, respectively. IP is obligated to make subordinated loans to the Fuel Company at any time the obligations of the Fuel Company that are due and payable exceed the funds available to the Fuel Company. IP has an obligation for nuclear fuel disposal costs of leased nuclear fuel. See "Note 3 -- Commitments and Contingencies" of the "Notes to Consolidated Financial Statements" for discussion of decommissioning and nuclear fuel disposal costs. Nuclear fuel lease payments are included with Fuel for electric plants on IP's Consolidated Statements of Income. At December 31, 1996 and 1995, current obligations under capital lease for nuclear fuel are $36.9 million and $33.3 million, respectively. Over the next five years estimated payments under capital leases are as follows: - -------------------------------------------------- (Millions of dollars) - -------------------------------------------------- 1997 $ 39.7 1998 28.5 1999 18.6 2000 11.6 2001 5.1 Thereafter 2.6 - ------------------------------------------------- 106.1 Less: Interest 9.7 - ------------------------------------------------- Total $ 96.4 =================================================
Note 8 - Long-Term Debt (Millions of dollars) - ------------------------------------------------------------------------------- December 31, 1996 1995 First mortgage bonds- 5.85% series due 1996 $ - $ 40.0 61/2 %series due 1999 72.0 72.0 6.60% series due 2004 (Pollution Control Series A) 6.5 6.8 7.95% series due 2004 72.0 72.0 6% series due 2007 (Pollution Control Series B) 18.7 18.7 75/8% series due 2016 (Pollution Control Series F, G and H) 150.0 150.0 8.30% series due 2017 (Pollution Control Series I) 33.8 33.8 73/8% series due 2021 (Pollution Control Series J) 84.7 84.7 83/4% series due 2021 57.1 120.0 5.70% series due 2024 (Pollution Control Series K) 35.6 35.6 7.40% series due 2024 (Pollution Control Series L) 84.1 84.1 - ------------------------------------------------------------------------------ Total first mortgage bonds 614.5 717.7 - ------------------------------------------------------------------------------ New mortgage bonds- 61/8% series due 2000 40.0 40.0 5.625%series due 2000 110.0 110.0 61/2% series due 2003 100.0 100.0 63/4% series due 2005 70.0 70.0 8% series due 2023 229.0 235.0 71/2% series due 2025 177.0 200.0 Adjustable rate series due 2028 (Pollution Control Series M, N and O) 111.8 111.8 - ------------------------------------------------------------------------------ Total new mortgage bonds 837.8 866.8 - ------------------------------------------------------------------------------ Total mortgage bonds 1,452.3 1,584.5 - ------------------------------------------------------------------------------ Medium-term notes, series A 78.5 100.0 Variable rate long-term debt due 2017 75.0 75.0 - ------------------------------------------------------------------------------ Total other long-term debt 153.5 175.0 - ------------------------------------------------------------------------------ 1,605.8 1,759.5 Unamortized discount on debt (18.1) (20.3) - ------------------------------------------------------------------------------ Total long-term debt excluding capital lease obligations 1,587.7 1,739.2 Obligations under capital leases 96.4 95.1 - ------------------------------------------------------------------------------ 1,684.1 1,834.3 Long-term debt and lease obligations maturing within one year (47.7) (95.0) - ------------------------------------------------------------------------------- Total long-term debt $ 1,636.4 $ 1,739.3 ===============================================================================
In 1996, a total of $62.9 million of 83/4% First Mortgage Bonds due 2021 was purchased at various times on the open market. In April 1996, $23.0 million of 71/2% New Mortgage Bonds due 2025 was purchased on the open market. In June 1996, $6.0 million of 8% New Mortgage Bonds due 2023 was purchased on the open market. In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At December 31, 1996, the maturity dates on these notes ranged from 1997 to 1998 with interest rates ranging from 9% to 9.31%. Interest rates on variable rate long-term debt due 2017 are adjusted weekly and ranged from 3.0% to 3.3% at December 31, 1996. For the years 1997, 1998, 1999, 2000 and 2001, IP has long-term debt maturities and cash sinking fund requirements in the aggregate of (in millions) $10.8, $68.8, $72.8, $150.8 and $.8, respectively. These amounts exclude capital lease requirements. See "Note 7 - Capital Leases" of the "Notes to Consolidated Financial Statements." Certain supplemental indentures