-----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, GGsw5b1vB0qz3Q6pl7cZM1MoYvMVdujMV9GndecYMYTmsAHeuorr1oi2yhhyctbV X13S9L8+/NienU3avLaLbg== 0000049816-99-000018.txt : 19990518 0000049816-99-000018.hdr.sgml : 19990518 ACCESSION NUMBER: 0000049816-99-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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-Q SEC ACT: SEC FILE NUMBER: 001-03004 FILM NUMBER: 99626821 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-Q 1 10-Q FOR 1ST QUARTER OF 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to __________ Commission Registrants; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-11327 Illinova Corporation 37-1319890 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 62521 (217) 424-6600 1-3004 Illinois Power Company 37-0344645 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 62521 (217) 424-6600 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 registrant was required to file such report), and (2) have been subject to such filing requirements for the past 90 days. Illinova Yes X No Corporation ---- ---- Illinois Power Yes X No Company ---- ---- Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: Illinova Corporation Common stock, no par value, 69,919,287 shares outstanding at April 30, 1999 Illinois Power Company Common stock, no par value, 62,892,213 shares outstanding held by Illinova Corporation at April 30, 1999 ILLINOVA CORPORATION ILLINOIS POWER COMPANY This combined Form 10-Q 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. FORM 10-Q FOR THE QUARTER ENDED March 31, 1999 INDEX PAGE NO. Part I. FINANCIAL INFORMATION Item 1: Financial Statements Illinova Corporation Consolidated Balance Sheets 3 - 4 Consolidated Statements of Income 5 Consolidated Statements of Comprehensive Income 6 Consolidated Statements of Cash Flows 7 Illinois Power Company Consolidated Balance Sheets 8 - 9 Consolidated Statements of Income 10 Consolidated Statements of Comprehensive Income 11 Consolidated Statements of Cash Flows 12 Notes to Consolidated Financial Statements of Illinova Corporation and Illinois Power Company 13 - 26 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations for Illinova Corporation and Illinois Power Company 27 - 44 Item 3: Quantitative and Qualitative Disclosures About Market Risk 45 - 47 Part II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K 48 Signatures 49 - 50 Exhibit Index 51 2 PART I. FINANCIAL INFORMATION ILLINOVA CORPORATION CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) MARCH 31, DECEMBER 31, 1999 1998 ASSETS (Unaudited) (Audited) (Millions of Dollars) Utility Plant Electric (includes construction work in progress of $139.4 million and $177.7 million, respectively) $5,496.0 $5,481.8 Gas (includes construction work in progress of $14.8 million and $15.3 million, respectively) 690.5 686.9 --------- -------- 6,186.5 6,168.7 Less - Accumulated depreciation 1,736.6 1,713.7 --------- -------- 4,449.9 4,455.0 Nuclear fuel under capital lease 20.3 20.3 --------- -------- Total utility plant 4,470.2 4,475.3 --------- -------- Investments and Other Assets 256.8 246.9 --------- -------- Current Assets Cash and cash equivalents 65.7 518.1 Accounts receivable (less allowance for doubtful accounts of $5.5 million) Service 116.6 105.9 Other 91.4 116.1 Accrued unbilled revenue 64.4 82.6 Materials and supplies, at average cost 80.2 90.8 Assets from commodity price risk management activities 58.5 51.5 Prepayments and other 61.7 51.5 --------- -------- Total current assets 538.5 1,016.5 --------- -------- Deferred Charges Transition period cost recovery 783.0 783.0 Other 347.0 279.6 --------- -------- Total deferred charges 1,130.0 1,062.6 --------- -------- $6,395.5 $6,801.3 ========= ======== 3 ILLINOVA CORPORATION CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) MARCH 31, DECEMBER 31, 1999 1998 CAPITAL AND LIABILITIES (Unaudited) (Audited) (Millions of Dollars) Capitalization Common stock - No par value, 200,000,000 shares authorized; 75,681,937 shares issued, stated at $1,319.8 $1,319.7 Less - Deferred compensation - ESOP 5.3 6.8 Retained deficit - accumulated since 1/1/99 (3.4) - Accumulated other comprehensive income 0.2 - Less - Capital stock expense 7.3 7.3 Less - 5,762,650 shares of common stock in treasury, at cost 138.7 138.7 -------- -------- Total common stock equity 1,165.3 1,166.9 Preferred stock of subsidiary 52.9 57.1 Company obligated mandatorily redeemable preferred stock of subsidiary 194.5 199.0 Long-term debt 175.7 176.1 Long-term debt of subsidiary 2,078.7 2,158.5 -------- -------- Total capitalization 3,667.1 3,757.6 -------- -------- Current Liabilities Accounts payable 216.4 256.5 Notes payable 263.5 147.6 Long-term debt and lease obligations of subsidiary maturing within one year 182.0 506.6 Liabilities from commodity price risk management activities 105.2 99.8 Other 170.6 203.8 -------- -------- Total current liabilities 937.7 1,214.3 -------- -------- Deferred Credits Accumulated deferred income taxes 975.2 964.0 Accumulated deferred investment tax credits 39.2 39.6 Decommissioning liability 574.2 567.4 Other 202.1 258.4 -------- -------- Total deferred credits 1,790.7 1,829.4 -------- -------- $6,395.5 $6,801.3 ======== ======== 4 ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED MARCH 31, 1999 1998 (Unaudited) (Millions except per share) Operating Revenues: Electric $ 255.2 $276.6 Electric interchange 94.0 96.3 Gas 123.1 116.6 Diversified enterprises 76.1 85.9 ---------- ---------- Total 548.4 575.4 ---------- ---------- Operating Expenses: Fuel for electric plants 51.4 55.7 Power purchased 51.7 97.1 Gas purchased for resale 72.5 66.0 Diversified enterprises 81.5 94.7 Other operating expenses 110.4 79.8 Maintenance 41.3 29.0 Depreciation & amortization 44.5 50.7 Amortization of regulatory asset 1.5 - General taxes 29.9 38.7 ---------- ---------- Total 484.7 511.7 ---------- ---------- Operating Income 63.7 63.7 ---------- ---------- Other Income and Deductions: Miscellaneous-net 10.9 (1.5) Equity earnings in affiliates 0.5 5.5 ---------- ---------- Total 11.4 4.0 ---------- ---------- Income Before Interest Charges and Income Taxes 75.1 67.7 ---------- ---------- Interest Charges: Interest expense 43.1 36.6 Allowance for borrowed funds used during construction (1.2) (1.1) Preferred dividend requirements of subsidiary 5.0 4.9 ---------- ---------- Total 46.9 40.4 ---------- ---------- Income Before Income Taxes 28.2 27.3 ---------- ---------- Income Taxes 11.3 4.3 ---------- ---------- Net Income 16.9 23.0 Carrying amount over consideration paid for redeemed preferred stock of subsidiary 0.8 - ---------- ---------- Net Income Applicable to Common Stock $17.7 $23.0 ========== ========== Earnings per common share (basic and diluted) $0.25 $0.32 Cash dividends declared per common share $0.31 $0.31 Cash dividends paid per common share $0.31 $0.31 Weighted average number of common shares outstanding during period 69,919,287 71,701,253 5 ILLINOVA CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED MARCH 31, 1999 1998 (Unaudited) (Millions of Dollars) Net Income Applicable to Common Stock $17.7 $23.0 ----- ----- Other Comprehensive Income Foreign currency translation adjustments (0.1) - Unrealized gains on securities 0.5 - ----- ----- Other comprehensive income, before tax 0.4 - Income taxes on other comprehensive income (0.2) - ----- ----- Other comprehensive income, net of tax 0.2 - ----- ----- Comprehensive Income $17.9 $23.0 ===== ===== 6 ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED MARCH 31, 1999 1998 (Unaudited) (Millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $16.9 $23.0 Items not requiring cash, net 54.2 44.4 Changes in assets and liabilities (129.4) 62.0 ------- ----- Net cash provided (used) by operating activities (58.3) 129.4 ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (37.1) (47.8) Other investing activities (17.4) (8.5) ------ ------ Net cash used in investing activities (54.5) (56.3) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Dividends on common stock (21.7) (22.2) Reissuance of common stock - 0.7 Redemptions - Short-term debt (123.4) (115.6) Long-term debt of subsidiary (345.8) - Preferred stock of subsidiary (8.6) - Issuances - Short-term debt 239.3 8.9 Long-term debt - 92.4 Other financing activities (79.4) 0.3 ------- ------ Net cash used in financing activities (339.6) (35.5) ------- ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (452.4) 37.6 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 518.1 33.0 ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $65.7 $70.6 ======= ====== 7 ILLINOIS POWER COMPANY CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) MARCH 31, DECEMBER 31, 1999 1998 (Unaudited) (Audited) (Millions of Dollars) ASSETS Utility Plant Electric (includes construction work in progress of $139.4 million and $177.7 million, respectively) $5,496.0 $5,481.8 Gas (includes construction work in progress of $14.8 million and $15.3 million, respectively) 690.5 686.9 -------- -------- 6,186.5 6,168.7 Less - Accumulated depreciation 1,736.6 1,713.7 -------- -------- 4,449.9 4,455.0 Nuclear fuel under capital lease 20.3 20.3 -------- -------- Total utility plant 4,470.2 4,475.3 -------- -------- Investments and Other Assets 3.2 2.6 -------- -------- Current Assets Cash and cash equivalents 49.3 504.5 Accounts receivable (less allowance for doubtful accounts of $5.5 million) Service 116.6 105.9 Other 29.2 32.5 Accrued unbilled revenue 64.4 82.6 Materials and supplies, at average cost 79.0 90.4 Assets from commodity price risk management activities 33.9 26.0 Prepayments and other 49.7 42.8 -------- -------- Total current assets 422.1 884.7 -------- -------- Deferred Charges Transition period cost recovery 783.0 783.0 Other 350.5 284.2 -------- -------- Total deferred charges 1,133.5 1,067.2 -------- -------- $6,029.0 $6,429.8 ======== ======== 8 ILLINOIS POWER COMPANY CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) MARCH 31, DECEMBER 31, 1999 1998 (Unaudited) (Audited) (Millions of Dollars) CAPITAL AND LIABILITIES Capitalization Common stock - No par value, 100,000,000 shares authorized; 75,643,937 shares issued, stated at $1,382.5 $1,382.4 Retained earnings - accumulated since 1/1/99 19.4 - Accumulated other comprehensive income 0.2 - Less - Capital stock expense 7.3 7.3 Less - 12,751,724 shares of common stock in treasury, at cost 286.4 286.4 -------- -------- Total common stock equity 1,108.4 1,088.7 Preferred stock 52.9 57.1 Company obligated mandatorily redeemable preferred stock 194.5 199.0 Long-term debt 2,078.7 2,158.5 -------- -------- Total capitalization 3,434.5 3,503.3 -------- -------- Current Liabilities Accounts payable 228.7 216.2 Notes payable 197.5 147.6 Long-term debt and lease obligations maturing within one year 182.0 506.6 Liabilities from commodity price risk management activities 71.0 61.6 Other 108.9 150.5 -------- -------- Total current liabilities 788.1 1,082.5 -------- -------- Deferred Credits Accumulated deferred income taxes 990.9 978.7 Accumulated deferred investment tax credits 39.2 39.6 Decommissioning liability 574.2 567.4 Other 202.1 258.3 -------- -------- Total deferred credits 1,806.4 1,844.0 -------- -------- $6,029.0 $6,429.8 ======== ======== 9 ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED MARCH 31, 1999 1998 (Unaudited) (Millions of Dollars) Operating Revenues: Electric $255.2 $276.6 Electric interchange 94.0 96.3 Gas 123.1 116.6 ------ ------ Total 472.3 489.5 ------ ------ Operating Expenses and Taxes: Fuel for electric plants 51.4 55.7 Power purchased 51.7 97.1 Gas purchased for resale 72.5 66.0 Other operating expenses 110.4 79.8 Maintenance 41.3 29.0 Depreciation & amortization 44.5 50.7 Amortization of regulatory asset 1.5 - General taxes 29.9 38.7 Income taxes 13.7 10.7 ------ ------ Total 416.9 427.7 ------ ------ Operating Income 55.4 61.8 ------ ------ Other Income and Deductions, Net 6.2 1.6 ------ ------ Income Before Interest Charges 61.6 63.4 ------ ------ Interest Charges and Other: Interest expense 39.8 34.1 Allowance for borrowed funds used during construction (1.2) (1.1) ------ ------ Total 38.6 33.0 ------ ------ Net Income 23.0 30.4 Less-Preferred dividend requirements 5.0 4.9 Plus - Carrying amount over consideration paid for redeemed preferred stock 0.8 - ------ ------ Net Income Applicable to Common Stock $18.8 $25.5 ====== ====== 10 ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED MARCH 31, 1999 1998 (Unaudited) (Millions of Dollars) Net Income Applicable to Common Stock $18.8 $25.5 ----- ----- Other Comprehensive Income Unrealized gains on securities 0.4 - Income taxes on other comprehensive income (0.2) - ----- ----- Other comprehensive income, net of tax 0.2 - ----- ----- Comprehensive Income $19.0 $25.5 ===== ===== 11 ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED MARCH 31, 1999 1998 (Unaudited) (Millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income $22.9 $30.4 Items not requiring cash, net 55.5 47.4 Changes in assets and liabilities (105.6) 61.7 ------- ----- Net cash provided (used) by operating activities (27.2) 139.5 ------- ----- CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (37.1) (47.8) Other investing activities (2.7) 0.6 ------- ------ Net cash used in investing activities (39.8) (47.2) ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Dividends on preferred and common stock (4.3) (27.2) Redemptions - Short-term debt (123.4) (77.1) Long-term debt (345.8) - Preferred stock (8.6) - Issuances - Short-term debt 173.3 - Long-term debt - 52.4 Other financing activities (79.4) - ------- ------ Net cash used in financing activities (388.2) (51.9) ------- ------ NET CHANGE IN CASH AND CASH EQUIVALENTS (455.2) 40.4 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 504.5 17.8 ------- ------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $49.3 $58.2 ======= ====== 12 ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENERAL Financial statement note disclosures, normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted from this Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission (SEC). However, in the opinion of Illinova Corporation (Illinova) and Illinois Power Company (IP), the disclosures and information contained in this Form 10-Q are adequate and not misleading. See the consolidated financial statements and the accompanying notes in Illinova's 1998 Annual Report to Shareholders, (included in the Proxy Statement), the consolidated financial statements and the accompanying notes in IP's 1998 Annual Report to Shareholders (included in the Information Statement), Illinova's and IP's 1998 Form 10-K filings to the SEC, and Illinova's and IP's 1998 Form 8-K filings to the SEC for information relevant to the consolidated financial statements contained herein, including information as to certain regulatory and environmental matters and as to the significant accounting policies followed. In the opinion of Illinova, the accompanying unaudited March 31, 1999, and audited December 31, 1998, consolidated financial statements for Illinova reflect all adjustments necessary to present fairly the Consolidated Balance Sheets as of March 31, 1999, and December 31, 1998, the Consolidated Statements of Income for the three months ended March 31, 1999 and 1998, and the Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998. In addition, it is Illinova's and IP's opinion that the accompanying unaudited March 31, 1999, and audited December 31, 1998, consolidated financial statements for IP reflect all adjustments necessary to present fairly the Consolidated Balance Sheets as of March 31, 1999, and December 31, 1998, the Consolidated Statements of Income for the three months ended March 31, 1999 and 1998, and the Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998. Due to seasonal and other factors which are characteristic of electric and gas utility operations, interim period results are not necessarily indicative of results to be expected for the year. The consolidated financial statements of Illinova include the accounts of Illinova, IP, Illinova Generating Company (IGC), Illinova Insurance Company (IIC), Illinova Energy Partners, Inc. (IEP), and Illinova Business Enterprises, Inc. (IBE). All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. All transactions for Illinova's unregulated subsidiaries are included in the sections titled "Diversified Enterprises," "Interest Charges," "Income Taxes" and "Other Income and Deductions" in Illinova's Consolidated Statements of Income. The consolidated financial statements of IP include the accounts of Illinois Power Capital, L.P., Illinois Power Financing I (IPFI), Illinois Power Securitization Limited Liability Company, and Illinois Power Special Purpose Trust (IPSPT). All significant intercompany balances and transactions have been 13 eliminated from the consolidated financial statements. All non-utility operating transactions are included in the section titled "Other Income and Deductions, Net" in IP's Consolidated Statements of Income. REGULATORY AND LEGAL MATTERS OPEN ACCESS AND COMPETITION The Illinois Customer Choice and Rate Relief Act of 1997, P.A. 90-561, Illinois electric utility restructuring legislation, was enacted in December 1997. P.A. 90-561 gives IP's residential customers a 15 percent decrease in base electric rates beginning August 1, 1998, and an additional 5 percent decrease effective May 1, 2002. The rate decreases result in revenue reductions of approximately $35 million in 1998, and expected revenue reductions of approximately $70 million in each of the years 1999 through 2001, approximately $90 million in 2002, and approximately $100 million in 2003, based on current consumption. Under P.A. 90-561, customers with demand greater than 4 MW at a single site and customers with at least 10 sites which aggregate at least 9.5 MW in total demand will be free to choose their electric generation suppliers ("direct access") starting October 1999. Direct access for the remaining non-residential customers will occur in two phases: customers representing one-third of the remaining load in the non-residential class in October 1999 and customers representing the entire remaining non-residential load on December 31, 2000. Direct access will be available to all residential customers in May 2002. IP remains obligated to serve all customers who continue to take service from IP at tariff rates and remains obligated to provide delivery service to all at regulated rates. Rates for delivery services for non-residential customers will be established in 1999, in proceedings mandated by P.A. 90-561. The transition charges departing customers must pay to IP are not designed to hold IP completely harmless from resulting revenue loss because of the mitigation factor described below. IP will be able to estimate the revenue impact of customer choice more accurately when the various components of the transition charges calculation have been established. Although the specified residential rate reductions and the introduction of direct access will lead to lower electric service revenues, P.A. 90-561 is designed to protect the financial integrity of electric utilities in three principal ways: 1) Departing customers are obligated to pay transition charges, based on the utility's lost revenue from that customer. The transition charges are applicable through 2006 and can be extended two additional years by the Illinois Commerce Commission (ICC). The transition charges are calculated by subtracting from a customer's fully bundled rate an amount equal to: a) delivery charges the utility will continue to receive from the customer, b) the market value of the freed-up energy, and c) a mitigation factor, which is the higher of a fixed rate per kwh or a percentage of the customer's bundled base rate. The mitigation factor increases during the transition period and is designed to provide incentive for management to continue cost reduction efforts and generate new sources of revenue; 14 2) Utilities are provided the opportunity to lower their financing and capital costs through the issuance of "securitized" bonds, also called transitional funding instruments; and 3) Utilities are permitted to seek rate relief in the event that the change in law leads to their return on equity falling below a specified minimum based on a prescribed test. Utilities are also subject to an "over-earnings" test which requires them, in effect, to share with customers earnings in excess of specified levels. The extent to which revenues are affected by P.A. 90-561 will depend on a number of factors including future market prices for wholesale and retail energy, and load growth and demand levels in the current IP service territory, and success in marketing to customers outside IP's service territory. The impact on net income will depend on, among other things, the amount of revenues earned and the cost of doing business. ACCOUNTING MATTERS Prior to the enactment of P.A. 90-561, IP prepared its consolidated financial statements in accordance with FAS 71, "Accounting for the Effects of Certain Types of Regulation." Because P.A. 90-561 provides for market-based pricing of electric generation services, IP discontinued application of FAS 71 for its generating segment in December 1997, when P.A. 90-561 was enacted. In December 1998, Illinova's and IP's Boards of Directors decided to exit the nuclear portion of the business by either sale or shutdown of Clinton Power Station (Clinton). FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that all long-lived assets for which management has committed to a plan of disposal be reported at the lower of carrying amount or fair value less costs to sell. Consequently, IP wrote off the value of Clinton and accrued Clinton-related exit costs, which resulted in a $1,372.2 million, net of income taxes, charge against retained earnings and an accumulated deficit in Illinova's consolidated retained earnings balance of $1,419.5 million. Illinova's and IP's Boards of Directors also chose in December 1998 to effect a quasi-reorganization. The quasi-reorganization is an accounting procedure that eliminated the accumulated deficit in retained earnings