to the First Mortgage require that IP make annual deposits, as a sinking and property fund, in amounts not to exceed $1.8 million in each of the years 1997 through 2001. These amounts are subject to reduction and historically have been met by pleding property additions, as permitted by the First Mortgage. At December 31, 1996, the aggregate total of unamortized debt expense and unamortized loss on reacquired debt was approximately $105.3 million. IP's First Mortgage Bonds are secured by a first mortgage lien on substantially all of the fixed property, franchises and rights of IP with certain minor exceptions expressly provided in the First Mortgage. In 1992, the Board authorized a new general obligation mortgage, which is intended to replace the First Mortgage. IP anticipates that during 1997 the 1943 mortgage will be amended to be consistent with the 1992 mortgage. Bonds issued under the New Mortgage were secured by a corresponding issue of First Mortgage Bonds under the First Mortgage. The remaining balance of net bondable additions at December 31, 1996, was approximately $1.5 billion. Note 9 - Preferred Stock (Millions of dollars) - ------------------------------------------------------------------------------ December 31, 1996 1995 Serial Preferred Stock, cumulative, $50 par value- Authorized 5,000,000 shares; 1,221,700 and 1,356,800 shares outstanding, respectively Series Shares Redemption Prices 4.08% 300,000 $ 51.50 $ 15.0 $ 15.0 4.26% 150,000 51.50 7.5 7.5 4.70% 200,000 51.50 10.0 10.0 4.42% 150,000 51.50 7.5 7.5 4.20% 180,000 52.00 9.0 9.0 7.75% 241,700 50.00 after July 1, 2003 12.1 18.8 Net premium on preferred stock .2 .2 - ----------------------------------------------------------------------------- Total Preferred Stock, $50 par value $ 61.3 $ 68.0 - ----------------------------------------------------------------------------- Serial Preferred Stock, cumulative, without par value- Authorized 5,000,000 shares; 698,200 and 1,152,550 shares outstanding, respectively Series Shares Redemption Prices A 698,200 $ 50.00 $ 34.9 $ 37.1 B - - - 20.5 - ----------------------------------------------------------------------------- Total Preferred Stock, without par value $ 34.9 $ 57.6 - ----------------------------------------------------------------------------- Preference Stock, cumulative, without par value- Authorized 5,000,000 shares; none outstanding - - - ------------------------------------------------------------------------------ Total Serial Preferred Stock, Preference Stock and Preferred Securities $ 96.2 $ 125.6 ============================================================================== Company Obligated Mandatorily Redeemable Preferred Securities of: Illinois Power Capital, L.P. Monthly Income Preferred Securities, cumulative, $25 liquidation preference- 3,880,000 shares authorized and outstanding $ 97.0 $ 97.0 Illinois Power Financing I Trust Originated Preferred Securities, cumulative, $25 liquidation preference- 4,000,000 shares authorized and outstanding 100.0 - - ----------------------------------------------------------------------------- Total Mandatorily Redeemable Preferred Stock $ 197.0 $ 97.0 ============================================================================= Serial Preferred Stock ($50 par value) is redeemable at the option of IP in whole or in part at any time with not less than 30 days and not more than 60 days notice by publication. Quarterly dividend rates for Serial Preferred Stock, Series A, are determined based on market interest rates of certain U.S. Treasury securities. Dividends paid in 1996 and 1995 were $.75 per quarter. The dividend rate for any dividend period will not be less than 6% per annum or greater than 12% per annum applied to the liquidation preference value of $50 per share. Illinois Power Capital, L.P. is a limited partnership in which IP serves as a general partner. Illinois Power Capital issued (1994) $97 million of tax- advantaged monthly income preferred securities (MIPS) at 9.45% (5.67% after- tax rate) with a liquidation preference of $25 per share. IP consolidates the accounts of Illinois Power Capital. Illinois Power Financing I (IPFI) is a statutory business trust in which IP serves as sponsor. IPFI issued $100 million of trust originated preferred securities (TOPrS) at 8% (4.8% after-tax rate) in January 1996. IPFI issued the TOPrS and invested the proceeds in an equivalent amount of IP subordinated debentures due in 2045. IP used the proceeds to repay short-term indebtedness on varying dates on or before March 1, 1996. IP incurred the indebtedness in December 