and permitted the Company to proceed on much the same basis as if it had been legally reorganized by restating the Company's assets and liabilities to their fair values, with the net amount of these adjustments added to or deducted from the deficit. The remaining deficit in retained earnings was then eliminated by a transfer from paid-in capital, giving the Company a "fresh start" with a zero balance in retained earnings. The quasi-reorganization eliminated Illinova's consolidated accumulated deficit in retained earnings of $1,419.5 million. Implementation of a quasi-reorganization required the adoption of any accounting standards that had not yet been adopted because their required implementation date had not occurred. All applicable accounting standards were adopted as of December 1998. The standards adopted included FAS 133, "Accounting for Derivative Instruments and Hedging Activities," EITF Issue 98-10, 15 "Accounting for Contracts Involved in Energy Trading and Risk Management Activities, SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and SOP 98-5, "Reporting on the Costs of Start-Up Activities." Illinova and IP recognized other comprehensive income for the three months ended March 31, 1999, as required by FAS 130, "Reporting Comprehensive Income." FAS 130 established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Illinova and IP have adopted the two-statement approach, as provided for by FAS 130 and present a separate statement of comprehensive income in addition to the income statement. Items included in Illinova's other comprehensive income for the three months ended March 31, 1999, include unrealized gains on securities, foreign currency translations, and related income taxes. IP's March 31, 1999, other comprehensive income was comprised of unrealized gains on securities held in IP's nuclear decommissioning trust and related income taxes. There were no items reported as other comprehensive income in 1998. MANUFACTURED GAS PLANT SITES IP's estimated liability for Manufactured Gas Plant (MGP) site remediation is $61 million. This amount represents IP's current estimate of the costs it will incur to remediate the 24 MGP sites for which it is responsible. Because of the unknown and unique characteristics at each site, IP cannot currently determine its ultimate liability for remediation of the sites. In October 1995, to offset the burden imposed on its customers, IP initiated litigation against a number of insurance carriers. As of June 1998, settlements or settlements in principle have been reached with all thirty of the carriers. Settlement proceeds recovered from the carriers will offset a significant portion of the MGP remediation costs and will be credited to customers through the tariff rider mechanism which the ICC has previously approved. Cleanup costs in excess of insurance proceeds will be fully recovered from IP's transmission and distribution customers. TREASURY STOCK Through March 31, 1999, IP has purchased a total of 12,751,724 shares of its common stock from Illinova, all of which are held as treasury stock and are deducted from common equity at the cost of the shares purchased. No shares of IP common stock were purchased during the first three months of 1999. At the October 14, 1998, Illinova Board of Director's meeting, the Board approved the repurchase of up to 12 million shares of Illinova common stock over the next six to twelve months in conjunction with IP's issuance of securitized debt, although no additional repurchases are planned, at present. For more information, see "Liquidity and Capital Resources" of "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 28 of this report. 16 FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS Trading Activities- Illinova, through its subsidiaries, IP and IEP, engages in the brokering and marketing of electricity and natural gas. IP and IEP use a variety of instruments, including fixed-price swap agreements, variable-price swap agreements, exchange-traded energy futures and options contracts, and over-the-counter forwards, swaps, and options. As of December 31, 1998, Illinova and its subsidiaries adopted EITF 98-10. For more information regarding Illinova's adoption of new accounting pronouncements, see Accounting Matters of this section on page 15 of this report. At March 31, 1999, IP's and IEP's derivative assets and liabilities were recorded in the Consolidated Balance Sheets at fair value with unrealized gains and losses shown net in the Consolidated Statements of Income. IP and IEP record realized gains and losses as components of operating revenues and operating expenses in the Consolidated Statements of Income. The notional quantities and average terms of commodity instruments held for trading purposes at March 31, 1999, are presented below: Volume-Fixed Volume-Fixed Average Price Payor Price Receiver Term Electricity IP 2,300 MW 1,950 MW 1 year IEP 11,388 MW 11,053 MW 1 year Gas IEP (in thousands) 2,350 MMBtu 2,350 MMBtu 1 year All notional amounts reflect the volume of transactions but do not represent the dollar amounts or actual megawatts exchanged by the parties to the contracts. Accordingly, notional amounts do not accurately measure Illinova's exposure to market or credit risk. The estimated fair value of commodity instruments held for trading purposes at March 31, 1999, are presented below: Fair Value Fair Value (Millions of dollars) Assets Liabilities Electricity IP $27.2 $52.1 IEP 24.6 34.0 ---- ---- 51.8 86.1 Gas IEP 2.2 1.2 --- --- $54.0 $87.3 The fair value was estimated using quoted prices and indices where available and the liquidity of the market for the instrument was considered. The fair values are subject to volatility based on changing market conditions. 17 The weighted average term of the trading portfolio, based on volume, is less than one year. The maximum and average terms disclosed herein are not indicative of likely future cash flows as these positions may be modified by new transactions in the trading portfolio at any time in response to changing market conditions, market liquidity, and Illinova's risk management portfolio needs and strategies. Terms regarding cash settlements of these contracts vary with respect to the actual timing of cash receipts and payments. Non-Trading Activities- To reduce the risk from market fluctuations in the price of electricity and related transmission, Illinova, through its subsidiary IP, enters into forward transactions, swaps, and options (energy derivatives). These instruments are used to hedge expected purchases, sales, and transmission of electricity (a portion of which are firm commitments at the inception of the hedge). The weighted average maturity of these instruments is less than one year. Periodically, IP has used interest rate derivatives (principally interest rate swaps and caps) to adjust the portion of its overall borrowings subject to interest rate risk. As of March 31, 1999, there were no interest rate derivatives outstanding. In order to hedge expected purchases of emission allowances, IP has entered into swap agreements and written put options with other utilities to mitigate the risk from market fluctuations in the price of the allowances. At March 31, 1999, the notional amount of two emission allowance swaps was 126,925 units, with a recorded liability of $15.6 million, based on fair value at delivery date. The maximum maturity of the swap agreements is 10 years. These agreements do not fall under the scope of FAS 133. Due to the remote probability of exercise, three put options written by IP are considered immaterial. As of December 31, 1998, Illinova and its subsidiaries adopted FAS 133. IP's derivative assets and liabilities are currently recorded on the Consolidated Balance Sheets at fair value with unrealized gains and losses shown net in the Consolidated Statements of Income. Hedge accounting was not applied. In the future, if hedge accounting is applied, unrealized gains and losses will be shown as a component of Comprehensive Income in the equity section of the Consolidated Balance Sheets. IP records realized gains and losses as components of operating revenues and operating expenses in the Consolidated Statements of Income. As of March 31, 1999, all non-trading derivative instruments were accounted for using mark-to-market accounting. The notional quantities and the average term of energy derivative commodity instruments held for other than trading purposes at March 31, 1999, follows: Volume-Fixed Volume-Fixed Average Price Payor Price Receiver Term Electricity IP 900 MW 300 MW 1 year In addition to the fixed-price notional volumes above, IP recorded a $25 million liability in 1998 for two "commodity for commodity" energy swap agreements totaling 350 MW which are not considered derivatives as defined by 18 FAS 133. As of March 31, 1999, the swap liability decreased to $23.5 million. The decrease in the liability is due to IP's commencing repayment of one power swap in January 1999. The notional amount is intended to be indicative of the level of activity in such derivatives, although the amounts at risk are significantly smaller because changes in the market value of these derivatives generally are offset by changes in the value associated with the underlying physical transactions or in other derivatives. When energy derivatives are closed out in advance of the underlying commitment or anticipated transaction, the market value changes may not be offset because price movement correlation ceases to exist when the positions are closed. The estimated fair values of energy derivative commodity instruments, held for non-trading purposes at March 31, 1999, are presented below: Fair Value Fair Value (Millions of dollars) Assets Liabilities Electricity IP $6.0 $18.6 The fair value was estimated using quoted prices and indices where available, and considering the liquidity of the market for the instrument. The fair values are subject to significant volatility based on changing market conditions. The average maturity and fair values discussed above are not necessarily indicative of likely future cash flows. These positions may be modified by new offsetting transactions at any time in response to changing generation forecast, market conditions, market liquidity, and Illinova's risk management portfolio needs and strategies. Terms regarding cash settlements of these contracts vary with respect to the actual timing of cash receipts and payments. ILLINOVA - SEGMENTS OF BUSINESS In 1997, the FASB issued FAS 131, "Disclosures about Segments of an Enterprise and Related Information." This statement superseded FAS 14, "Financial Reporting for Segments of a Business Enterprise," and established new standards for defining a company's segments and disclosing information about them. The new statement requires that segments be based on the internal structure and reporting of a company's operations. The Illinova enterprise comprises six separate corporations and eight functional business groups. The business groups and their principal activities are as follows: o IP Customer Service Business Group - transmission, distribution, and sale of electric energy; distribution, transportation, and sale of natural gas in Illinois. 19 o IP Wholesale Energy Business Group - fossil-fueled electric generation in Illinois, wholesale electricity transactions throughout the United States, and dispatching activities. o IP Nuclear Generation Business Group - nuclear-fueled electric generation in Illinois. o Illinova Energy Partners - energy-related products and services throughout the United States and Canada. o Illinova Generating Company - independent power projects throughout the world. o IP Financial Business Group - financial support functions such as accounting, finance, corporate performance, audit and compliance, investor relations, legal, corporate development, regulatory, risk management, and tax services. o IP Support Services Business Group - specialized support functions, including information technology, human resources, environmental resources, purchasing and materials management, and public affairs. o Corporate - Illinova Corporation, Illinova Insurance Company and Illinova Business Enterprises - holding company; insurance and risk products; and miscellaneous business lines. Of the above-listed segments, the IP Financial Business Group, the IP Support Services Business Group, and Corporate did not individually meet the minimum threshold requirements for separate disclosure and are combined in the Other category. In 1998, three measures were used to judge segment performance: contribution margin, cash flow, and return on net invested capital. In 1999, two measures were used to judge segment performance: contribution margin and cash flow; return on net invested capital is no longer a corporate measure in 1999. 20
Illinova Corporation Three Months Ended March 31, 1999 (Millions of Dollars) Illinova Customer Wholesale Energy Illinova Other Consoli- Service Energy Nuclear Partners Generating dated 1999 Revenues from external customers 376.7 94.1 1.5 - - - 472.3 Diversified enterprise revenue - - - 46.4 28.3 1.4 76.1 Intersegment revenue (1) - 135.9 (0.7) - - - 135.2 ----------------------------------------------------------- Total Revenue 376.7 230.0 0.8 46.4 28.3 1.4 683.6 Depreciation and amortization expense 18.5 25.6 2.0 - - (0.1) 46.0 Other operating expenses (1) 275.3 126.6 89.4 49.3 30.1 3.2 573.9 ----------------------------------------------------------- Operating income (loss) 82.9 77.8 (90.6) (2.9) (1.8) (1.7) 63.7 Interest expense 19.3 19.9 0.7 - - 3.2 43.1 AFUDC (0.4) (0.8) - - - 0.0 (1.2) ----------------------------------------------------------- Net income (loss) before taxes 64.0 58.7 (91.3) (2.9) (1.8) (4.9) 21.8 Income tax expense (benefit) 24.4 22.3 (35.7) (0.7) 1.7 (0.7) 11.3 Miscellaneous - net - 0.1 (0.5) - (6.2) (1.2) (7.8) Equity earnings in subsidiaries - - - (1.0) 0.4 0.1 (0.5) Interest revenue - - (1.1) - - (2.0) (3.1) ----------------------------------------------------------- Net income (loss) after taxes 36.7 36.3 (54.0) (1.2) 2.3 (1.1) 21.9 Preferred dividend requirement and carrying amount over consideration paid for redeemed preferred stock 2.9 3.0 (0.9) - - (0.8) 4.2 ---------------------------------------------------------- Net income (loss) available to common 36.7 33.3 (53.5) (1.2) 2.3 (0.3) 17.7 - ----------------------------------------------------------------------------------------------------------------------------------- Other information - Total assets (3) 2,623.0 3,121.8 198.5 63.3 239.7 149.2 6,395.5 Subsidiary's investment in equity method investees - - - 9.5 188.5 - 198.0 Total expenditures for additions to long-lived assets 22.9 14.5 - - - 0.9 38.3 - ----------------------------------------------------------------------------------------------------------------------------------- Corporate Measures - Contribution margin (4) 50.0 46.5 (53.4) (1.2) 2.3 0.9 45.3 Cash flow (5) 42.1 (87.6) (106.3) (1.7) 12.5 51.6 (89.4) - -----------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.9 cents per kwh delivered. Intersegment expense is reflected in other operating expenses for Customer Service (2) Net Income (loss) before Clinton impairment loss. (3) Primary assets for Nuclear include decommissioning assets, shared general and intangible plant and nuclear fuel. (4) Contribution margin represented by net income before financing costs (net-of-tax) and preferred dividend requirement. (5) Cash flow before financing activities. 21
Illinova Corporation Three Months Ended March 31, 1998 (Millions of Dollars) Illinova Customer Wholesale Energy Illinova Other Consoli- Service Energy Nuclear Partners Generating dated 1998 Revenues from external customers 391.6 96.3 1.6 - - - 489.5 Diversified enterprise revenue - - - 84.9 0.7 0.3 85.9 Intersegment revenue (1) - 111.8 (0.6) - - - 111.2 ------------------------------------------------------------ Total Revenue 391.6 208.1 1.0 84.9 0.7 0.3 686.6 Depreciation and amortization expense 16.9 7.4 24.8 - - 1.6 50.7 Other operating expenses (1) 244.7 150.7 84.0 89.8 4.0 (1.0) 572.2 ------------------------------------------------------------ Operating income (loss) 130.0 50.0 (107.8) (4.9) (3.3) (0.3) 63.7 Interest expense 17.1 5.7 21.5 - - (7.7) 36.6 AFUDC (0.3) (0.4) (0.4) - - - (1.1) ------------------------------------------------------------ Net income (loss) before taxes 113.2 44.7 (128.9) (4.9) (3.3) 7.4 28.2 Income tax expense (benefit) 46.4 16.7 (55.3) (1.1) (0.7) (1.7) 4.3 Miscellaneous - net - 1.8 - (0.1) - (0.2) 1.5 Equity earnings in subsidiaries - - - (2.0) (3.5) - (5.5) Interest revenue - - - - - - - ------------------------------------------------------------ Net income (loss) after taxes 66.8 26.2 (73.6) (1.7) 0.9 9.3 27.9 Preferred dividend requirement and carrying amount over consideration paid for redeemed preferred stock 1.8 0.7 2.5 - - (0.1) 4.9 ---------------------------------------------------------- Net income (loss) available to common 65.0 25.5 (76.1) (1.7) 0.9 9.4 23.0 - ----------------------------------------------------------------------------------------------------------------------------------- Other information - Total assets 1,766.9 717.1 2,772.3 56.4 174.6 131.5 5,618.8 Subsidiary's investment in equity method investees - - - 12.4 165.4 - 117.8 Total expenditures for additions to long-lived assets 30.2 10.2 7.2 - - 1.3 48.9 - ----------------------------------------------------------------------------------------------------------------------------------- Corporate Measures - Contribution margin (2) 75.6 28.1 (61.2) (1.7) 0.9 5.0 46.7 Cash flow (3) 73.2 43.2 (81.6) 2.1 3.9 42.1 82.9 - ----------------------------------------------------------------------------------------------------------------------------------- Return on net invested capital (4) 5.9% 6.0% N/A 5.2% 0.5% N/A 1.3%
(1) Intersegment revenue priced at 2.5 cents per kwh delivered. Intersegment expense is reflected in other operating expenses for Customer Service. Nuclear reflects a replacement power expense for the increment of market price over the intersegment price. (2) Contribution margin represented by net income before financing costs (net-of-tax) and preferred dividend requirement. (3) Cash flow before financing activities. (4) Return on net invested capital calculated as contribution margin divided by net invested capital. 22 GEOGRAPHIC INFORMATION (Millions of dollars) - -------------------------------------------------------------------------------- Quarter ended March 31, 1999 1998 - -------------------------------------------------------------------------------- Revenues: (1) United States $544.2 $575.4 Foreign countries - seven 4.2 0 ------ ------ $548.4 $575.2 ====== ====== (Millions of dollars) - -------------------------------------------------------------------------------- March 31, 1999 1998 - -------------------------------------------------------------------------------- Long-lived assets: (2) United States $4,525.5 $4,597.4 Foreign countries - nine 157.1 124.8 -------- -------- $4,682.6 $4,722.2 ======== ======== (1) Revenues are attributed to geographic regions based on location of customer. (2) Long-lived assets include plant, equipment, and investments in subsidiaries. IP - SEGMENTS OF BUSINESS IP comprises five business groups. The business groups and their principal services are as follows: o IP Customer Service Business Group - transmission, distribution, and sale of electric energy; distribution, transportation, and sale of natural gas in Illinois. o IP Wholesale Energy Business Group - fossil-fueled electric generation in Illinois, wholesale electricity transactions throughout the United States, and dispatching activities. o IP Nuclear Generation Business Group - nuclear-fueled electric generation in Illinois. o IP Financial Business Group - financial support functions such as accounting, finance, corporate performance, audit and compliance, investor relations, legal, corporate development, regulatory, risk management, and tax services. o IP Support Services Business Group - specialized support functions, including information technology, human resources, environmental resources, purchasing and materials management, and public affairs. Of the above-listed segments, the IP Financial Business Group and the IP Support Services Business Group did not individually meet the minimum threshold requirements for separate disclosure and are combined in the Other category. 23 In 1998, three measures were used to judge segment performance: contribution margin, cash flow, and return on net invested capital. In 1999, two measures were used to judge segment performance; contribution margin and cash flow; return on net invested capital is no longer a corporate measure in 1999.
Illinois Power Three Months Ended March 31, 1999 Customer Wholesale Total 1999 Service Energy Nuclear Other Company Revenues from external customers $376.7 $94.1 $1.5 $ - $472.3 Intersegment revenue (1) - 135.9 (0.7) - 135.2 ------------------------------------------------------------------------- Total Revenue 376.7 230.0 0.8 - 607.5 Depreciation and amortization expense 18.5 25.6 2.0 (0.1) 46.0 Other operating expenses (1) 275.3 126.6 89.4 1.1 492.4 ------------------------------------------------------------------------- Operating income (loss) 82.9 77.8 (90.6) (1.0) 69.1 Interest expense 19.3 19.9 0.7 (0.1) 39.8 AFUDC (0.4) (0.8) - 0.0 (1.2) ------------------------------------------------------------------------- Net income (loss) before taxes 64.0 58.7 (91.3) (0.9) 30.5 Income tax expense (benefit) 24.4 22.3 (35.7) 0.6 11.6 Miscellaneous-net - 0.1 (0.5) (0.4) (0.8) Interest revenue - - (1.1) (2.2) (3.3) ------------------------------------------------------------------------- Net income (loss) after taxes 39.6 36.3 (54.0) 1.1 23.0 Preferred dividend requirement and carrying amount over consideration paid for redeemed preferred stock 2.9 3.0 (0.9) (0.8) 4.2 ------------------------------------------------------------------------- Net income (loss) available to common $ 36.7 $ 33.3 $ (53.1) $1.9 $ 18.8 - -------------------------------------------------------------------------------------------------------------------------------- Other information - Total assets (2) $2,623.0 $3,121.8 $198.5 $ 34,4 $5,977.7 Total expenditures for additions to long-lived assets 22.9 14.5 - 0.9 38.3 Corporate Measures - Contribution margin (3) $ 50.0 $ 46.7 $ (53.4) $1.1 $ 44.4 Cash flow (4) 42.1 (87.6) (106.3) 81.4 (70.4) - --------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.9 cents per kwh delivered for 1999. Intersegment expense is reflected in other operating expenses for Customer Service. (2) Primary assets for Nuclear include decommissioning assets, shared general and intangible plant and nuclear fuel. (3) Contribution margin represented by net income before financing costs (net-of-tax) and preferred dividend requirement. (4) Cash flow before financing activities. 24
Illinois Power Three Months Ended March 31, 1998 Customer Wholesale Total 1998 Service Energy Nuclear Other Company Revenues from external customers $391.6 $96.3 $ 1.6 $ - $489.5 Intersegment revenue (1) - 111.8 (0.6) - 111.2 ------------------------------------------------------------------------- Total Revenue 391.6 208.1 1.0 - 600.7 Depreciation and amortization expense 16.9 7.4 24.8 1.6 50.7 Other operating expenses (1) 244.7 150.7 84.0 (1.9) 477.5 ------------------------------------------------------------------------- Operating income (loss) 130.0 50.0 (107.8) 0.3 72.5 Interest expense 17.1 5.7 21.5 (10.2) 34.1 AFUDC (0.3) (0.4) (0.4) - (1.1) ------------------------------------------------------------------------- Net income (loss) before taxes 113.2 44.7 (128.9) 10.5 39.5 Income tax expense (benefit) 46.4 16.7 (55.3) (0.6) 7.2 Miscellaneous-net - 1.8 - 0.3 2.1 Interest revenue - - - (0.2) (0.2) ------------------------------------------------------------------------- Net income (loss) after taxes 66.8 26.2 (73.6) 11.0 30.4 Preferred dividend requirement 1.8 0.7 2.5 (0.1) 4.9 ------------------------------------------------------------------------- Net income (loss) available to common $ 65.0 $25.5 $ (76.1) $ 11.1 $ 25.5 - -------------------------------------------------------------------------------------------------------------------------------- Other information - Total assets $1,766.9 $ 717.1 $2,772.3 $ 84.4 $5,340.7 Total expenditures for additions to long-lived assets $ 30.2 $10.2 $ 7.2 $ 1.3 $ 48.9 long-lived assets - -------------------------------------------------------------------------------------------------------------------------------- Corporate Measures - Contribution margin (2) $ 75.6 $28.1 $ (61.2) $ 5.1 $ 47.6 Cash flow (3) 73.2 43.2 (81.6) 31.3 66.1 Return on net invested capital (4) 5.9% 6.0% N/A N/A 1.3% - --------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.5 cents per kwh delivered for 1998. Intersegment expense is reflected in other operating expenses for Customer Service. Nuclear reflects a replacement power expense for the increment of market price over the intersegment price for 1998. (2) Contribution margin represented by net income before financing costs (net-of-tax) and preferred dividend requirement. (3) Cash flow before financing activities. (4) Return on net invested capital calculated as contribution margin divided by net invested capital. 25 GEOGRAPHIC INFORMATION (Millions of dollars) - -------------------------------------------------------------------------------- Quarter ended March 31, 1999 1998 - -------------------------------------------------------------------------------- Revenues: (1) United States $472.3 $489.5 ====== ====== (Millions of dollars) - -------------------------------------------------------------------------------- March 31, 1999 1998 - -------------------------------------------------------------------------------- Long-lived assets: (2) United States $4,436.1 $4,536.5 ======== ======== (1) Revenues are attributed to geographic regions based on location of customer. (2) Long-lived assets include plant, equipment, and investments in subsidiaries. 26 ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain information contained in this report is forward-looking information based on current expectations and plans that involve risks and uncertainties. Forward-looking information includes, among other things, statements concerning the impact of regulatory changes, plans for the Clinton facility, and success in addressing Year 2000 issues; as well as those that include the words "expect," "intend," "predict," "estimate," "believe" or similar language. Although Illinova and IP believe these forward-looking statements are accurate, their businesses are dependent on various regulatory issues, general economic conditions and future trends, and these factors can cause actual results to differ materially from the forward-looking statements that have been made. The following factors, in addition to those discussed elsewhere in this report and in the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, and subsequent securities filings could cause results to differ materially from management expectations as suggested by such forward-looking statements: the outcome of state and Federal regulatory proceedings affecting the restructuring of the electric and utility industry; the impact on IP of current regulations providing for rate reductions and the phasing in of the opportunity for some customers to choose alternative energy suppliers; the effects of increased competition in the future due to, among other things, deregulation of certain aspects of IP's business at both the state and Federal levels, and the increasing popularity of alternative sources of electricity, such as co-generation facilities; the effects of the implementation of Illinova's various strategies to best respond to its changing business and regulatory environment, including potential acquisitions, focused growth of unregulated businesses and other options; the fluctuating electricity supply demands of IP customers, which, if increased beyond IP's generation capacity, might result in unplanned outages forcing IP to acquire additional supplies in the electricity marketplace in uncertain and often volatile prices and availability; changes in prices and costs of fuel; various financial risks attendant to selling or shutting down Clinton; ongoing nuclear operational exposures until Clinton is sold or shut down; the effect of events that can occur in Illinova's or IP's business operations or in general economic conditions, that could negatively impact its financial flexibility and costs of financing; the impact of the sale or shutdown of Clinton on IP's ability to issue indebtedness under its existing mortgages; the impact of current environmental regulations on utilities and the expectation that more stringent requirements will be introduced over time, which are likely to have a negative financial effect; various factors affecting non-utility investments, such as IGC's investments in foreign countries, which are subject to currency fluctuations, cyclical and sustained economic downturns and political risks; the inherent risks of active purchases and sales by Illinova, through IEP and IP, of electricity and natural gas futures and similar contracts; and the ability of Illinova and IP, their vendors and others to manage Year 2000 issues. 27 All forward-looking statements in this report are based on information that currently is available. Illinova and IP disclaim any obligation to update any forward-looking statement. ILLINOVA SUBSIDIARIES IP, a subsidiary of Illinova, engages 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 has publicly traded preferred shares outstanding but its common stock is wholly-owned by Illinova. IGC is Illinova's wholly-owned independent power subsidiary. IGC invests in energy supply projects throughout the world and competes in the independent power market. IGC's strategy is to invest in and develop "greenfield" power plants, acquire existing generation facilities and provide power plant operations and maintenance. IEP is a wholly-owned subsidiary of Illinova, IEP develops and markets energy-related products and services to the unregulated energy market throughout the United States and Canada and engages in the brokering and marketing of electric power and gas. IIC is a wholly-owned subsidiary of Illinova and was licensed by the State of Vermont as a captive insurance company. The primary business of IIC is to insure certain risks of Illinova and its subsidiaries. IBE is a wholly-owned subsidiary of Illinova and was created to account for miscellaneous business activities not regulated by the ICC or the Federal Energy Regulatory Commission (FERC) and not falling within the business scope of other Illinova subsidiaries. Illinova Power Marketing, Inc. (IPMI) is a wholly-owned subsidiary of Illinova created in April, 1999 to become the wholesale generation and power marketing company to which IP's fossil generating assets will be transferred. Regulatory approvals for the transfer of these assets and for IPMI's marketing activities are being sought. LIQUIDITY AND CAPITAL RESOURCES CAPITAL RESOURCES AND REQUIREMENTS Cash flows from operations during the first three months of 1999, supplemented by external financing and cash on hand, were sufficient to meet ongoing operating requirements and to service existing common and preferred stock dividends, debt requirements, IP's construction requirements and Illinova's investments in its subsidiaries. However, Illinova and IP liquidity has decreased as compared to March 31, 1998, as a result of higher fossil maintenance costs, increased marketing expenses, and higher Clinton costs combined with lower revenues caused by the rate reduction mandated by P.A. 90-561. Illinova expects to use future operating cash flows, supplemented by external financing, to meet operating requirements and to continue to service 28 existing debt, IP's preferred and Illinova common stock dividends, and Illinova's and IP's anticipated subsidiary investments and construction requirements for the remainder of 1999. Illinova currently has authority to issue an additional $130 million in debt securities under an existing $300 million shelf registration. Illinova put in place a $130 million Revolving Credit Agreement in January 1999, which had $64 million of capacity available at March 31, 1999. Prior to 1999 IP has paid Illinova dividends on the IP common stock held by Illinova to provide Illinova cash for operations. IP is limited in its payment of dividends by the Illinois Public Utilities Act, which requires retained earnings equal to or greater than the amount of any proposed dividend declaration or payment, and by the Federal Power Act, which precludes declaration or payment of dividends by electric utilities "out of money properly stated in a capital account." In the first quarter of 1999, IP did not declare or pay dividends on its common stock. Based on the Board's current dividend policy, management expects IP's retained earnings to be sufficient to support Illinova common dividends. IP also is allowed to periodically repurchase its common stock from Illinova in accordance with authority granted by the ICC, contingent on IP meeting certain cash flow tests. IP currently does not satisfy this cash flow test and it is anticipated that it will not satisfy the test throughout 1999. This test would not interfere with the repurchases, if any, of Illinova equity shares using securitization proceeds. Illinova's current $130 million capacity under the existing shelf registration should meet its cash requirements through the remainder of 1999. Illinova and IGC are developing additional financing capabilities to meet future needs. Through May 10, 1999, IP redeemed $57.1 million of 8.75% First Mortgage Bonds due 2021, $229 million of 8.00% New Mortgage Bonds due 2023, $22.9 million of 7.95% First Mortgage Bonds due 2004, $36.8 million of 6.50% First Mortgage Bonds due 1999, $39.85 million of 7.50% New Mortgage Bonds due 2025, along with 154,900 shares of Monthly Income Preferred Securities (MIPS) and 83,780 shares of various serial preferred stock series. These securities were retired using funds from securitization proceeds received in December 1998. IP's capital requirements for construction were approximately $37 million and $48 million during the three months ended March 31, 1999 and 1998, respectively. Through 2000, IP plans to complete improvements in its generation facilities including pollution control equipment and new combustion turbine peaking units. Illinova estimates that it will spend approximately $370 million for IP construction expenditures in 1999. IP construction expenditures for 1999 through 2003 are expected to total approximately $1.3 billion. In light of the December 1998 decision to exit Clinton and resulting Clinton impairment, Clinton capital expenditures are expensed as incurred and are not included in the above estimates. On March 2, 1999, IP deposited $62.1 million for partially depleted nuclear fuel in the Clinton reactor with IP Fuel Company as a result of Clinton Nuclear Station failing to restart by January 31, 1999. The liability for the nuclear fuel was accrued as of December 31, 1998. As part of the Clinton impairment entries at year end, nuclear fuel was written down to the expected consumption through August 31, 1999. Additional expenditures may be required during this period to accommodate the transition to a competitive environment, environmental compliance, system upgrades, and other costs which cannot be determined at this time. 29 In addition to IP construction expenditures, Illinova's capital expenditures for 1999 through 2003 are expected to include $592 million for mandatory debt retirement and approximately $600 million target levels for investment opportunities by the non-regulated subsidiaries. In addition, IPSPT has long-term debt maturities of $86.4 million in each of the above years. IP currently has the authority to issue $250 million in long-term debt and $500 million in short-term debt, which includes $350 million in committed bank lines of credit. Of these authorized amounts, IP had $229 million at March 31, 1999, in remaining capacity that may be utilized to issue commercial paper and extend floating rate notes. IP anticipates that this liquidity will be sufficient to address its requirements into the fourth quarter of 1999. IP is developing additional financial capabilities to meet future needs. Presently, IP's mortgage bonds are rated Baa1 by Moody's, BBB+ by Duff & Phelps and BBB by Standard & Poor's. IP's preferred stock is rated Baa2 by Moody's, BBB- by Duff & Phelps and BB+ by Standard & Poor's. Illinova's senior and medium-term notes have a rating of Baa3 from Moody's and BBB- from Standard & Poor's. On July 6, 1998, a change in outlook was issued. The outlook from Moody's changed from stable to negative and the outlook from Standard & Poor's changed from positive to stable. On March 4, 1999, Moody's placed all of the securities of Illinova and IP under review for possible downgrade, citing erosion of cash flow and an expected increase in leverage caused by the extended Clinton outage. On April 18, 1999, Moody's confirmed the security ratings of Illinova and IP, and removed the securities from review for possible downgrade following the NRC's decision to allow the restart of Clinton and the announcement of an interim sales agreement with AmerGen to purchase and operate Clinton. See "PECO Agreement" section which follows on page 30 for additional information regarding the interim sales agreement. ACCOUNTING MATTERS For further information on accounting issues, see "Accounting Matters" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on page 15 of this report. CLINTON POWER STATION In September 1996, a leak in a recirculation pump seal caused IP operations personnel to shut down Clinton. Clinton has not resumed operation. In January 1997, the Nuclear Regulatory Commission (NRC) named Clinton among plants having a trend of declining performance and, in January 1998, placed Clinton on its "Watch List" of nuclear plants that require additional regulatory oversight. In late 1997, an independent team conducted an ISA to thoroughly assess Clinton's performance, and an NRC team performed an evaluation to validate the ISA results. Both teams concluded that the underlying reasons for Clinton's 30 performance problems were ineffective leadership throughout the organization in providing standards of excellence, complacency throughout the organization, barrier weaknesses, and weaknesses in teamwork. In January 1998, IP and PECO announced an agreement under which PECO provides management services for Clinton, with IP maintaining the operating license and ultimate oversight for the plant. PECO employees have assumed senior positions at Clinton but the plant remains staffed primarily by IP employees. IP selected PECO because it believed that bringing in PECO's experienced management team would be the fastest and most efficient way to return Clinton to service and to a superior level of operation. In February 1998, IP filed with the NRC Clinton's Summary Plan for Excellence, a comprehensive set of strategies and associated actions necessary to improve performance, permit safe restart of the plant, and achieve excellence in operations. IP is implementing the actions required prior to plant restart. The NRC is conducting a formal review process in parallel with IP's recovery and restart program. On April 27, 1999, IP received notification from the NRC that the actions required prior to restart have been satisfied, thus lifting the regulatory agency's constraints on restarting the plant. Due to uncertainties of deregulated generation pricing in Illinois and to various operation and management factors, Illinova's and IP's Boards of Directors decided in December 1998 to sell or close Clinton. This decision resulted in an impairment of Clinton-related assets and accrual of exit-related costs of $1,327.2 million, net of income taxes, which was recognized as a charge against earnings. The prolonged outage at Clinton is having an adverse effect on Illinova's and IP's financial condition, through higher operating and maintenance and capital costs, lost opportunities to sell energy, and replacement power costs. Due to the failure of Clinton to restart by January 31, 1999, a provision in the lease agreement between IP and the Fuel Company required IP to deposit $62.1 million cash for the acquisition of core fuel in March 1999, with the Fuel Company Trustee for the benefit of investors in secured Notes of the Fuel Company. PECO AGREEMENT On April 15, 1999, IP announced that it had reached an interim agreement with AmerGen Energy Company (AmerGen), whereby AmerGen would purchase and operate Clinton and IP would buy at least 75 percent of the plant's electricity output for the next several years. AmerGen is owned jointly by PECO Energy Company (PECO) and British Energy. IP also announced a revised management agreement (Agreement) with PECO for the operation of Clinton commencing April 1, 1999. PECO will continue to manage the station pending a final agreement between the parties and consummation of the sale. Under the Agreement, starting April 1, 1999, PECO is assuming the plant's direct operating and capital expenditures, regardless of operating status. This eliminates the Company's exposure to the uncertainty regarding the 31 costs of returning Clinton to service and subsequent operations. In return for transferring this financial risk, the Company has modified the management agreement with PECO to incorporate a new fee structure. The Agreement obligates IP to pay a management fee to PECO calculated by multiplying a fixed dollar amount per MWH times 80 percent of the electricity generated at Clinton during the remainder of 1999. The financial impact of this obligation is contingent on three variables: (1) whether Clinton restarts; (2) the capacity levels at which it subsequently operates; and (3) the prices at which the electricity can be sold from time to time. Based on the terms of the revised management agreement the fees payable to PECO between April 1 and December 31, 1999 could equal or exceed the 1999 Clinton-related O&M and capital costs for which PECO assumed full responsibility commencing April 1, 1999. Under the interim agreement AmerGen has no obligation to buy the plant if it has not actually generated electric energy and been synchronized to the grid by December 31, 1999. For further information, see the management agreement, which is attached as exhibit A to the interim agreement filed as Exhibit 10.1 to this document. Under the terms of the interim agreement, AmerGen will pay IP $20 million for Clinton (including nuclear fuel) and IP will have an obligation to pay AmerGen $275 million to assume the Clinton decommissioning liability. It is anticipated that IP will transfer $95 million in its decommissioning trust fund and make payments of $30 million in each of the next six years to meet its decommissioning obligation. This compares favorably with the $529 million NPV that IP reported as its decommissioning liability as of December 31, 1998. IP has agreed to negotiate exclusively with AmerGen until June 15, 1999. While the interim agreement provides a framework for further negotiations toward a final agreement to sell Clinton to AmerGen, several significant steps remain before a sale can be completed. Significant income tax issues related to the funding of decommissioning costs, similar to those being addressed with the Internal Revenue Service by parties to other pending sales of nuclear generating stations, must be resolved to the mutual satisfaction of IP and AmerGen. The parties must conclude a definitive agreement. The NRC must approve the sale and the transfer of the operating license; the ICC must approve the sale; and, the FERC must approve the PPA. REGULATORY MATTERS FOSSIL GENERATION FILING IP filed a notice with the ICC in April 1999, as required by law, advising of its intention to sell its fossil generating assets to Illinova. Subsequently, Illinova intends to transfer those assets to its IPMI subsidiary. IPMI, which was incorporated in April 1999, will become a wholesale generation and power marketing company. The proposed transfer