1995, to redeem $95.3 million (principal value) of higher-cost outstanding preferred stock of IP. On April 15, 1996, IP issued a notice of redemption to all holders of its Adjustable Rate Series B Preferred Stock. All 410,250 shares outstanding were redeemed on May 15, 1996, at the redemption price of $50 per share. In 1996, IP redeemed $6.7 million of the 7.75% Serial Preferred Stock, $2.2 million of its Series A Serial Preferred Stock and the remaining $20.5 million of its Series B Serial Preferred Stock. The carrying amount was $.7 million under consideration paid and was recorded in equity and included in Net income applicable to common stock. Note 10 - Common Stock and Retained Earnings On May 31, 1994, common shares of IP began trading as common shares of Illinova. Illinova is the sole shareholder of IP common stock. In 1996, IP repurchased 714,811 shares of its common stock from Illinova. In 1995, IP repurchased 2,696,086 shares of its common stock from Illinova. Under Illinois law, such shares may be held as treasury stock and treated as authorized but unissued, or may be cancelled by resolution of the Board of Directors. IP holds the common stock as treasury stock and deducts it from common equity at the cost of the shares. IP has an Incentive Savings Plan (Plan) for salaried employees. IP's matching contribution is used to purchase Illinova common stock. Under this Plan, 27,545 shares of common stock were designated for issuance at December 31, 1996. IP has an Incentive Savings Plan for Employees Covered Under a Collective Bargaining Agreement. IP's matching contribution is used to purchase Illinova common stock. Under this plan, 69,167 shares of common stock were designated for issuance at December 31, 1996. IP employees participate in an Employees' Stock Ownership Plan (ESOP) that includes an incentive compensation feature which is tied to achievement of specified corporate performance goals. This arrangement began in 1991 when IP loaned $35 million to the Trustee of the Plans, which used the loan proceeds to purchase 2,031,445 shares of IP's common stock on the open market. The loan and common shares were converted to Illinova instruments with the formation of Illinova in May 1994. These shares are held in a suspense account under the Plans and are being distributed to the accounts of participating employees as the loan is repaid by the Trustee with funds contributed by IP, together with dividends on the shares acquired with the loan proceeds. IP financed the loan with funds borrowed under its bank credit agreements. For the year ended December 31, 1996, 69,367 common shares were allocated to salaried employees and 62,975 shares to employees covered under the Collective Bargaining Agreement through the matching contribution feature of the ESOP arrangement. Under the incentive compensation feature, 83,300 common shares were allocated to employees for the year ended December 31, 1996. During 1996, IP contributed $5.2 million to the ESOP and using the shares allocated method, recognized $1.6 million of expense. Interest paid on the ESOP debt was approximately $1.6 million in 1996 and dividends used for debt services were approximately $2.2 million. In 1992, the Board of Directors adopted and the shareholders approved a Long- Term Incentive Compensation Plan (the Plan) for officers or employee members of the Board, but excluding directors who are not officers or employees. The types of awards that may be granted under the Plan are restricted stock, incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalents and other stock-based awards. The Plan provides that any one or more types of awards may be granted for up to 1,500,000 shares of Illinova's common stock. The following table outlines the activity thus far under this Plan:
- -------------------------------------------------------------------------- Year Options Grant Year Expiration Options Granted Granted Price Exercisable Date Exercised - --------------------------------------------------------------------------- 1992 62,000 $ 23 3/8 1996 6/10/01 38,000 1993 73,500 $ 24 1/4 1997 6/9/02 - 1994 82,650 $ 20 7/8 1997 6/8/03 - 1995 69,300 $ 24 7/8 1998 6/14/04 - 1996 80,500 $ 29 3/4 1999 2/7/05 - ============================================================================