of assets from IP will be done pursuant to Section 16-111(g) of The Customer Choice and Rate Relief Act of 1997, which permits transfer of utility assets on successful demonstration to the Commission that certain financial and reliability criteria will be met. The Commission will have 90 days to review the filing and make its decision. Also, IP intends to make a filing with the FERC during the second quarter of 1999, seeking approval of a proposed Purchase Power Agreement between IP and IPMI. 32 ATTORNEY GENERAL COMPLAINT On July 17, 1998, a complaint against IP was filed at the ICC by the Illinois State Attorney General. The complaint alleges that IP failed to meet its statutory obligations to provide adequate and reliable service in connection with last summer's electric supply situation (for further disclosure, see "Power Supply and Reliability" on page 31). It asks the ICC to conduct a management audit of IP and seeks an order requiring IP to offer compensation to customers for voluntary conservation and service interruptions. The company has agreed to provide the Attorney General with a reliability report. The Attorney General and the Company have mutually agreed on an independent committee of two outside experts to review the report. The company believes this approach will lead to a settlement of the complaint without a material adverse effect. Although there were limited calls for voluntary conservation, and interruptible customers were curtailed, no firm load was interrupted or curtailed during all of 1998. SOYLAND POWER COORDINATION AGREEMENT The FERC approved an amended Power Coordination Agreement (PCA) between Soyland and IP in July 1997. Under the amended PCA, Soyland was allowed to prepay an Elected Capacity Reduction Fee associated with a unilateral reduction in its base capacity charge under the PCA. In December 1997, Soyland signed a letter of intent to pay in advance the remainder of its base capacity charges in the PCA. Soyland obtained the necessary financing and regulatory approvals during the second quarter of 1998. During the first quarter of 1998, IP received $30 million from Soyland and the remaining $40 million was received during the second quarter of 1998. The prepayment was deferred and was being recognized as interchange revenue evenly over the initial term of the PCA, which was from September 1, 1996 through August 31, 2006. In March 1999, Soyland and IP signed a new PCA agreement and filed this agreement with FERC. The new agreement no longer obligates IP to provide capacity and energy to Soyland with the exception of a small amount of capacity for the purpose of supplying Soyland's load within the IP Control Area. Therefore, the new PCA triggered the immediate recognition of the deferred revenue from the prepayment of the base capacity charge as discussed above. This resulted in an increase in interchange revenues of $61 million in the first quarter of 1999. UNIFORM FUEL ADJUSTMENT CLAUSE (UFAC) Prior to March 1998, the costs of fuel for electric generation and purchased power costs were deferred and recovered from customers pursuant to the UFAC. On March 6, 1998, IP initiated an ICC proceeding to eliminate the UFAC in accordance with P.A. 90-561. A new base fuel cost recoverable under IP's electric tariffs was established, effective on the date of the filing. UFAC elimination prevents IP from automatically passing cost increases through to its customers and exposes IP to the risks and opportunities of cost fluctuations and operating efficiencies. Under UFAC, IP was subject to annual ICC audits of its actual allowable fuel costs. Costs could be disallowed, resulting in negotiations and/or litigation with the ICC. In 1998, IP agreed to settlements with the ICC which 33 closed the audits for all previously disputed years. As a result of the settlements, IP electric customers received refunds totaling $15.1 million in the first quarter of 1999. These refunds complete the process of eliminating the UFAC at IP. DEREGULATION RULEMAKINGS AND TARIFFS The Illinois Public Utilities Act was significantly modified in 1997 by P.A. 90-561, but the ICC continues to have broad powers of supervision and regulation with respect to the rates and charges of IP, its services and facilities, extensions or abandonment of service, classification of accounts, valuation and depreciation of property, issuance of securities and various other matters. Before a significant plant addition may be included in IP's rate base, the ICC must determine that the addition is reasonable in cost, prudent and used and useful in providing utility service to customers. IP must continue to provide bundled retail electric service to all who choose to continue to take service at tariff rates, and IP must provide unbundled electric distribution services to all eligible customers as defined by P.A. 90-561 at rates to be determined by the ICC. During 1998, pursuant to authority granted in P.A. 90-561, the ICC issued rules associated with (i) transactions between the utility and its affiliates; (ii) service reliability; (iii) environmental disclosure; and (iv) alternative retail electric supplier certification criteria and procedures. During 1999, it is expected that the ICC will rule on (i) the rates and terms associated with the provision of delivery services for commercial and industrial customers; (ii) establishing the neutral fact finder price utilized in (a) calculating competitive transition costs and (b) IP's power purchase tariff; (iii) the competitive transition cost methodology; and (iv) guidelines regarding standards of conduct and functional separation. A proceeding will be opened in September 1999 to address the issue of unbundling billing, metering, and customer handling with a final decision to be rendered prior to the third quarter of the year 2000. The final rule on delivery service tariffs is expected in early August. Under the new rules, Illinois utilities must keep records identifying service interruptions experienced by each customer. Illinois utilities must also file an annual report detailing the reliability of its service and explaining its plans for reliability improvements. In addition, each utility must also report the number and causes of service interruptions that were due to causes within the utility's control. Outage targets were established for service to individual customers and for system performance. The extent to which revenues are affected by P.A. 90-561 will depend on a number of factors including future market prices for wholesale and retail energy, load growth and demand levels in the current IP service territory, and success in marketing to customers outside IP's existing service territory. The impact on net income will depend on, among other things, the amount of revenues earned and the cost of doing business. OPEN TRANSMISSION ACCESS AND COMPETITION In January 1998, IP, in conjunction with eight other transmission-owning entities, filed with the FERC for all approvals necessary to create and implement the Midwest Independent Transmission System Operator, Inc. (MISO). On 34 September 16, 1998, the FERC issued an order authorizing the creation of a MISO. The MISO has elected a seven-person independent board of directors. The goals of this joint undertaking are to: 1) put in place a tariff allowing easy and nondiscriminatory access to transmission facilities in a multi-state region, 2) enhance regional reliability and 3) establish an entity that operates independently of any transmission owner(s) or other market participants, thus furthering competition in the wholesale generation market consistent with the objectives of the FERC's Order No. 888. Since January 1998, four other transmission-owning entities joined the MISO. Participation in an ISO by utilities serving retail customers in Illinois was one of the requirements included in P.A. 90-561, enacted in 1997. The MISO has a stated goal to be fully operational by January 1, 2001. See "Open Access and Competition" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on page 14 of this report for additional information. YEAR 2000 DATA PROCESSING Passing from 1999 into 2000 creates a risk that computer-dependent processes will fail because the date will be read as "1900." Illinova began its Year 2000 (Y2K)project in November 1996. The project scope encompasses all of Illinova's subsidiaries including IP, IGC, and IEP. A central organization is providing overall project guidance and coordination among the business groups, meeting monthly to share information, conducting internal project reviews, and producing monthly status reports to all levels of Illinova management. Bi-monthly Year 2000 readiness reports are provided to the Illinova Board of Directors. The Year 2000 project involves evaluation and testing of software, hardware, and business processes, including mainframe and personal computer software and hardware, process computer software and hardware, end user computing, telecommunications and networks, vendor purchased packages, embedded systems, facility control systems, vendors/supplies, financial institutions, and electronic interfaces with outside agencies. The project is divided into two focus areas. The first focus area deals with information technology (IT) software, hardware, and infrastructure. This includes such items as the billing system, payroll system, accounts payable system, personal computers, telecommunications, networks, and mainframes. The second focus area targets non-IT operational systems and processes which encompass most of the systems and business processes actually used to deliver electricity and gas to customers. This is also the area where embedded systems and microprocessors are found. Included in this focus area are power plant facilities, transportation systems such as railways, barges, etc., fuel suppliers, electric and gas transmission and distribution facilities, substations and transformers, meters, building systems such as HVAC and security, and financial institutions. 35 The overall status of Illinova's Y2k project is illustrated in the table below. Illinova Status March 1999 IT Non-IT % Completion * % Completion * Complete Date Complete Date Awareness 100 02/01/97 a 100 05/31/98 a Inventory 100 01/20/97 a 100 02/28/99 a Assessment 100 05/09/97 a 100 02/28/99 a Process Analysis 100 11/30/98 a 100 03/31/99 a Implementation - (Mission Critical) 81 06/30/99 e 74 10/31/99 e Implementation - (Important to Operations) 87 05/31/99 e 73 10/31/99 e Contingency Planning 20 06/30/99 e 35 06/30/99 e *"a" = Actual Completion Date, "e" = Estimated Completion Date IP has completed its awareness, inventory, assessment, and process analysis phases. The table below provides further details differentiating between IT and non-IT for IP alone. 36 IP Status March 1999 IT Non-IT % Completion * % Completion * Complete Date Complete Date Awareness 100 02/01/97 a 100 04/29/98 a Inventory 100 01/20/97 a 100 07/31/98 a Assessment 100 05/09/97 a 100 09/30/98 a Process Analysis 100 11/30/98 a 100 02/28/99 a Implementation - ** (Mission Critical) 81 06/30/99 e 79 10/31/99 e Implementation - (Important to *** Operations) 87 05/31/99 e 82 10/31/99 e Contingency Planning 20 06/30/99 e 41 06/30/99 e *"a" = Actual Completion Date, "e" = Estimated Completion Date ** It is currently projected that all IP mission critical items will be fully Year 2000 ready by June 30, 1999, with the exception of one process computer system at Clinton. However, Clinton still plans to be Year 2000 ready, per NRC requirements, by developing contingency plans that will allow continued operation. *** It is currently projected that all IP important to operations items will be fully Year 2000 ready by June 30, 1999, with the exception of three process computer systems at Clinton and one process computer system in our fossil power system. Contingency plans for these systems are being developed to allow continued operations. IT systems (such as billing, payroll, etc.) and infrastructure are approximately 84% complete, with 100% completion projected by June 30, 1999. The customer billing system, materials management system, accounts payable system, power plant maintenance system, payroll system, and shareholder system have been remediated and are now year 2000 ready. Year 2000 work has not caused any IT projects to be delayed, and thus no maintenance costs have been deferred. The United States Department of Energy (DOE) has charged the North American Electric Reliability Council (NERC) with taking the lead in facilitating North American-wide coordination of electric utilities' Year 2000 efforts. The collective efforts of the industry will minimize risks imposed by Year 2000 to the reliable supply of electricity. NERC has in turn assigned the regional reliability councils the responsibility of assessing their respective networks to ensure reliable electric supply. IP is taking an active role within 37 its regional council (MAIN) in assessment and renovation of the grid and in developing contingency plans to minimize any unexpected Year 2000 grid problems. Illinois Power participated in the April NERC drill and is also participating in the September NERC drill. NERC has recommended that all "mission critical" systems needed to meet demand and reliability obligations be Year 2000 ready by June 30, 1999. IP is working diligently to meet the June 30, 1999, deadline. It is currently projected that all of IP's power plants and field transmission and distribution items will be fully Year 2000 ready by that date with the exception of one process computer system at Clinton. Clinton still plans to be Year 2000 ready by June 30, 1999, per NRC requirements, by developing contingency plans that will allow continued operation. The total cost for achieving Year 2000 readiness for Illinova is estimated to be approximately $20.5 million through 1999. Through the end of March 1999, $11.8 million, or 57% of the total $20.5 million had been spent. Invoicing is lagging a few months behind when the actual work is completed, and Clinton has had to reschedule some tasks to a later date to coincide with the plant startup schedule. Development of contingency plans has begun and are focused on Illinova's "mission critical" business processes. Contingency plans are being developed in accordance with industry guidelines, such as NERC and the General Accounting Office, and involve senior management review and approval. These plans address business continuity and the ability to deliver essential products and services to customers in the event of unexpected Year 2000 problems. Illinova is currently assessing potential worst-case scenarios. Such a scenario might include one or both of the following events: winter storms coupled with a significant Year 2000 system problem that compounds emergency response efforts and/or loss of a major telecommunications carrier causes disruptions in dispatching generation, dispatching emergency response crews, and communications with financial institutions. Contingency plans will address the above scenarios as well as any other potential scenarios that could affect the ability to serve customers and maintain the financial viability of Illinova DIVERSIFIED BUSINESS ACTIVITIES In February, 1999, IEP, a wholly-owned subsidiary of Illinova, purchased the Indiana-based natural gas management operations of Equitable Resources Marketing Company. Equitable Resources Marketing was a subsidiary of Equitable Resources, Inc., (ERI) of Pittsburgh, PA. ERI is an integrated energy company that produces, markets, and distributes natural gas and oil. In April 1999, IEP also purchased Quality Energy Services (QES), a Tempe, Arizona based natural gas marketing company. In May 1999, IEP purchased the Chicago, IL based holdings of Energy Dynamics, Inc., (EDI) an independent natural gas marketing firm based in Rolling Meadows, IL. 38 The 1998 combined revenues of ERI, QES, and EDI were approximately $67 million. ENVIRONMENTAL MATTERS GAS MANUFACTURING SITES See "Manufactured Gas Plant Sites" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on page 16 of this report. NITROGEN OXIDE On October 27, 1998, the U.S. EPA finalized air pollution rules that will require substantial reductions of NOx emissions in Illinois and 21 other states. This rule will require the installation of NOx controls by May 2003, with each Illinois utility's exact reduction requirement to be specified in 1999. Preliminary estimates of the capital expenditures needed in 2000 through 2003 to comply with these new NOx limitations are $90 million to $140 million. Nox estimates are included in forecasted capital expenditures. The legality of this proposal, along with its technical feasibility, is being challenged by a number of states, utility groups, and utilities, including IP. EMISSION ALLOWANCE EXCHANGES The value of emission allowances expected to be given up in future periods as the result of exchange agreements was recorded in the third quarter 1998 at the current market price and a liability of $9.8 million was recognized. This obligation will be adjusted as price fluctuates until the allowances are surrendered. The market value and recorded liability of the allowances at March 31, 1999, was $10.4 million. GLOBAL WARMING On December 11, 1997, international negotiations to reduce greenhouse gas emissions concluded with the adoption of the Kyoto Protocol. This Protocol requires the United States to reduce greenhouse gas emissions to 7% below 1999 levels during the years 2008 through 2012 and to make further reductions thereafter. Before it can take effect, this protocol must be ratified by the United States Senate. However, United States Senate Resolution 98 which passed 95-0 in July 1997, says the Senate would not ratify an agreement that fails to include commitments for all countries or would damage the economy of the United States. Since the Protocol does not contain these key elements, ratification would be a major political issue. It is anticipated that a ratification vote will be delayed until the current administration feels the Protocol could pass, or an attractive alternative to the Kyoto Protocol is found. IP will face major changes in the way it generates electricity if the Kyoto Protocol is ratified, or if the Protocol's reduction goals are incorporated into other environmental regulations. IP would have to repower some generating units and change from coal to natural gas in other units to reduce greenhouse gas emissions. IP estimates that compliance with these proposed regulations may require significant capital outlays and annual operating expenses which could have a material adverse impact on Illinova and IP. 39 POWER SUPPLY AND RELIABILITY Electricity was in short supply during the 1998 summer cooling season because of an unusually high number of plant outages in the Midwest region. IP bought generation and transmission capacity to prevent firm load curtailment and took additional steps to avoid power outages, including upgrading transmission lines and equipment, readying emergency procedures, and returning to service five units that had been in cold shutdown. Expenses incurred as a result of the shortage have had a material adverse impact on Illinova and IP. The electric energy market experienced unprecedented prices for power purchases during the last week of June 1998. IP's power purchases for 1998 were $517 million higher than 1997 due to summer price spikes resulting in a $274 million increase in power purchased, additional purchases of $215 million to serve increased volumes of interchange sales, and market losses of $28 million recorded on forward power purchase and sales contracts as part of the wholesale trading business. Income from interchange sales was $382 million higher than in 1997 due to increased sales volumes and higher prices. IP expects to have in excess of 400 MW of additional generation on line for the summer of 1999. This includes approximately 235 MW from five oil-fired units which were brought up from cold shutdown during the summer of 1998 and 176 MW from four natural gas turbines that IP plans to install before the summer of 1999. Total cost for the two projects is estimated at $87 million. IP also plans to refurbish nine gas turbines already in service at a cost of $13 million. In addition, the restructuring of the Soyland PCA agreement freed up an additional 287 MW of capacity. IP expects to have sufficient generating capacity to serve firm load during the periods of peak summer demand using demand-side and supply-side initiatives taken in response to the 1998 regional supply crisis. If generation is lost or demand is at unprecedented levels, firm load could be curtailed. RESULTS OF OPERATIONS THREE MONTHS ENDED March 31, 1999 AND 1998 Electric Operations - Electric revenues for the first quarter of 1999 decreased $21.4 million compared to the first quarter of 1998 primarily due to the 15% residential rate decrease effective August 1, 1998, and the reclassification of revenue-related taxes mandated by deregulation legislation. Revenue-related taxes are now accounted for as a liability, and both revenues and general taxes are reduced. The rate decrease resulted in revenue reductions of $17.4 million in the first quarter of 1999. The removal of $11.3 million in excise and municipal taxes from revenue and general taxes also negatively impacted electric revenues. These reductions were partially offset by increased sales in 1999. Electric interchange revenues decreased $2.3 million. Interchange activity decreased $59.0 million along with a $3.4 million expense to reflect mark-to-market for forward contracts and options. These decreases were offset by 40 a $60.1 million revenue recognition resulting from the restructuring of a Soyland Power Cooperative power supply contract. Power purchased decreased $45.4 million due largely to decreased interchange activity. During the quarter, fuel for electric plants decreased $4.3 million due to decreased generation and decreased emission allowance costs. These factors combined to increase electric margin $26.0 million for the quarter. Kilowatt hour (kwh) sales to ultimate consumers increased 6.5% for the quarter due to increases of 11.3% and 9.5% in the residential and the commercial markets, respectively. Heating degree days increased approximately 12% from 1998 which contributed to the increase in sales to the temperature-sensitive markets. For the first quarter of 1999 and 1998, Clinton was unavailable due to the continued outage which began September 6, 1996. The equivalent availability for IP's coal-fired plants was 77.5% and 79.5% for the three months ended March 31, 1999 and 1998, respectively. Gas Operations - For the quarter, gas margin remained constant. Gas revenues increased $6.5 million reflecting a 10% increase in therm sales (excluding transport) caused by colder winter weather. Gas purchased costs increased $6.5 million due to the higher consumption. Operation and Maintenance Expenses - Of the current quarter increase of $42.9 million, $29.0 million is due to higher operating and maintenance expenses associated with the Clinton outage. This $29.0 million increase in Clinton expenses includes $12.4 million of costs which would have been considered capital additions had Clinton not been impaired. For more information, see "Clinton Power Station" of the "Management's Discussion and Analysis" on pages 13-14 of this report. Depreciation and amortization - The decrease in depreciation and amortization for the first quarter of 1999 compared to 1998 was $6.2 million. Due to the Clinton impairment, nuclear depreciation decreased approximately $23 million but was offset by approximately $18 million for the amortization of the adjustment to fair value for the fossil generation assets. Diversified enterprises - Due primarily to decreased power trading activity at IEP, diversified enterprise revenues decreased $9.8 million for the first quarter of 1999, which was offset by a decrease in diversified enterprise expenses of $13.2 million. Miscellaneous - net - Of the current quarter increase of $12.4 million, $6.2 million is income from IGC investments not accounted for under the equity method. Interest income increased $3.1 million primarily due to the investment of the proceeds of the transitional funding trust notes issued in December 1998, and the adjustment in the net present value of the decommissioning regulatory asset. Revenues from non-utility operations also increased in the first quarter of 1999. Interest expense - The increase in interest expense of $6.5 million in the first quarter of 1999 is primarily the result of interest on increased long-term debt and the adjustment in the net present value of the decommissioning liability, offset by lower interest charges resulting from reduced short-term borrowings in 1999. 41 Earnings per Common Share - The earnings per common share for Illinova during the first quarter of 1999 and 1998 resulted from the interaction of all the factors discussed herein as well as fewer shares of common stock outstanding. RESULTS OF OPERATIONS - ILLINOVA SEGMENTS OF BUSINESS Customer Service For the quarter, both the contribution margin and cash flow measures were lower than for the corresponding quarter in 1998, primarily due to decreased electric revenues as discussed below. Transmission, Distribution and Sale of Electric Energy The Customer Service Business Group derives its revenues through regulated tariffs. Its source of electricity is the Wholesale Energy Business Group; electricity was provided to the Customer Service Business Group at a fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998, primarily due to decreased electric revenues as discussed below. Retail electric revenues, excluding interchange sales, for the first quarter of 1999 decreased 7.7% over the first quarter of 1998 due to the 15% residential decrease mandated by P.A. 90-561, which became effective July 15, 1998 voluntarily advanced by IP from the statutory effective date of August 1, partially offset by increased kwh sales to customers. Additionally, operating costs were higher during the first quarter of 1999 compared to the same period in 1998. Transmission, Distribution and Sale of Natural Gas Revenues are derived through regulated tariffs. During the first quarter of 1999, revenues from gas sales and transportation were up 5.5%, while therms sold and transported were up 7.7% over the first quarter of 1998. The increase in therm sales was caused by a return to normal weather after the milder-than-usual weather experienced in 1998. The margin on gas sales and transportation decreased 0.2% during the period due to an increase in gas costs, offset by decreases in both therms sold and therms transported. Wholesale Energy Factors leading to the increased contribution margin during the first quarter of 1999 compared to 1998 include: higher intersegment revenues in 1999 due to a new pricing agreement; higher purchased power costs, partially offset by lower fuel costs, due to fossil generating stations having extended outages during 1999; a one-time credit to electric interchange revenues from the restructuring of a power supply contract; market losses recorded on forward power purchase and sales contracts as part of the wholesale trading business; and higher depreciation expense due to the revaluation of fossil assets during the December 1998 quasi-reorganization. Cash flow is lower than 1998 due to cash received in 1998 related to the power supply contract buyout, increased expenditures for major capital projects in 1999, payments in 1999 for prepaid fuel purchases, as well as changes in current assets and liabilities due to normal operating activity. 42 Wholesale Energy provided power to the Customer Service Group at 2.9 cents per kwh during the first Quarter of 1999 compared to 2.5 cents per kwh in 1998. Nuclear IP's only nuclear generating station, Clinton, did not generate electricity during the first quarter of either 1999 or 1998. Its only revenues were those paid by customers under a tariff rider to fund the decommissioning trust. Nuclear's results were unfavorably affected by higher operating and maintenance expenses and capital being expensed in 1999. Illinova Energy Partners, Inc. Although negative, contribution margin is slightly more favorable than in 1998 due to increased revenues and margin earned on electricity and natural gas, offset by continuing investment in future growth and market penetration in both the Midwest and Western United States. Illinova Generating Company IGC's positive contribution margin during the first quarter of 1999 compared with the first quarter of 1998 reflect improvement due primarily to an increase in income from investing activities. The increase in cash flows is attributed to increased distributions from project investments. Other Included in this category are the Financial Business Group, the Support Services Business Group, and Corporate. These segments did not individually meet the minimum threshold requirements for separate disclosure. See "Illinova Segments of Business" in the footnotes to the financial statements on page 19 for additional information. RESULTS OF OPERATIONS - ILLINOIS POWER SEGMENTS OF BUSINESS Customer Service For the quarter, both the contribution margin and cash flow measures were lower than for the corresponding quarter in 1998, primarily due to decreased electric revenues as discussed below. Transmission, Distribution and Sale of Electric Energy The Customer Service Business Group derives its revenues through regulated tariffs. Its source of electricity is the Wholesale Energy Business Group; electricity was provided to the Customer Service Business Group at a fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998. Retail electric revenues, excluding interchange sales, for the first quarter of 1999 decreased 7.7% over the first quarter of 1998 due to the 15% residential decrease mandated by P.A. 90-561, which became effective July 15, 1998 voluntarily advanced by IP from the statutory effective date of August 1, partially offset by increased kwh sales to customers. Additionally, operating costs were higher during the first quarter of 1999 compared to the same period in 1998. 43 Transmission, Distribution and Sale of Natural Gas Revenues are derived through regulated tariffs. During the first quarter of 1999, revenues from gas sales and transportation were up 5.5%, while therms sold and transported were up 7.7% over the first quarter of 1998. The increase in therm sales was caused by a return to normal weather after the milder-than-usual weather experienced in 1998. The margin on gas sales and transportation decreased 0.2% during the period due to an increase in gas costs, offset by decreases in both therms sold and therms transported. Wholesale Energy Factors leading to the increased contribution margin during the first quarter of 1999 compared to 1998 include: higher intersegment revenues in 1999 due to a new pricing agreement; higher purchased power costs, partially offset by lower fuel costs, due to fossil generating stations having extended outages during 1999; a one-time credit to electric interchange revenues from the restructuring of a power supply contract; market losses recorded on forward power purchase and sales contracts as part of the wholesale trading business; and higher depreciation expense due to the revaluation of fossil assets during the December 1998 quasi-reorganization. Cash flow is lower than 1998 due to cash received in 1998 related to the power supply contract buyout, increased expenditures for major capital projects in 1999, payments in 1999 for prepaid fuel purchases, as well as changes in current assets and liabilities due to normal operating activity. Wholesale Energy provided power to the Customer Service Group at 2.9 cents per kwh during the first quarter of 1999 compared to 2.5 cents per kwh in 1998. Nuclear IP's only nuclear generating station, Clinton, did not generate electricity during the first quarter of either 1999 or 1998. Its only revenues were those paid by customers under a tariff rider to fund the decommissioning trust. Nuclear's results were unfavorably affected by higher operating and maintenance expenses and capital being expensed in 1999. Other Included in this category are the Financial Business Group, the Support Services Business Group, and other corporate functions. These segments did not individually meet the minimum threshold requirements for separate disclosure. See "IP Segments of Business" in the footnotes to the financial statements on page 23 for additional information. 44 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk RISK MANAGEMENT Illinova is exposed to both trading and non-trading market risks. The non-trading market risks to which Illinova is exposed include interest rate risk, equity price risk, foreign currency risks, and commodity price risks. The market risk due to trading is comprised basically of commodity price risk. Illinova's risk management policy allows the use of financial derivative products, like futures, swaps, and certain types of options to manage its positions. Illinova uses various approaches to measure and monitor market risk, which include Value-at-Risk (VaR) and position sensitivity measures to market factors. VaR is the maximum potential loss that may be incurred on a portfolio due to adverse movements in market factors, given a confidence level and specified holding period. VaR does not represent the expected nor the maximum loss that may actually occur since gains and losses may differ from those estimated, based on actual fluctuations in market factors and changes in the composition of the portfolio during a given evaluation period. INTEREST RATE RISK Illinova is exposed to interest rate risk from its financing activities, through issuance of fixed or variable-rate debt and acquisition of bank notes. IP is likewise exposed to interest rate risk resulting from its issuance of fixed or variable-rate debt, commercial paper, and bank notes that it has obtained. Interest rate exposure is managed in accordance with policy by limiting the variable-rate exposure to a certain percentage of capitalization. Interest rate derivative instruments are also used when deemed appropriate to change the composition of variable to fixed-rate component. In addition, the sensitivity of the portfolio to changes in market factors like interest rate levels and volatility are also monitored. At March 31, 1998, there was no interest rate derivative instrument in use. Interest rate VaR is calculated based on a variance-covariance approach using the RiskMetrics FourFifteen(TM) model. A 95 percent confidence level and a one-day holding period is currently used. The interest rate risk as measured by VaR at March 31, 1999, as compared to VaR at December 31, 1998, is given below. - -------------------------------------------------------------------------------- (Millions of dollars) March 31, 1999 December 31,1998 - -------------------------------------------------------------------------------- VaR VaR Illinova, including IP debt $9.2 $14.9 IP debt only $8.7 $14.2 - -------------------------------------------------------------------------------- Contributing factors to the decrease in VaR were retirement of high coupon debt with maturities extending past the year 2020 and an increase in commercial paper levels from that at year end. The December 31, 1998, VaR was unusually high due to the issuance of securitized debt with the removal of called bonds not occurring until after year end. The securitized debt has shorter maturities than the called bonds, which further contributed to the decrease in VaR. 45 COMMODITY PRICE RISK Trading Positions Illinova is exposed to commodity price risk through IEP's power trading activities and IP's trading and non-trading operations. IEP uses a variance-covariance approach to calculate VaR, similar to the RiskMetrics(TM) model, to monitor and control its market risk positions. IP measures, monitors, and manages its commodity price risk using a proprietary VaR model employing a Monte Carlo simulation technique. IP and IEP both use a 95 percent confidence level and a five-day holding period to monitor their daily trading market risk positions. During the quarter ended March 31, 1999, the Board approved a change in the risk management policy, to use a five day holding period instead of a four-day period. IP's and IEP's trading VaR at March 31, 1999, and December 31, 1998, as restated using a five day holding period follow: - -------------------------------------------------------------------------------- March 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------- (Millions of Dollars) VaR VaR IP $0.6 $1.4 IEP $0.1 $0.1 - -------------------------------------------------------------------------------- IP and IEP both use stress and scenario testing to control "event risk", i.e., the risk that certain stressful market events will occur and result in a loss. In addition, option positions are monitored using sensitivity limits such as delta (sensitivity to price change), gamma (sensitivity of delta to price change), and vega (sensitivity to change in implied volatility.) Non-Trading Positions IP is also exposed to non-trading commodity price risk through its energy generation business. IP uses physical contracts and is authorized to use financial derivative instruments to manage its native load requirements. To measure, monitor, and control the commodity price risk of its non-trading portfolio, IP uses the same proprietary Monte Carlo model used in the trading portfolio. The Monte-Carlo simulation process used in this VaR model generates the power price, fuel price and load series that are used to value the generation assets, fuel assets, and contracts entered into by the firm (e.g., tolling, forward, call & put options). A sophisticated process is used to generate daily and hourly prices based on historical price series and volatility, wherein "price spikes", a recent phenomenon in the electricity markets, are modeled into the price series. The VaR calculated by this model represents the maximum reduction in operating margin given a 95 percent confidence level. This means that there is only a 5 percent probability that the reduction in operating margin from the expected margin will be greater than what is provided by the VaR number. In this model, a sufficient number of scenarios are generated, whereby each scenario simulates a one-year margin (one-year holding period). The expected margin is obtained by averaging the margins calculated from all the simulation scenarios. The VaR is obtained by sorting the simulation results from the lowest to highest value and taking the 95th percentile worst case value. 46 Since the new VaR methodology was implemented only at the beginning of March 1999, there is no comparable VaR number at December 31, 1998. The VaR for the non-trading portfolio at March 31, 1999 using a five-day holding period is $11.6 million. The overall IP electricity portfolio is also controlled using quarterly expected margin reduction limits. In this process, the difference between the current expected margin and last quarter's expected margin is monitored against the quarterly limits. To control "event risk", IP measures the "Stress-VaR", i.e., the VaR calculated using assumptions similar to the events that led to the electricity price spikes in June 1998. The "Stress-VaR" is monitored against stress limits that were approved by the Board. FOREIGN OPERATIONS RISK Illinova's foreign operations risk is its inherent risk of loss due to the potential volatility of emerging countries and fluctuations in foreign currency exchange rates in relation to the U.S. dollar. At March 31, 1999, IGC had invested $169 million in several international operations, many of which are joint ventures. Primarily, these investments are with affiliates owning energy-related production, generation, and transmission facilities. IGC is exposed to foreign currency risk, sovereign risk, and other foreign operations risks, primarily through investments in affiliates of $47 million in Asia and $119 million in South and Central America. To mitigate risks associated with foreign currency fluctuations, the majority of contracts entered into by IGC or its affiliates are denominated in or indexed to the U.S. dollar. OTHER MARKET RISK Illinova is exposed to equity price risk primarily through IP. IP maintains trust funds, as required by the NRC, to fund certain costs of nuclear decommissioning. As of March 31, 1999, these funds were invested in domestic and international equity securities, fixed income securities, and cash and cash equivalents. By maintaining a portfolio that includes equity investments, IP is maximizing the return to be used to fund nuclear decommissioning, which in the long term will correlate better with inflationary increases in decommissioning costs. The equity securities included in the corporation's portfolio are exposed to price fluctuations in equity market risk as a result of fluctuations in interest rates. IP actively monitors its portfolio by benchmarking the performance of its investments against equity and fixed-income indexes. It maintains and periodically reviews established target allocations of the trust assets approved in the investment policy statement. VaR at March 31, 1999, calculated based on a 95 percent confidence level and a one day holding period follows: - -------------------------------------------------------------------------------- (Millions of dollars) Value-at-Risk - -------------------------------------------------------------------------------- IP $1.4 - -------------------------------------------------------------------------------- 47 ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits The Exhibits filed with this 10-Q are listed on the Exhibit Index. (b) Reports on Form 8-K since December 31, 1998: Report filed on Form 8-K on February 12, 1999 Item 7: Illinova announces continued work toward restarting Clinton Power Station and pursuit of negotiations with potential buyers. Report filed on Form 8-K on March 3, 1999 Item 5, Other Events: Press release: Illinova releases 1998 year end earnings. Item 7, Exhibits: Illinova Consolidated Income Statements. Report filed on Form 8-K on April 19, 1999 Item 5, Other Events: Press Release: Illinova Releases 1999 first quarter earnings, Announces expected sale of Clinton to AmerGen. Item 7, Exhibits: Illinova Consolidated Income Statements. 48 SIGNATURES Pursuant to the requirements 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) /s/Larry F. Altenbaumer --------------------------- Larry F. Altenbaumer Senior Vice President, Chief Financial Officer, Treasurer and Controller on behalf of Illinova Corporation Date: May 17, 1999 49 SIGNATURES Pursuant to the requirements 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) /s/Larry F. Altenbaumer --------------------------- Larry F. Altenbaumer Senior Vice President and Chief Financial Officer on behalf of Illinois Power Company Date: May 17, 1999 50 EXHIBIT INDEX PAGE NO. WITHIN SEQUENTIAL NUMBERING EXHIBIT DESCRIPTION SYSTEM 10 Material Contracts 52 - 128 27 Financial Data Schedule UT (filed herewith) 51 EX-10 2 EX-10.1 March 31, 1999 Mr. Charles Bayless Chairman Illinois Power Company 500 South 27th Street Decatur, Illinois 62521 Re: Interim Agreement Relative to the Clinton Nuclear Power Station Dear Mr. Bayless: Reference is hereby made to that certain Agreement between Illinois Power Company ("IP") and PECO Energy Company ("PECO") dated as of January 15, 1998, as amended by that certain Incentive Compensation Agreement to Amend the Management Services Agreement dated as of May 19, 1998 (collectively, the "Management Agreement"), whereby PECO has been providing management services to IP in connection with the restart of IP's 930 MWE Clinton Nuclear Power Station ("Clinton"). PECO and IP have been in discussions concerning the possibility of a sale or abandonment (hereinafter, "sale") by IP of Clinton to PECO or AmerGen Energy Company ("Buyer"), a nuclear operating company owned by PECO and British Energy. The parties intend promptly to negotiate a Definitive Agreement which will contain the definitive terms and conditions relative to the sale of Clinton and additionally to negotiate certain Ancillary Agreements, including a Power Purchase Agreement ("PPA") and Interconnection Agreement, which will be entered into in connection with the sale. The purpose of this Interim Agreement is to (i) set forth certain rights, obligations and agreements of the parties during the term of this Interim Agreement, (ii) provide for certain amendments to the Management Agreement which are set forth in an Amendment No. 2 effective April 1, 1999, to be executed by IP and PECO in the form attached hereto as Exhibit A, (iii) provide for the execution by IP. PECO and the designated Chief Nuclear Officer of Clinton of a Leased Employee Agreement of even date in the form attached hereto as Exhibit B, (iv) provide for the modification by the parties of the Confidentiality Agreement dated March 12, 1999 attached hereto as Exhibit C, to provide for an extension of the Exclusivity Period as described in Paragraph 4 hereof, and (v) to establish certain business points which will guide the parties in their negotiation of the Definitive Agreement. 