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123), effective for fiscal years beginning after December 15, 1995. If the accounting provisions of FAS 123 had been adopted as of the beginning of 1996, the effect on 1996 net earnings would have been immaterial. Further, based on current and anticipated use of stock options, it is not envisioned that the impact of FAS 123 accounting provisions would be material in any future period. IP continues to account for its stock options in accordance with Accounting Principle Board Opinion No. 25. The provisions of Supplemental Indentures to IP's General Mortgage Indenture and Deed of Trust contain certain restrictions with respect to the declaration and payment of dividends. IP was not limited by any of these restrictions at December 31, 1996. Under the Restated Articles of Incorporation, common stock dividends are subject to the preferential rights of the holders of preferred and preference stock. Note 11 - Pension and Other Benefit Costs Illinova offers certain benefit plans to the employees of all of its subsidiaries. IP is sponsor and administrator of all the benefit plans. IP is reimbursed by the other Illinova subsidiaries for their shares of the expenses of the benefit plans. The discussion and values below represent the plans in total, including the amounts attributable to the other subsidiaries. IP sponsors defined-benefit pension plans covering all officers and employees. Benefits are based on years of service and compensation. IP's funding policy is to contribute annually at least the minimum amount required by government funding standards, but not more than can be deducted for federal income tax purposes. Pension costs, a portion of which have been capitalized for 1996, 1995 and 1994, include the following components: Years Ended December 31, - ------------------------------------------------------------------------------ (Millions of Dollars) 1996 1995 1994 - ------------------------------------------------------------------------------ Service cost on benefits earned during the year $ 10.2 $ 10.4 $ 11.9 Interest cost on projected benefit obligation 26.8 23.6 21.8 Return on plan assets (42.2) (58.3) (7.9) Net amortization and deferral 9.4 29.6 (19.2) Effect of enhanced retirement program - 15.7 - - -------------------------------------------------------------------------------- Net periodic pension cost $ 4.2 $ 21.0 $ 6.6 ================================================================================
The estimated funded status of the plans at December 31, 1996 and 1995, using discount rates of 8.0% and 7.75%, respectively, and future compensation increases of 4.5% was as follows: Balances as of December 31, - ----------------------------------------------------------------------------- (Millions of Dollars) 1996 1995 - ----------------------------------------------------------------------------- Acturial present value of: Vested benefit obligation $ (291.7) $ (276.8) - ----------------------------------------------------------------------------- Accumulated benefit obligation (312.5) (297.5) - ----------------------------------------------------------------------------- Projected benefit obligation (361.5) (343.6) Plan assets at fair value 357.2 331.5 - ----------------------------------------------------------------------------- Funded Status (4.3) (12.1) Unrecognized net (gain)/loss (13.8) (5.1) Unrecognized net asset at transition (30.3) (34.6) Unrecognized prior service cost 19.3 21.2 - ----------------------------------------------------------------------------- Accrued pension cost included in accounts payable $ (29.1) $ (30.6) =============================================================================
The plan's assets consist primarily of common stocks, fixed income securities, cash equivalents and real estate. The acturial present value of accumulated plan benefits at January 1, 1996 and 1995, were $361 million and $258 million, respectively, including vested benefits of $337 million and $239 million, respectively. The pension cost for 1996, 1995 and 1994 was calculated using a discount rate of 7.75%, 8.75% and 7.75%, respectively; future compensation increases of 4.5% for 1996, 1995 and 1994; and a return on assets of 9.5% for 1996, 9.0% for 1995 and 1994. The unrecognized net asset at transition and unrecognized prior service cost are amortized on a straight-line basis over the average remaining service period of employees who are expected to receive benefits under the plan. IP made cash contributions of $6 million in 1996, $2 million and $10 million in 1994. IP sponsors health care and life insurance benefits for certain retired employees, including their eligible dependents, who attain specified ages and years of service under the terms of the defined-benefit plans. Post- retirement benefits, a portion of which have been capitalized, for 1996 and 1995 included the following components: Years Ended December 31, - ---------------------------------------------------------------------------- (Millions of Dollars) 1996 1995 - ---------------------------------------------------------------------------- Service cost on benefits earned during the year $ 2.2 $ 2.1 Interest cost on projected benefit obligation 6.1 5.5 Return on plan assets (5.9) (4.7) Amortization of unrecognized transition obligation 6.4 6.3 Effect of enhanced retirement program - 9.5 - --------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 8.8 $ 18.7 ===========================================================================