1. Negotiation of Definitive Agreement and Ancillary Agreements This Interim Agreement shall become effective on the date (the "Effective Date") that this Interim Agreement is ratified and approved by the Board of Directors of IP. Following the Effective Date and during the Exclusivity Period, IP and the Buyer shall use their respective best efforts to negotiate the Definitive Agreement and all Ancillary Agreements necessary or desirable to complete and provide for the sale of Clinton by IP to Buyer. Buyer is completing due diligence of Clinton, and IP is making available to Buyer such information, including confidential information, as Buyer has to date reasonably requested. The parties will endeavor to complete the negotiation of the Definitive Agreement and Ancillary Agreements during the Exclusivity Period but the parties will have no obligations to each other except as specifically provided for in this Interim Agreement, the Confidentiality Agreement, the Management Agreement as amended by Amendment No. 2 thereto and the Leased Employee Agreement, and as may hereinafter be provided by the Definitive Agreement and the Ancillary Agreements. Without in any way binding the parties hereto (the parties being bound with respect to these matters only to the extent and as provided for in the Definitive Agreement as may hereafter be executed by the parties), it is intended that the Definitive Agreement and the Ancillary Agreements thereto will reflect the following business points between the parties as such business points may be amplified or supplemented through negotiation of the parties and set forth in the Definitive Agreement and Ancillary Agreements: (a) Purchase Price At the closing of the sale of Clinton under the Definitive Agreement (the "Closing"), which Closing shall be within ten (10) days after satisfaction or waiver of all conditions precedent to the Closing, Buyer will pay IP $20,000,000 for all of IP's right, title and interest in and to Clinton including all IP equipment, spare parts, fixtures, inventory, nuclear fuel and other property of any kind necessary for the operation and maintenance of Clinton. IP has indicated that it desires to exclude from the sale certain lands and facilities which are not necessary for the safe, efficient and economic operation of Clinton. The Definitive Agreement shall identify the particular portions of the Clinton site and facilities which IP and Buyer agree will be excluded from the sale, subject to appropriate conditions to meet regulatory requirements. Buyer shall have the right to contract for any necessary transmission service under IP's Open Access Transmission Tariff and for back-up power to the site consistent with NRC requirements and current arrangements. (b) PPA Ancillary to the Definitive Agreement will be a PPA providing for IP's purchase of energy from Clinton for the period from Closing through December 31, 2004. In addition to such other terms, conditions and amplifications the parties may negotiate, the PPA will reflect the following basic understandings: IP will purchase and the Buyer will deliver to IP on an as-available (or Unit output) hourly basis the following percentages of the actual net electric output of Clinton: Year 1999 2000 2001 2002 2003 2004 % output 80 xx xx xx xx xx IP will pay for such output (with pricing reflecting all charges, including energy and capacity) at the following general price levels, provided, however, that such prices will be modified by mutual agreement to reflect seasonality (canted to strongly incentivize the Buyer to maximize output at Clinton during the summer months) and "on" and "off" peak periods on an hourly basis: Year 1999 2000 2001 2002 2003 2004 Price per MWH $xx $xx $xx $xx $xx $xx (c) Decommissioning Liability At the Closing, IP will make or cause to be made such additional cash deposits as are necessary to the Clinton Qualified and Nonqualified Decommissioning Trusts (together with any other trusts into which the current trusts may be liquidated or the current trust funds may be transferred, the "Decommissioning Trusts") in order to ensure that the liquidated value of the aggregate trust corpus of the Decommissioning Trusts is not less than $95,000,000. On each of the next six (6) anniversary dates of the Closing, IP wil deposit or cause to be deposited an additional $30,000,000 in such Decommissioning Trusts subject to the NRC approval of such funding as an acceptable method of demonstrating reasonable assurance of such funding in accordance with 10 CFR ss.50.75 (e)(v) and IP providing such additional assurance of payment as may be mutually agreed to by IP and Buyer. IP and the Buyer shall cooperate in obtaining federal and state approvals to permit these additional contributions to be made to the Qualified Trust contained in the Decommissioning Trusts to the maximum extent practicable. The parties intend that to the extent practicable the Buyer will take control of the decommissioning funds, but in any event the parties agree that neither IP nor any of its affiliates will have any liability following the Closing with respect to the decommissioning of Clinton except to the extent of the aforementioned funding of the Decommissioning Trusts at the time of the Closing and IP's liability to make the six (6) anniversary payments following the Closing. Except as set forth in the immediately preceding sentence, at Closing Buyer will assume and be responsible for all other liability with respect to the decommissioning of Clinton. It will be a condition to the Closing that either through the receipt of favorable rulings from the Internal Revenue Service, changes in existing tax law and/or the regulations thereunder or other circumstances, the Buyer is satisfied that the transfer of the assets represented by the Decommissioning Trusts on a tax-free or tax-efficient basis can be accomplished and that the maintenance of the Qualified and Nonqualified Decommissioning Trust funds post-Closing can be accomplished without negative tax implications for the assets of the Decommissioning Trusts or the Buyer. Similarly, it will be a condition to Closing that IP must be satisfied that any chosen structure will neither result in adverse tax consequences to IP (such as, but not limited to, inability to deduct its payments into the Decommissioning Trusts, increased amounts realized on the sale or other income recognition which are not offset by deductions or losses, its inability to collect its decommissioning tariff from the Illinois taxpayers on a tax effective basis, or a recapture of the Qualified or Nonqualified Decommissioning Trusts) nor jeopardize IP's legal entitlement to continue to collect such decommissioning tariff in no less than the aggregate amounts now envisioned under such tariff. (d) Spent Fuel Fees IP will continue to pay or cause to be paid all spent fuel disposal fees now in effect or subsequently imposed for nuclear fuel burned at Clinton prior to Closing. On and after the Closing, Buyer will assume the liability for payment of all spent fuel disposal fees for fuel burned on or subsequent to Closing. Fuel burned shall be determined by electricity generated in accordance with Department of Energy Regulations. (e) Decommissioning and Decontamination Fee IP will continue to pay or cause to be paid to the Department of Energy the annual decontamination and decommissioning fees associated with Clinton fuel enriched and burned prior to the Closing. (f) Insurance IP will maintain in effect until the Closing substantially the same level of property damage and liability insurance for Clinton as is currently in effect. As of the date of Closing, IP shall retain all rights to (i) its member insurance accounts in Nuclear Electric Insurance Limited ("NEIL"), and (ii) its future nuclear insurance distributions and credits from both NEIL and American Nuclear Insurers ("ANI") including, but not limited to, shutdown credits earned by IP through the date of Closing. Alternatively, upon mutual agreement of the parties, IP shall transfer is rights referenced in clauses (i) and (ii) of the immediately preceding sentence to Buyer at the Closing, subject to the approval of NEIL and/or ANI, if required, in return for a lump sum payment from Buyer to IP in an amount to be mutually agreed upon by the parties. (g) Employees As of the Closing, Buyer will employ consistent with its business needs the IP employees then working at Clinton and those fully dedicated to Clinton who are on Clinton's budget and payroll and Buyer will be given the opportunity, subject to agreement by IP and Buyer as to the particular individuals involved, to offer positions to IP headquarters staff whose job responsibility is to provide support for Clinton. Buyer will recognize the unions which currently represent employees at Clinton and will adopt pension and other employee benefit plans and arrangements for Clinton employees which will provide substantially similar benefits to such employees retained by Buyer as such employees would receive under IP's plans and programs in effect as of the date of Closing. IP and Buyer shall agree in the Definitive Agreement to develop a transition plan in accordance with Sections 16-128 of the Illinois Public Utilities Act to be offered to employees of Clinton prior to and following Closing. IP will be responsible for implementing and funding the transition plan for employees at Clinton who are not transferred to (employed by) Buyer and for applicable severance obligations owing to any transferred employees lawfully terminated (except for cause) by Buyer during the twenty-four (24) month period following Closing. Following its employment of the employees referenced above, the Buyer will comply with the provisions of Section 16-128 of the Illinois Public Utilities Act. As soon as practicable following the Closing, IP will transfer or cause to be transferred to defined contribution plans established and/or already maintained by the Buyer an amount equal to the assets (including, but not limited to, promissory notes evidencing loans from IP's corresponding defined contribution plans to transferred employees that are outstanding as of the transfer date) representing the account balances of all transferred employees. This transfer will be done in the most practical and effective method in order to ensure compliance with the Internal Revenue Code and the Employee Retirement Income Security Act. As soon as practicable after the Closing, Seller shall cause to be transferred from Seller's pension and welfare benefit plans to Buyer or its affiliates an amount (the "Benefit Assets Transfer Amount") equal to the total of (i) an amount to be mutually agreed upon by the parties based upon the projected costs to cover pension benefit obligations owing to Seller's transferred employees, (ii) an amount to be mutually agreed upon by the parties equal to the value of retiree medical and life insurance benefits for each transferred employee accrued through the date immediately preceding Closing, less (iii) any payment made to or in respect of any transferred employee who retires or otherwise terminates employment with Buyer after Closing and before the date of the transfer of such assets. With respect to the preceding sentence, a dollar for dollar adjustment to the purchase price shall be made in the event that compliance with applicable law results in the actual assets transferred to Buyer being different than the assets that would have been transferred if the asset calculation were undertaken using mutually approved long-term actuarial assumptions, including, but not limited to, long-term trust earnings. (h) Approvals The Definitive Agreement will contain provisions which make the Closing subject, among other things, to receipt of all necessary federal, state and local regulatory approvals as well as the expiration of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act. These approvals must contain no terms or conditions which would cause a material adverse effect on the value of Clinton or on the cost of the transaction to IP and shall be otherwise reasonably satisfactory to the parties. The parties will cooperate with each other and use their respective best efforts to obtain the necessary regulatory approvals as promptly as practicable following the execution of the Definitive Agreement. (i) Closing Conditions The Definitive Agreement shall contain provisions which condition each party's obligation to proceed with the Closing on all Closing conditions having been satisfied or waived by the appropriate party within eighteen (18) months of the execution of the Definitive Agreement. A further condition to Closing will be the requirement that Clinton has at any instant in time subsequent to March 15, 1999 and on or before December 31, 1999 actually generated electric energy and been synchronized to the grid. In addition to such Closing conditions described herein, the Definitive Agreement will contain such further Closing conditions as are negotiated by the parties. (j) Environmental Matters To the extent that IP has not already conducted or had conducted a Phase I environmental site assessment reasonably satisfactory to Buyer of the Clinton land and facilities to be transferred, Buyer may, at its expense, have a Phase I and/or Phase II environmental site assessment conducted by environmental consultants mutually agreeable to IP and Buyer to identify any recognized environmental condition for which a release notification would be required to be made to any state or federal agency having jurisdiction or which would pose an imminent or substantial endangerment to human health or the environment under applicable environmental laws. IP and Buyer shall mutually agree on (i) whether any remediation is necessary with respect to any such recognized environmental conditions, (ii) what type of remediation should be performed, if any, and (iii) who will conduct such remediation. IP shall cause any mutually agreed upon remediation to be performed prior to Closing, or IP shall pay to Buyer the estimated cost for any uncompleted mutually agreed upon remediation or make appropriate arrangements to indemnify Buyer therefor. From and after the Closing, Buyer shall assume, and shall indemnify IP with respect to, all environmental liabilities and obligations at the site; provided however, that IP shall indemnify Buyer for environmental liabilities arising from waste disposal or treatment of waste at the site or other waste disposal activities of IP which occurred off-site prior to Closing. (k) Property Tax The Definitive Agreement will provide for (i) the allocation of property taxes on the basis of the percent of the tax year that Clinton is owned by IP and the Buyer, and (ii) the allocation of transfer taxes on a 50-50 basis between IP and Buyer. 2. Publicity The parties must mutually agree on any news release, press statement or other public announcement relating to this Interim Agreement or the proposed sale of Clinton to the Buyer, which agreement in either case shall not be unreasonably withheld or delayed, except either party may disclose the transaction to the extent it is advised by counsel that such disclosure is required under applicable regulatory provisions, securities laws or the rules of the New York Stock Exchange. Notwithstanding the foregoing, no party will disclose the existence of this Agreement prior to the Effective Date, except as otherwise provided in Paragraph 6 herein. 3. Transaction Costs Each party shall bear its own costs related to this Agreement and the agreements exhibited herein, the Definitive Agreement and the Ancillary Agreements, to the provision, receipt and examination of due diligence materials, and to any other transaction costs, including the cost of legal, technical and financial consultants and the cost of any necessary or appropriate regulatory filings and/or prosecuting applications for required regulatory approvals, except as may otherwise be provided in the Definitive Agreement. 4. Exclusivity Buyer shall have the exclusive right to negotiate with IP for the sale of Clinton during the Exclusivity Period to the extent and in the manner provided for in paragraph 10 of the Confidentiality Agreement; provided, however, that the Exclusivity Period shall continue in effect from the execution of this Agreement until the execution of a Definitive Agreement or 5:00 p.m. Decatur, Illinois time June 15, 1999, whichever first occurs. 5. Other Agreements Concurrently with the execution of this Interim Agreement, the appropriate parties will execute and deliver to each other Amendment No. 2 to the Management Agreement and the Leased Employee Agreement (together with the Confidentiality Agreement, as modified hereby, the "Other Agreements"). 6. Regulatory Filings: Cooperation At the time of the execution of this Interim Agreement, the parties hereto will confer as to whether this Interim Agreement, any of the Other Agreements or the transactions to be implemented under any of them require or make advisable (i) the filing of any documents, notices, requests or applications for approval with any state, local or federal government or regulatory agency, and/or (ii) the appearance before or personal contact with the appropriate personnel at any such governmental body or agency. To the extent that any of the foregoing is determined by the parties to be necessary or advisable, the parties will cooperate with one another and use their respective best efforts to initiate and complete such necessary or appropriate action in the most effective and prompt fashion practicable. 7. Term If the Definitive Agreement is executed by the parties prior to June 15, 1999, this Interim Agreement will terminate upon the earlier to occur of the date of the Closing or the effective date of the termination of the Definitive Agreement, unless the Definitive Agreement otherwise provides. Otherwise, this Interim Agreement will terminate at midnight on December 31, 1999. 8. Governing Law This Interim Agreement shall be governed by, and construed, interpreted and enforced in accordance with, the laws of the State of Illinois without regard to the conflict of law provisions thereof. 9. No Waiver: Amendment No failure or delay by any of the parties in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. This Interim Agreement shall not be modified, supplemented or amended except by a writing signed by all parties hereto. Sincerely, PECO Energy Company By:_________________________ Paul E. Haviland Vice President AmerGen Energy Compay By:_________________________ Name:____________________ Title:___________________ Agreed to and accepted: ILLINOIS POWER COMPANY By: /s/David W. Butts -------------------------- Name: David W. Butts Title: Sr. Vice President Exhibit A AMENDMENT NO. 2 THIS AMENDMENT AGREMENT (the "Amendment") is made and entered into this 31st day of March, 1999, to be effective as of the "Effective Date" (as hereinafter defined), by and between PECO ENERY COMPANY, a Pennsylvania corporation ("PECO"), and ILLINOIS POWER COMPANY, an Illinois corporation ("IP"). WHEREAS, PECO and IP entered into that certain Agreement dated as of January 15, 1998, as amended by that certain Incentive Compensation Agreement to Amend the Management Services Agreement dated as of May 19, 1998 (the "Incentive Compensation Amendment"), the terms of which are incorporated by reference herein (such Agreement as so amended being hereinafter referred to as the "Management Agreement"); WHEREAS, the Management Agreement provides for the provision of certain management services by PECO to IP in support of outage recovery efforts and operation of IP's Clinton Power Station ("CPS"); WHEREAS, IP, PECO and AmerGen Energy Company ("AmerGen") have entered into an Interim Agreement of even date herewith (the "Interim Agreement") (which Interim Agreement shall become effective on the date that it is ratified and approved by the Board of Directors of IP (the "Effective Date")), in anticipation among other things of (i) PECO's or AmerGen's purchase of CPS (pursuant to the terms and conditions of a to-be-negotiated and executed definitive asset purchase agreement (the "Definitive Agreement")) and (ii) a revised fee arrangement under the Management Agreement and the assumption of certain O&M and capital costs relative to CPS by PECO; and WHEREAS, the parties hereto desire to amend the Management Agreement, effective as of the Effective Date, in the manner set forth herein to provide, among other things, for changes in the compensation for PECO's management of CPS during the period that the Interim Agreement is in effect, or as otherwise provided for in the Definitive Agreement; NOW, THEREFORE, FOR AND IN CONSIDEATION OF the mutual promises and covenants hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The Management Agreement is hereby amended by deleting the seventh sentence of Article 3.1.1 in its entirety and inserting in lieu thereof the following sentence: The Parties recognize and agree that notwithstanding any duties the CNO will have by virtue of his position in IP, the CNO may share information regarding Clinton Power Station with PECO management, including information regarding plant status, plant condition, budgets, future needs for repairs, replacements, modifications and costs, plant staff performance, labor relations, regulatory issues, and local conditions and issues; provided, however, that in no event may the CNO disclose information to PECO management (i) which is privileged to IP (including but not limited to the attorney client communication privilege and work product doctrine), or (ii) the disclosure of which would constitute a breach of a confidentiality or nondisclosure agreement to which IP is bound with another party or a violation of law; provided further that any information shared by CNO with PECO management shall be subject to the non-disclosure provisions of Article 15 of this Agreement and to the terms of the Confidentiality Agreement among IP, PECO and AmerGen Energy Company dated March 12, 1999, as amended from time to time, which is incorporated by reference herein. 2. The Management Agreement is hereby amended by deleting Articles 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.11, 5.12, Attachments A and B, and Article 3 of the Incentive Compensation Amendment in their entirety and inserting in lieu thereof the following Articles 5.1, 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10 and 5.11 which read in their entirety as follows: 5.1 Direct Operating and Maintenance and Capital Costs Reimbursement Commencing as of April 1, 1999, PECO shall be responsible for the payment of all direct operating and maintenance ("O&M") costs and direct capital costs incurred by IP and allocable to the operation of CPS. The specific categories of such O&M and capital costs for which PECO shall be responsible are set forth on Attachments A.1, A.2 and A.3, respectively, which Attachments are incorporated herein by reference. The Parties will confer with each other to ensure that the categories of costs set forth on Attachments A.1, A.2 and A.3 constitute reimbursable direct O&M and capital costs of IP allocable to the operation of CPS. Notwithstanding the foregoing prior to the scheduled November, 1999 purchase of fuel, IP will confer with PECO as to the timing of such purchase and the treatment of such purchase if the Closing under the Definitive Agreement does not occur. IP shall remain responsible for all other costs attributable to the operation of CPS, including, for example: pension, benefits and payroll tax payments; real property taxes; DOE spent fuel fees; DOE decommissioning and decontamination fees, if any; and contributions to the CPS decommissioning trust funds. IP shall submit to PECO invoices for each calendar month detailing all O&M and capital costs incurred or accrued by IP with respect to such month and reimbursable or payable, as the case may be, by PECO hereunder. Within fifteen (15) days of receipt of such invoice, PECO shall by wire transfer pay the invoiced amount, subject to PECO's right to dispute the invoice pursuant to Article 5.7. Other than as expressly provided in such Article 5.7, such payments are non-refundable. Invoices to PECO will be submitted to: Charles P. Lewis PECO Nuclear 965 Chesterbrook Boulevard Wayne, Pennsylvania 19087 Fax No.: and may, at IP's election, be submitted by first class or priority mail, courier, fax or hand delivery. 5.2 PECO Management Fee Commencing as of April 1, 1999, in consideration for all services, payments and reimbursements provided by PECO under this Agreement, including without limitation the On-Site Management Services and Additional Services, and in lieu of any and all other fees and incentive payments accrued as of, or otherwise payable after, April 1, 1999, IP shall, in addition to the provision of electric energy as provided in Article 5.3, pay as provided in the next paragraph to PECO a management fee ("Management Fee") of $xx.xx for each megawatt-hour ("Fee Hour") of electric energy contained during the period commencing April 1, 1999 and ending December 31, 1999 in the Net Electric Output of CPS after subtracting therefrom the Electric Output Entitlement, as such terms are defined in Article 5.3. For months commencing after December 31, 1999, the Management Fee shall be calculated consistent with the pricing provided for in the Power Purchase Agreement to be negotiated in connection with (and attached as an Exhibit to) the Definitive Agreement. Commencing with the month immediately following the first calendar month after March 1999 that CPS generates Net Electric Output which is measurable, IP will by the last day of each month provide to PECO a statement setting forth the Net Electric Output of CPS for the preceding month along with a calculation of the Management Fee based thereon and shall concurrently make payment of such indicated fee to PECO by wire transfer. PECO shall be entitled to dispute such statement in accordance Article 5.7 hereof. 5.3 PECO Entitlement to Electric Output As additional consideration for On-Site Management Services and Additional Services provided by PECO, IP shall be obligated to deliver to PECO 20% of the Net Electric Output of the CPS (the "Electric Output Entitlement"), if any, generated after March 31, 1999 during term of this Agreement. For purposes of determining the amount of the Electric Output Entitlement to be delivered to PECO pursuant to this Article 5.3, the Net Electric Output of CPS shall be defined as follows: [Within fifteen (15) business days following the execution of this Amendment, the Parties shall negotiate a supplement to this Amendment pursuant to which the Parties shall agree on procedures for calculating the Net Electric Output of CPS prior to and following installation of the revenue-grade metering discussed in the following paragraph, as well as the metering points necessary to calculate the Net Electric Output and Station Service Energy.] The Parties recognize and agree that the current metering equipment and system at the CPS (the "Metering System") is not optimal and modifications to improve the Metering System are needed. The Parties shall mutually agree upon the modifications and upgrades required to convert the Metering System to the level of revenue-grade metering as well as how the costs of such modifications and upgrades shall be allocated between the Parties. PECO shall be notified of and shall have the right to have a representative present at any test, inspection, adjustment, maintenance, installation or replacement of any part of the Metering System performed by IP or its agents. IP will test the Metering System for accuracy at least once each year. In addition, IP will also conduct a test, at any time within thirty (30) business days after a request by PECO, if PECO reasonably believes that the Metering System is inaccurate by more than two percent (2%). PECO may have a representative present during all testing. The costs of such tests requested by PECO shall be borne one-half by PECO an one-half by IP; provided, however, that if a test requested by PECO indicates that the Metering System is accurate to within two percent (2%), PECO shall bear the full costs of such test. IP shall be responsible for delivery of the Electric Output Entitlement to the Delivery Point and shall have no obligation, responsibility or liability for making arrangements for or the costs for the transmission of the Electric Output Entitlement beyond the Delivery Point, including but not limited to, transmission and ancillary service costs and congestion costs. IP shall provide for transmission service in accordance with IP's Open Access Transmission Tariff on file with the FERC. The Electric Output Entitlement shall be unit specific from the CPS and, except as expressly set forth above, IP shall have no minimum or maximum delivery obligations over any time period. If CPS is unavailable in whole or in part, IP shall have no obligation to supply back-up energy to PECO. The transaction contemplated by IP and PECO in this Section 5.3 is a wholesale power sale for resale pursuant to IP's Power Sales Tariff (the "PS Tariff") on file with the Federal Energy Regulatory Commission. IP and PECO have previously executed a "Form of Agreement for Electric Service" pursuant to the PS Tariff, dated as of October 3, 1996. IP and PECO desire for this transaction to occur pursuant to this Form of Agreement for Electric Service. Other than as provided for in this Article 5.3 and in Article 5.2, PECO shall not be entitled to receive from IP any other compensation or payment for, or in respect of, any services or performance rendered under this Agreement. 5.4 Billing Estimates and Adjustments If either Party renders an invoice or statement on an estimated basis, any adjustment to such invoice or statement shall be made in the subsequent month's invoice or statement, as appropriate. Each invoice or statement shall be subject to adjustment for errors in arithmetic, computation, meter readings, or other errors, until twelve months after the date each respective invoice or statement was rendered. 5.5 Record Retention and Audit Rights IP and PECO shall both keep complete and accurate records and all other data required by either of them for the purpose of proper administration of the Agreement, including such records as may be required by state or federal regulatory authorities. All such records shall be maintained for a minimum of five (5) years after the creation of the record or data and for any additional length of time required by state or federal regulatory agencies with jurisdiction over IP and PECO. IP and PECO, on a confidential basis as provided for in Article 15 of this Agreement, will provide reasonable access to the relevant and appropriate financial and operating records and data kept by the other relating to this Agreement necessary for such Party to comply with its obligations to federal and/or state regulatory authorities, through the use of a mutually agreed upon third party auditor. The Party seeking access to such records in this manner shall pay 100% of the fees and expenses associated with use of the third party auditor. 5.6 Late Payment If either IP or PECO fails to pay any amount due under this Agreement in full, when due, then such Party shall be required to pay interest on the unpaid or late amount, which shall accrue from the date payment was due through the date payment is made at a daily rate equal to the lower of (a) the highest daily prime interest rate published in the Wall Street Journal on the date of, or the next business day following, the invoice due date, or (b) the highest daily rate allowed under applicable law. Any over-payments or under-payments shall bear interest as provided above and shall be assessed from the time of the over or under payment to the date of the refund or payment thereof. 5.7 Disputed Invoices or Statements Management Fees and O&M/capital costs payable hereunder shall not be subject abatement or setoff and shall be paid in full when due. If either Party disputes an invoice or statement or any part thereof, it nevertheless shall make the payment due in full but may dispute the invoice or statement in the manner prescribed in Article 12, but only if Notice of such dispute is provided to the other Party within one year of the date of the invoice or statement. 5.8 Proration If this Agreement is terminated effective on a day other than the last day of a calendar month, the Management Fee, O&M costs and capital costs due for that month hereunder shall be prorated based on the ratio of the number of days of such month that this Agreement is in effect to the total number of days in such month. 5.9 Payment by Wire Unless otherwise specified in writing by the receiving Party, all payments made under this Agreement shall be by wire transfer of immediately available funds to a bank account specified in writing by PECO or IP, respectively, and in accordance with the instructions provided by each Party. 5.10 Taxes Any and all taxes, fees and assessments based on the payment or receipt of Management Fees or the Electric Output Entitlement, whether paid in cash or power, shall be borne by PECO. PECO, at its own expense, will file any documentation required by governmental authorities with respect to such payment or receipt of Management Fees or the Electric Output Entitlement. 5.11 Separation Costs Except as may be otherwise provided in the Definitive Agreement, separation agreements with any IP employee, or any PECO employee providing services pursuant to this Agreement, who is outplaced during the term of this Agreement shall be the sole financial responsibility of the employing Party, either IP or PECO, as the case may be, or as specified in any Leased Employee Agreement among the Parties and any employee. 3. The Management Agreement is hereby amended by deleting Article 7.2 in is entirety and inserting in lieu thereof the following Article 7.2, which reads in its entirety as follows: 7.2 Limit on PECO Liability PECO's aggregate liability to IP, exclusive of indemnification obligations, arising out of this Agreement or the performance thereof in any calendar year, whether arising in contract, tort or otherwise (including strict liability), shall not exceed the greater of (a) $20,000,000.00, or (b) the aggregate fees paid to PECO by IP under this Agreement for all periods prior to April 1, 1999 plus the product of $10.00 multiplied by the aggregate number of Fee Hours against which IP has paid Management Fees to PECO. 4. The Management Agreement is hereby amended by deleting Article 11.1 in its entirety and inserting in lieu thereof the following Article 11.1, which reads in its entirety as follows: 11.1 Termination Without Cause This Agreement shall terminate on the date of the Closing pursuant to the Definitive Agreement contemplated by the Parties for the sale of CPS to PECO. In the event of the termination of the Interim Agreement without the Parties having entered into and executed a Definitive Agreement, this Agreement will terminate on December 31, 1999. In the event that a Definitive Agreement is entered into and executed by the Parties, but is terminated without a Closing for the sale of CPS, then this Agreement will terminate on the later to occur of (i) December 31, 1999, or (ii) the effective date of termination of the Definitive Agreement. At any time after termination of the Exclusivity Period as described in the Interim Agreement and unless otherwise provided in the Definitive Agreement, if any, IP may terminate this Agreement by providing 180 days written Notice of termination to PECO, such termination to be effective as of the date of the Notice or, upon mutual agreement of the Parties, as of any other date. Except as provided in Article 20.10, termination in accordance with this Article 11.1 shall discharge both Parties from all obligations and duties under this Agreement that have not become payable as of the effective date of termination. Upon the provision of a Notice of termination pursuant to this Article 11.1, or beginning September 1, 1999, in the event that a Definitive Agreement has not been executed, the Parties shall work in good faith to provide for the expeditious replacement of PECO personnel and transition of responsibility and work in progress in a safe and orderly manner, with the actual length of transition to be established by IP. The Term of this Agreement shall extend until the effective time of any termination thereof pursuant to this Article 11. 5. The Management Agreement is amended by deleting Article 18 in its entirety. 6. The Management Agreement is hereby amended by deleting Article 20.15 in its entirety and inserting in lieu thereof the following Article 20.15, which reads in its entirety as follows: 20.15 Employee Status Except as otherwise provided in the Definitive Agreement, during the term of this Agreement and for a period of eighteen months thereafter, PECO shall not, directly or indirectly, initiate offers of employment or hire any IP employees, without IP's prior written consent. During the term of this Agreement and for a period of eighteen months thereafter, IP shall not, directly or indirectly, initiate offers of employment or hire any personnel employed by PECO who has provided On-Site Management Services or Additional Services, without PECO's prior written consent. 7. Except as provided in paragraphs 1, 2, 3, 4, 5 and 6 above, the Management Agreement shall remain in full force and effect. 8. Miscellaneous (a) This Amendment Agreement and the Management Agreement as amended hereby constitutes the complete understanding of the Parties with respect to the subject matter set forth herein, and shall supersede any prior understanding or agreement to the contrary, written or oral, and may not be amended, altered or discharged unless in a writing signed by the Parties hereto. (b) This Amendment shall be governed by and construed in accordance with the laws and decisions of the State of Illinois. IN WITNESSS WHEREOF, the parties have caused this Amendment to be executed by their duly authorized officers. ILLIOIS POWER COMPANY "IP" By:/s/David W. Butts Witness: /s/Kay M. Trummel PECO ENERGY COMPANY "PECO" By:_________________________ Witness: - --------------------- Exhibit B LEASED EMPLOYEE AGREEMENT THIS LEASED EMPLOYEE AGREEMENT (the "Agreement") is made and entered into this 31st day of March, 1999, by and among PECO ENERGY COMPANY, a Pennsylvania corporation ("PECO"), ILLINOIS POWER COMPANY, an Illinois corporation ("IP"), and John P. McElwain ("Employee"). WHEREAS, PECO and IP have entered into that certain Agreement effective as of January 15, 1998, as the same has been amended by that certain Inventive Compensation Agreement to Amend the Management Services Agreement dated as of May 19, 1998, and Amendment No. 2, dated of even date herewith (collectively, the "Management Agreement"), the terms of which are incorporated by reference herein; WHEREAS, the Management Agreement provides for the provision of certain management services by PECO to IP in support of outage recovery efforts and future operations of IP's Clinton Power Station ("CPS"); WHEREAS, PECO employs Employee who has the experience and skills necessary to perform such management services; WHEREAS, PECO has selected Employee to serve as the full time Chief Nuclear Officer ("CNO") of CPS; WHEREAS, in reliance upon PECO's representations regarding Employee's experience and skills, IP has approved PECO's selection of Employee as CNO of CPS; and WHEREAS, the parties hereto desire to permit IP to lease the services of Employee from PECO subject to the conditions set forth herein; NOW, THEREFORE, FOR AND IN CONSIDERATION OF the mutual promises and covenants hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Furnishing of Employee. PECO agrees to furnish, for the time specified in Section 2 hereof, Employee to provide full time services under the Management Agreement (the "Work"). 2. Term. This Agreement and PECO's provision of Employee shall continue for the term of the Management Agreement or until the earlier termination of this Agreement by written notice of either IP, PECO or Employee, at the will of the terminating party, subject, however, to the terms and conditions of Section 3.1 and Article 11 of the Management Agreement. 3. Status of Employee. Employee shall serve as the CNO of IP and in such capacity shall be an officer of IP subject to the direction of the IP Chief Executive Officer ("CEO") or other officer as designated by the CEO and subject to IP's standard rules of conduct (a copy of which is attached to the Management Agreement as Attachment "C"). For operational and functional purposes related to the operation of the CPS, Employee shall be treated as an employee of IP and shall be entitled to those rights of indemnification and other protection from claims brought by third parties as afforded by IP to is officers and employees. Except as expressly provided by the foregoing, neither PECO nor any of its employees or agents, including Employee, shall maintain, hold out, represent, state or imply to any other individual or entity that an employer/employee relationship exists between IP and PECO or between IP and Employee. Notwithstanding the foregoing, PECO, IP and Employee hereby acknowledge and agree that Employee shall remain an employee of PECO, and except for actions taken in his position and under his authority as CNO, IP shall have no liability of any kind or nature whatsoever to Employee, PECO, or any other individual or entity, as a result of the actions of Employee as a consequence of Employee's status as a leased employee. PECO and Employee recognize, covenant and agree that neither PECO nor Employee shall be entitled to any compensation or other benefits given to any employees of IP, including (without limitation) pension, welfare benefits, incentive bonuses, compensation insurance and unemployment insurance. 4. Duties of Employee. As an officer of IP, Employee agrees to devote his time, attention and energies in the performance of the duties designated by IP, that with respect to such duties Employee shall be under the sole supervision, direction and control of IP, and that Employee is subject to those duties of loyalty and honesty to IP as an officer as established by Illinois law. As an officer of IP, Employee shall report to, and be subject to the supervision of, the CEO of IP or such other officer of IP as may from time to time be designated by the CEO. Notwithstanding the foregoing, IP, PECO and Employee recognize and agree that Employee may share information regarding CPS with PECO management, including information regarding plant status, plant condition, budgets , future needs for repairs, replacements, modifications and costs, plant staff performance, labor relations, regulatory issues, and local conditions and issues, provided, however, that in no event may Employee disclose information to PECO management (i) which is privileged to IP (including, but not limited to, the attorney client communication privilege and work product doctrine), or (ii) the disclosure of which would constitute a breach of a confidentiality or nondisclosure agreement to which IP is bound with another party or constitute a violation of law; provided further that any information shared by Employee with PECO management shall be subject to the non-disclosure provisions of Paragraph 6 of this Agreement. PECO shall not take any action either pursuant to this Agreement or the Management Agreement that diminishes the final decision-making authority of IP with respect to licensed activities, including, but not limited to, shut-down and start-up, reporting, operability determinations, deferral or prioritization of repairs, implementation of quality assurance programs, continuation of operations or cessation of operations (either short-term or permanently), or organizational or design changes to the CPS. 5. Responsibility for Compensation and Expenses. PECO hereby recognizes, covenants and agrees that, as the employer of Employee and pursuant to Section 20.4 of the Management Agreement, it shall be solely and exclusively responsible and liable for Employee's compensation, and all expenses, costs, liabilities, assessments, taxes, insurance and other obligations incident to the employment of Employee in performance of the Work hereunder, including (without limitation) all wages and salary, benefits, withholding taxes, social security taxes, unemployment taxes and workers' compensation insurance premiums. 