The net periodic postretirement benefit cost in the preceding table includes amortization of the previously unrecognized accumulated postretirement benefit plan obligation, which was $44.2 million and $52.3 million as of January 1, 1996 and 1995, respectively, over 20 years on a straight-line basis. IP has established two separate trusts for those retirees who were subject to a collectively bargained agreement and all other retirees to fund retiree health care and life insurance benefits. IP's funding policy is to contribute annually an amount at least equal to the revenues collected for the amount of postretirement benefit costs allowed in rates. The plan assets consist of common stocks and fixed income securities at December 31, 1996 and 1995. The estimated funded status of the plans at December 31, 1996 and 1995, using weighted average discount rates of 8.0% and 7.75%, respectively, and a return on assets of 9.0% was as follows: Balances as of December 31, - ---------------------------------------------------------------------------- (Millions of Dollars) 1996 1995 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees $ (49.6) $ (54.5) Other fully eligible participants (3.5) (3.0) Other active plan participants (28.6) (27.5) - ----------------------------------------------------------------------------- Total benefit obligation (81.7) (85.0) Plan assets at fair value 34.4 25.6 - ----------------------------------------------------------------------------- Funded status (47.3) (59.4) Unrecognized transition obligation 41.5 44.2 Unrecognized net (gain)/loss (9.2) - - ----------------------------------------------------------------------------- Accrued postretirement benefit cost included in accounts payable $ (15.0) $ (15.2) =============================================================================
The pre-65 health-care-cost trend rate decreases from 7.3% to 5.5% over nine years and the post-65 health-care-cost trend rate is level at 1.5%. A 1% increase in each future year's assumed health-care-cost trend rates increases the service and interest cost form $8.3 million to $9.3 million and the accumulated postretirement benefit obligation from $81.7 million to $89.6 million. Enhanced Retirement In December 1994, IP announced plans for voluntary enhanced retirement programs. During the fourth quarter of 1995, enhanced retirement and severance reduced the number of employees by 492 and 235, respectively. The combined enhanced retirement and severance programs generated pre-tax charges of approximately $26 million and $12 million, respectively, against fourth quarter 1995 earnings. Note 12 - Segments of Business Illinois Power Company is a public utility engaged in the generation, transmission, distribution and sale of electric energy, and the distribution, transportation and sale of natural gas. The following is a summary of operations: (Millions of dollars) - ------------------------------------------------------------------------------------------------------------- 1996 1995 1994 Total Total Total Electric Gas Corporation Electric Gas Corporation Electric Gas Corporation - ------------------------------------------------------------------------------------------------------------------------------- Operation information - Operating revenues $ 1,340.5 $ 348.2 $ 1,688.7 $ 1,368.9 $ 272.5 1,641.4 $ 1,287.5 $ 302.0 $ 1,589.5 Operating expenses, excluding provision for income taxes 886.2 300.5 1,186.7 946.2 245.0 1,191.2 876.1 274.7 1,150.8 - ------------------------------------------------------------------------------------------------------------------------------- Pre-tax operating income 454.3 47.7 502.0 422.7 27.5 450.2 411.4 27.3 438.7 Allowance for funds used during construction (AFUDC) 6.3 .2 6.5 5.5 .5 6.0 8.9 .4 9.3 - ------------------------------------------------------------------------------------------------------------------------------- Pre-tax operating income, including AFUDC $ 460.6 $ 47.9 $ 508.5 $ 428.2 $28.0 $ 456.2 $ 420.3 $ 27.7 $ 448.0 - ----------------------------------------------- ------------------ ------------------- Other deductions, net 9.0 8.1 11.3 Interest charges 133.0 148.0 143.9 Provision for income taxes 137.9 117.4 112.5 - ------------------------------------------------------------------------------------------------------------------------------ Net income 228.6 182.7 180.3 Preferred dividend requirements (22.3) (23.7) (24.9) Carrying value over (under) consideration paid for redeemed preferred stock (.7) (3.5) 6.4 - ------------------------------------------------------------------------------------------------------------------------------- Net income applicable to common stock $ 205.6 $ 155.5 $ 161.8 =============================================================================================================================== Other information - Depreciation $ 164.0 $ 22.5 $ 186.5 $ 161.4 $ 21.6 $ 183.0 $ 156.1 $ 21.1 $ 177.2 - ------------------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 164.0 $ 23.3 $ 187.3 $ 185.7 $ 23.6 $ 209.3 $ 173.1 $ 20.6 $ 193.7 - ------------------------------------------------------------------------------------------------------------------------------- Investment information - Identifiable assets* $ 4,577.1 $ 481.9 $ 5,059.0 $4,580.4 $ 446.3 $ 5,026.7 $ 4,589.0 $ 442.6 5,031.6 ------------------------------------------ --------------------- -------------------- Nonutility plant and other investments 14.3 16.2 15.2 Assets utilized for overall operations 495.2 524.3 549.0 - ------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 5,568.5 $ 5,567.2 $5,595.8 =============================================================================================================================== *Utility plant, nuclear fuel, materials and supplies, deferred Clinton costs and prepaid and deferred energy costs. Note 13 - Fair Value of Financial Instruments
1996 1995 - --------------------------------------------------------------------------- Carrying Fair Carrying Fair (Millions of dollars) Value Value Value Value - ---------------------------------------------------------------------------- Nuclear decommissioning trust funds $ 41.4 $ 41.4 $ 32.7 $ 32.7 Cash and cash equivalents 12.5 12.5 4.3 4.3 Mandatorily redeemable preferred stock 197.0 199.3 97.0 108.2 Long-term debt 1,587.7 1,629.3 1,739.2 1,855.8 Notes payable 310.0 310.0 359.6 359.6 ============================================================================
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 1996 1996 1996 1996 - ----------------------------------------------------------------------------------------------------------------- Operating revenues $ 446.7 $ 365.7 $ 458.4 $ 417.9 Operating income 88.1 74.9 133.3 65.1 Net income 49.1 48.7 100.6 30.2 Net income applicable to common stock 43.5 42.5 94.8 24.8 Cash dividends declared on common stock 21.2 21.2 21.2 23.5 Cash dividends paid on common stock 21.2 21.2 21.2 21.2 First Quarter Second Quarter Third Quarter Fourth Quarter 1995 1995 1995 1995 - ---------------------------------------------------------------------------------------------------------------- Operating revenues $ 425.5 $ 344.3 $ 486.1 $ 385.5 Operating income 78.3 67.1 137.2 41.8 Net income 41.7 34.5 98.2 8.3 Net income (loss) applicable to common stock 35.3 35.1 95.9 (10.8) Cash dividends declared on common stock 18.9 18.9 18.9 21.2 Cash dividends paid on common stock 18.9 18.6 18.9 18.9 The 1995 fourth quarter earnings include $(23) million for the enhanced retirement and severance program and $(3.5) million for the carrying amount under consideration paid for redeemed preferred stock.
ILLINOIS POWER COMPANY SELECTED CONSOLIDATED FINANCIAL DATA - --------------------------------------------------------------------------------------------------------------------------- (Millions of dollars) 1996 1995 1994 1993 1992 1986 - --------------------------------------------------------------------------------------------------------------------------- Operating revenues Electric $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 1,135.6 $ 1,117.9 $ 814.1 Electric interchange 137.6 116.3 110.0 130.8 73.0 76.6 Gas 348.2 272.5 302.0 314.8 288.6 369.7 - --------------------------------------------------------------------------------------------------------------------------- Total operating revenues $ 1,688.7 $ 1,641.4 $ 1,589.5 $ 1,581.2 $ 1,479.5 $ 1,260.4 - -------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 228.6 182.7 180.3 (56.1) 122.1 292.7 Effective income tax rate 37.6% 39.1% 38.4% (72.4%) 39.4% 20.5% - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) applicable to common stock $ 205.6 151.5 161.8 (82.2) 93.2 256.5 Cash dividends declared on common stock 87.1 77.9 49.1 30.2 105.9 171.1 Cash dividends paid on common stock 84.8 75.3 60.5 60.5 60.5 168.6 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 5,568.5 5,567.2 5,595.8 5,445.1 5,331.7 5,622.8* - ----------------------------------------------------------------------------------------------------------------------------- Capitalization Common stock equity $ 1,576.1 $1,478.1 $1,466.0 $1,342.8 $ 1,454.0 $1,691.9 Preferred stock 96.2 125.6 224.7 303.7 303.1 315.2 Mandatorily redeemable preferred stock 197.0 97.0 133.0 48.0 100.0 196.0 Long-term debt 1,636.4 1,739.3 1,946.1 1,926.3 2,017.4 2,241.0* - ----------------------------------------------------------------------------------------------------------------------------- Total capitalization $ 3,505.7 $3,440.0 $3,769.8 $3,620.8 $ 3,874.5 $4,444.1* - ----------------------------------------------------------------------------------------------------------------------------- Embedded cost of long-term debt 8.0% 7.9% 7.6% 7.5% 8.3% 9.1% - ------------------------------------------------------------------------------------------------------------------------------ Retained earnings (deficit) $ 245.9 129.6 51.1 (71.0) 41.0 481.2 - ------------------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 187.3 $ 209.3 $ 193.7 $ 277.7 $ 244.4 $ 710.1 Cash flows from operations $ 443.4 473.7 280.2 396.6 374.5 212.3 AFUDC as a percent of earnings applicable to common stock 3.2% 3.9% 5.7% N/A 5.6% 85.5% Return on average common equity 12.0% 9.9% 11.4% (6.0)% 6.5% 15.9% Ratio of earnings to fixed charges 3.40 2.77 2.73 .80 2.02 2.57 - -------------------------------------------------------------------------------------------------------------------------------
* Restated for the effect of capitalized nuclear fuel lease. ILLINOIS POWER COMPANY SELECTED STATISTICS 1996 1995 1994 1993 1992 1986 - ------------------------------------------------------------------------------------------------------------ Electric Sales in KWH (Millions) Residential 4,782 4,754 4,537 4,546 4,138 4,198 Commercial 3,894 3,804 3,517 3,246 3,055 2,821 Industrial 8,493 8,670 8,685 8,120 8,083 7,341 Other 367 367 536 337 466 875 - ------------------------------------------------------------------------------------------------------------- Sales to ultimate consumers 17,536 17,595 17,275 16,249 15,742 15,235 Interchange 5,454 4,444 4,837 6,015 2,807 2,726 Wheeling 928 642 622 569 402 - - ------------------------------------------------------------------------------------------------------------- Total electric sales 23,918 22,681 22,734 22,833 18,951 17,961 - ------------------------------------------------------------------------------------------------------------- Electric Revenues (Millions) Residential $ 483 $ 500 $ 471 $ 463 $ 435 $ 293 Commercial 318 321 295 269 263 187 Industrial 360 392 378 360 381 290 Other 38 37 30 40 38 44 - ------------------------------------------------------------------------------------------------------------ Revenues from ultimate consumers 1,199 1,250 1,174 1,132 1,117 814 Interchange 138 116 110 131 73 77 Wheeling 4 3 3 3 1 - - ------------------------------------------------------------------------------------------------------------ Total electric revenues $ 1,341 $ 1,369 $ 1,287 $ 1,266 $ 1,191 891 - ------------------------------------------------------------------------------------------------------------ Gas Sales in Therms (Millions) Residential 427 356 359 371 339 357 Commercial 177 144 144 148 138 161 Industrial 99 88 81 78 136 198 - ------------------------------------------------------------------------------------------------------------ Sales to ultimate consumers 703 588 584 597 613 716 Transportation of customer-owned gas 251 273 262 229 204 253 - ------------------------------------------------------------------------------------------------------------ Total gas sold and transported 954 861 846 826 817 969 Interdepartmental sales 9 21 5 7 12 1 - ------------------------------------------------------------------------------------------------------------- Total gas delivered 963 882 851 833 829 970 - ------------------------------------------------------------------------------------------------------------- Gas Revenues (Millions) Residential $ 216 $ 173 $ 192 $ 200 $ 181 $ 206 Commercial 79 60 66 68 61 78 Industrial 40 24 31 34 37 73 - ------------------------------------------------------------------------------------------------------------- Revenues to ultimate consumers 335 257 289 302 279 357 Transportation of customer-owned gas 7 8 9 8 7 11 Miscellaneous 6 7 4 5 3 2 - ------------------------------------------------------------------------------------------------------------ Total gas revenues $ 348 $ 272 $ 302 $ 315 $ 289 $ 370 - ------------------------------------------------------------------------------------------------------------ System peak demand (native load) in kw (thousands) 3,492 3,667 3,395 3,415 3,109 3,176 Firm peak demand (native load) in kw (thousands) 3,381 3,576 3,232 3,254 2,925 2,949 Net generating capability in kw (thousands) 4,148 3,862 4,121 4,045 4,052 3,397 - ------------------------------------------------------------------------------------------------------------- Electric customers (end of year) 549,957 529,966 553,869 554,270 549,391 540,595 Gas customers (end of year) 389,223 374,299 388,170 394,379 386,261 383,201 Employees (end of year) 3,635 3,559 4,350 4,540 4,624 4,593 - ------------------------------------------------------------------------------------------------------------ Illinois Power 500 South 27th Street, Decatur, Illinois 62525 http://www.illinova.com
EX-21 9 Exhibit 21(a) Subsidiaries of Illinova Corporation and Illinois Power Company State or Jurisdiction Name of Incorporation - ---- --------------------- Illinova Corporation Illinois Illinois Power Company Illinois IP Gas Supply Company Illinois Illinois Power Fuel Company (1) Illinois Illinois Power Capital, L.P. (2) Delaware Illinois Power Financing I Delaware Illinova Generating Company Illinois Electric Energy, Inc. (3) Illinois 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 Jamaica Partnership, LLC (7) Cayman Islands IGC International II, Inc. Cayman Islands IGC Flores Partnership, LLC (8) Cayman Islands IGC Flores Partnership II, LLC (9) Cayman Islands FIG Leasing International, LLC (10) Cayman Islands FIG Leasing International III, Inc. Cayman Islands FIG Equipment, LLC (11) Cayman Islands IGC Aguatia Partners (12) Cayman Islands IGC-ABC Shanghai Co., Ltd. Mauritius IGC-ZJ XC Company (13) Mauritius IGC Mauritius International Company Mauritius IGC Uch, LLC Cayman Islands Illinova Power Marketing, Inc. Delaware Tenaska Marketing Ventures (14) Nebraska Illinova Insurance Company Vermont Illinova Energy Partners, Inc. Delaware (1) Illinois Power Company owns 50% of the common stock of Illinois Power Fuel Company. (2) Illinois Power Company is the general partner in Illinois Power Capital, L.P., with a 3% equity ownership share. Illinois Power Capital is consolidated in the accounts of Illinois Power Company. (3) Illinova Generating Company owns 20% of the common stock of EEI. (4) Illinova Generating Company owns 47.5% of the voting common stock of ECI Energy, Ltd.. (5) Illinova Generating Company owns 50% of the common stock of North American Energy Services Company. (6) 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 Jamaica Partnership, LLC. (8) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 1% of IGC Flores Partnership, LLC. (9) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 1% of IGC Flores Partnership II, LLC. (10) 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. (11) 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 FIG Equipment, LLC. (12) 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. (13) IGC International II, Inc. (a wholly-owned subsidiary of Illinova Generating Company) owns 99% and IGC International Inc. (a wholly owned subsidiary of IGC) owns 1% of IGC-ZJ XC Company. (14) Illinova Power Marketing, Inc. owns 50% of the equity of Tenaska Marketing Ventures. EX-23 10 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. 33-17847), and the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-03011)of our report dated February 7, 1997, 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 25, 1997 [TYPE] EX-27 [DESCRIPTION] FINANCIAL DATA SCHEDULE UT FOR 1996 10K [TEXT] [ARTICLE] UT [LEGEND] 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. [RESTATED] 0 [SUBSIDIARY] 0 [NUMBER] 0 [MULTIPLIER] 1,000,000 [CURRENCY] DEFAULT [PERIOD-START] JAN-01-1996 [PERIOD-END] DEC-31-1996 [PERIOD-TYPE] YEAR [EXCHANGE-RATE] 0 [BOOK-VALUE] PER BOOK [TOTAL-NET-UTILITY-PLANT] 4664 [OTHER-PROPERTY-AND-INVEST] 15 [TOTAL-CURRENT-ASSETS] 444 [TOTAL-DEFERRED-CHARGES] 446 [OTHER-ASSETS] 0 [TOTAL-ASSETS] 5569 [COMMON] 1330 [CAPITAL-SURPLUS-PAID-IN] 0 [RETAINED-EARNINGS] 246 [TOTAL-COMMON-STOCKHOLDERS-EQ] 1576 [PREFERRED-MANDATORY] 197 [PREFERRED] 96 -----END PRIVACY-ENHANCED MESSAGE-----