6. Confidentiality. As an employee of PECO and pursuant to this Agreement, Employee shall be bound by the provisions of the Confidentiality Agreement between IP and PECO, dated December 29, 1997, attached to the Management Agreement, and incorporated by reference herein and by the terms of the Confidentiality Agreement among IP, PECO and AmerGen Energy Company, dated March 12, 1999, which is incorporated by reference herein. 7. Miscellaneous. (a) The parties may not assign this Agreement or any of their rights, duties or obligations hereunder without the prior written consent of the remaining parties, and any attempted assignment without such prior written consent shall be null and void. (b) This Agreement constitutes the complete understanding of the parties with respect to the subject matter set forth herein, and shall supersede any prior understanding or agreement to the contrary, written or oral, and may not be amended, altered or discharged unless in a writing signed by all parties hereto. (c) This Agreement shall be governed by and construed in accordance with the laws and decisions of the State of Illinois. (d) Failure by either party hereto, any time or from time to time, to enforce and require the strict keeping and performance of any terms and conditions of this Agreement shall not constitute a waiver of any such terms and conditions at any future time and shall not prevent such party from insisting on the strict keeping and performance of such terms and conditions at any time. (e) The rights and responsibilities of the parties hereto under Sections 4 and 6 hereof shall survive any termination or expiration of this Agreement. (f) The unenforceability or invalidity of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions hereof. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers. PECO ENERGY COMPANY "PECO" Witness: By:_________________________ _____________________ Its:________________________ ILLINOIS POWER COMPANY "IP" Witness: By:/s/David W. Butts /s/Kay M. Trummel Its:Sr. Vice President "EMPLOYEE" Witness: /s/John P. McElwain John P. McElwain /s/Dale L. Holtzscher Exhibit C CONFIDENTIALITY AGREEMENT THIS CONFIDENTIALITY AGREEMENT (the "Agreement') is made and entered into this 12th day of March, 1999, by and among ILLINOIS POWER COMPANY, an Illinois Corporation ("Illinois Power"), AMEREGEN ENERGY COMPANY L.L.C., a Delaware limited liability company ("AmerGen"). And PECO ENERGY COMPANY, a Pennsylvania corporation and shareholder of AmerGen ("PECO") (PECO and AmerGen are sometimes collectively referred to herein as the "Buyer Parties"). W I T N E S S E T H WHEREAS, Illinois Power and the Buyer Parties are discussing the possibility of a transaction involving the sale or abandonment of the Clinton Nuclear Power Station (the "Clinton Plant") located in Clinton, Illinois (the "Transaction"); and WHEREAS, in order to permit each party to evaluate fully the potential merits of the Transaction, each party will furnish, or cause to be furnished, "Evaluation Material" (as defined below) to the other parties and their Representatives (as defined below); NOW, THEREFORE, for and in consideration of the premises, the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto (collectively, the "Parties" and individually, a "Party") hereby agree as follows: 1. Definitions (a) "Affiliate" shall have the meaning set forth in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (b) "Evaluation Material" shall mean all data, information, reports, interpretations ions, forecasts and records (whether in oral or written form, electronically stored or otherwise) containing or otherwise reflecting information concerning the Transaction, the Supplying Party (as defined below) or its Affiliates or subsidiaries which is (or has been heretofore) provided by the Supplying Party or its Representatives (as defined below) to the Recipient (as defined below) or its Representatives pursuant to this Agreement or any of the Other Agreements (as defined below), and all notes, analyses, compilations, studies or other documents in tangible form (whether in written form, electronically stored or otherwise) that contain or otherwise reflect such information whether prepared by the Supplying Party, the Recipient or their respective Representatives or others. Notwithstanding the foregoing, the following will not constitute "Evaluation Material" for purposes of this Agreement: (i) Information that was already in the possession of the Recipient or its Representatives prior to the date hereof and that was not acquired or obtained from the Supplying Party or its Affiliates or Representatives; (ii) Information that is obtained by the Recipient or its Representatives from a source other than the Supplying Party or its Affiliates or Representatives who, insofar as is known to the Recipient after reasonable inquiry, is not prohibited by a contractual, legal or fiduciary obligation to the Supplying Party from transmitting the information to the Recipient or its Representatives; or (iii) Information that is or becomes generally available to the public other than as a result of a disclosure by the Recipient or its Representatives in violation of the provisions of this Agreement. Provided, however that the exceptions set forth in subsections (i) through (iii) above shall not extend to any data, information, reports, interpretations, forecasts or records obtained or developed by or disclosed to the Buyer Parties, or either of them, in connection with PECO's operation and maintenance of the Clinton Plant or its performance under the Agreement dated as of January 15, 1998 with Illinois Power or any other agreement between the Buyer Parties (or either of them or any of their Affiliates) and Illinois Power (or any of its Affiliates) (such Agreement and all such other agreements being herein referred to as the "Other Agreements"),. all of which data, information, reports, interpretations, forecasts and records shall be deemed Evaluation Material for purposes of this Agreement. (c) "Representatives" of any Party shall mean the subsidiaries and Affiliates of such Party and the respective directors, officers, employees, representatives and agents of such Party and such Party's subsidiaries and Affiliates. 2. Nondisclosure. Except as otherwise expressly provided in this Agreement, without the prior written consent of the Party delivering or providing the information or as to which the information relates (the "Supplying Party"), Evaluation Material will be held in confidence and not disclosed .by the Party receiving or developing the information following receipt (the "Recipient") or its Representatives or used by the Recipient or its Representatives other than directly or indirectly in connection with the consideration and evaluation of the Transaction or in strict compliance with such of the Other Agreements as may be relevant. Except as otherwise expressly provided herein, the Recipient further agrees that it will only disclose Evaluation Material received from a Supplying Party to its Representatives who need to know the Evaluation Material to evaluate the possible Transaction or in strict compliance with such of the Other Agreements as may be relevant and who are informed of its confidential nature and agree to be bound by the terms of this Agreement. Each Recipient agrees to be fully responsible for any breach of this Agreement by any of its Representatives. 3. Confidentiality of Transaction. Except as expressly provided herein, without the prior written consent of the Supplying Party, the Recipient agrees that it and its Representatives will not disclose to any person (i) that any investigation, discussions or negotiations are taking or have taken place concerning a possible Transaction, or (ii) that either Party has requested or received Evaluation Material, or any terms or other facts regarding the possible Transaction, including the status thereof; provided, however that nothing in this Agreement shall prohibit a Party from making any such disclosure to the extent it has received an opinion of counsel that such disclosure is required to be made by it in order to avoid violating the federal securities laws or stock exchange regulations. The term "persons" as used in this agreement shall be interpreted broadly to include any corporation, company. governmental agency or body, entity, partnership, group or individual. 4. Convenants of the Buyer Parties. (a) Without limiting the generality of the foregoing, the Buyer Parties agree that unless otherwise required by law, they will not permit any person to have access to Restricted Data, as such term is defined in 42 U.S.C ss. 2014(y), until and unless the Federal Office of Personnel Management shall have made an investigation and report to the Nuclear Regulatory Commission (the "NRC") on the character, associations and loyalty of such person and the NRC shall have determined that permitting such person to have access to Restricted Data will not endanger the common defense and security. (b) Notwithstanding anything to the contrary set forth in of this Agreement, any access to Safeguards Information, as such term is defined in 10 C.F.R. ss. 73.2, shall be subject to the limitations and conditions of 10 C.F.R. ss. 73.21, the safeguards plan for the Clinton Plant, and any other applicable legal requirements. (c) The Buyer Parties shall use and maintain all documents prepared by the Institute for Nuclear Power Operations ("INPO") about the Clinton Plant, as may be made available to them, consistent with agreements between INPO and Illinois Power and the policies of INPO and Illinois Power, as the same may be amended from time to time. As a general matter the Buyer Parties shall treat information, reports, draft reports, field notes, draft notes or documents, and technical documents prepared by INPO about the Clinton Plant as if they are Evaluation Material belonging to Illinois Power. However, if an INPO document is classified for "General Distribution" and marked "GENERAL" by INPO, the use and distribution of such document will not be limited by this Agreement. 5. Return and Retention of Evaluation Material. All Evaluation Material in tangible form (whether in written form, electronically stored or otherwise) provided by the Supplying Party or its Representatives will be returned by the Recipient to the Supplying Party immediately upon request, without retention of any copies thereof. All other Evaluation Material in tangible form, including analyses, compilations, studies, personal notes, or other documents (whether in written form, electronically stored or otherwise) prepared by the Recipient or any of its Representatives, and any Evaluation Material not so requested to be returned, will be retained by the Recipient and kept subject to the terms of this Agreement or destroyed; provided, however that all such Evaluation Material shall be destroyed upon the Supplying Party's request with such destruction to be confirmed in writing. Except as otherwise provided in this Agreement, all retained Evaluation Material (whether in written form, electronically stored or otherwise) will continue to be subject to this Agreement. 6. Legal Process. If the Recipient or any of its Representatives are requested or required to disclose any Evaluation Material (or to disclose that any investigation, discussions or negotiations are taking or have taken place concerning the possible Transaction) pursuant to a subpoena, court order, civil investigative demand or similar judicial process or other oral or written request issued by a court of competent jurisdiction or by a federal, state or local governmental or regulatory body, the Recipient will provide the Supplying Party with prompt written notice of such request or requirement so that the Supplying Party and/or any of its Representatives may seek an appropriate protective order or other appropriate remedy or waive pursuant to paragraph 13 compliance with the provisions of this Agreement. If such order or other remedy is not obtained. or the Supplying Party waives compliance with the provisions of this Agreement, the Recipient or its Representatives, as the case may be, will disclose only that portion of the Evaluation Material (or information relating to any such investigation, discussions or negotiations) that it is advised by counsel that it is legally required to so disclose and will exercise reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Evaluation Material or information so disclosed. 7. No Obligation to Provide: No Warranty of Accuracy or Completeness. This Agreement defines the rights, duties and obligations of the Parties with respect to Evaluation Material disclosed or made available hereunder. Under no circumstances shall any Party be obligated to disclose or make available to the other Parties any information including, without limitation, any Evaluation Material, that such Party in its sole discretion determines not to disclose, provided, however, that to the extent that any Party, acting through one of its authorized officers makes such a determination as to information requested by the other Party, it will so advise the other Party of that fact. The Parties (i) acknowledge that no Party, nor any Representative of any Party, makes any representation or warranty, either express or implied, as to the accuracy or completeness of any Evaluation Material, and (ii) agree, to the fullest extent permitted by law, that except as may be provided in a Definitive Agreement (as defined below), no Party, nor any Representative of any Party, shall have any liability to the other Parties or any of the other Parties' Representatives on any basis (including, without limitation, in contract, tort, under federal or state securities laws or otherwise) as a result of the Parties' participation in evaluating a possible Transaction, the review by any Party of the other Parties'. Evaluation Material, or the use of the Evaluation Material by any Party or its Representatives in accordance with the provisions of this Agreement. Each Party agrees that it is not entitled to rely on the accuracy or completeness of the Evaluation Material. Each Party understands and agrees that there is no definitive agreement providing for a Transaction currently existing among the Parties and to no contract or agreement providing for a Transaction shall be deemed to exist by virtue of this Agreement with respect to such Transaction except, in the case of this Agreement, for the matters specifically agreed to herein. 8. Securities Laws. The Parties acknowledge that they are, and that their respective Representatives who are informed as to the matters that are the subject of this Agreement will be made, (i) aware that the United States securities laws would prohibit any person who has material non-public information about a company from purchasing or selling securities of such company, or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities, and (ii) familiar with the Exchange Act and the rules and regulations promulgated thereunder to the extent they relate to the matters referred to in this Section 8. The Parties agree that they will not use or permit any third party to use, and that they will each use reasonable efforts to ensure that none of their respective Representatives will use or permit any third party to use, any Evaluation Material in contravention of the United States securities laws including, without limitation, the Exchange Act or any rules and regulations promulgated thereunder. 9. Non-Solicitation. Except as may be provided in a Definitive Agreement, for a period of eighteen (18) months following the execution of this Agreement, no Party or its respective Representatives or Affiliates will, directly or indirectly, solicit or direct any other person to solicit any current officer or key employee or contractor of another Party (i) terminate or adversely alter his or her employment or other relationship with that Party; or (ii) to seek accept employment or other affiliation with such Party. 10. Exclusivity. Illinois Power hereby agrees immediately to cease any existing discussions or negotiations with any third parties with respect to a sale or other transfer of Plant Clinton (a "Sale Transaction") other than a Transaction with the Buyer Parties or their Affiliates. Illinois Power shall not and Illinois Power shall use its commercially reasonable efforts to ensure that none of its Representatives or Affiliates shall solicit any person, entity or group concerning any Sale Transaction, nor shall Illinois Power furnish information or enter into negotiations regarding, or an agreement for, a Sale Transaction, other than a Transaction with the Buyer Parties or their Affiliates. The provisions and covenants contained in this Section 10 shall expire at 5:00 p.m. C.S.T. on April 15, 1999 unless extended in a writing signed by all the Parties. 11. Indemnification: Remedies. Each Party will be responsible for and will idemnify and hold harmless the other Parties from any damage, loss, cost or liability (including, without limitation, reasonable attorney's fees and the costs of enforcing such obligations under this indemnity) arising out of or resulting from any breach by such Party or its Representatives of its obligations hereunder. Each Party acknowledges that remedies at law are inadequate to protect against breach of this Agreement and hereby in advance agrees, without prejudice to any rights to judicial or other relief, to the granting of equitable relief, including, without limitation, injunction, in the other Parties' favor without proof of actual damages. Each Party agrees not to seek and agrees to waive any requirement for the securing or posting of, a bond in connection with a Party seeking or obtaining such equitable relief. 12. Severability. If any term or provision of this Agreement, or any application thereof to any circumstances, shall, to any extent and for any reason, be held to be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to circumstances other than those to which it is held invalid or enforceable, shall not be affected thereby and shall be construed as if such invalid or unenforceable provision had never been contained herein, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Term. Except as provided in Sections 9 and 10 of this Agreement, this Agreement shall be effective for a period of five (5) years from the date hereof. 14. Miscellaneous. This Agreement shall constitute the entire agreement among the Parties with respect to the subject matter hereof. The provisions of this Agreement shall control in the event of any inconsistency with the provisions of any Other Agreement and such Other Agreement shall be deemed modified hereby. No modification, amendment or waiver of this Agreement shall be binding without the written consent of the Parties hereto. This Agreement shall inure to the benefit of and be binding upon each of the Parties and their respective successors and permitted assigns; provided, however that neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any Party without the prior written consent of the other Parties, and no assignment of any right, interest or obligation shall release any such assigning Party therefrom unless the other Parties shall have consented to such release in writing specifically referring to the right, interest or obligation from which such assigning Party is to be released. It is further understood and agreed that no failure or delay in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude (nor any waivers thereof, unless so expressly stated in such written waiver) any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to the conflict of laws principles thereof. 16. Representatives. Any person who at any time after the date hereof becomes a Representative of either Party shall be deemed to be such Party's Representative for purposes of this Agreement, regardless of whether such person was a Representative of such Party on the date hereof. All references to Affiliates or subsidiaries contained in this Agreement shall apply with equal force and effect to any and all Representatives of such referenced Affiliates or subsidiaries. 17. Notices. (a) All notices, consents, requests and other communications hereunder shall be in writing and shall be sent by hand delivery, by certified or registered mail (return-receipt requested), by facsimile, or by reorganized national overnight courier service as set forth below: If to Illinois Power: Illinois Power Company 500 South 27th Street Decatur. Illinois 62521 Attention: Dave Butts Facsimile: (217) 362-7417 With a copy to: Troutman Sanders LLP 5200 NationsBank Plaza 600 Peachtree Street, NE Atlanta, Georgia 30308 Attention: Terry C. Bridges, Facsimile: (404) 962-6731 If to AmerGen: AmerGen Energy Company L.L.C. 2301 Market Street Philadelphia Pennsylvania 19101 Attention: Paul E. Haviland, Vice President Facsimile: (215) 841-3508 With a copy to: Edward J. Cullen, Jr. 2301 Market Street Philadelphia, Pennsylvania 19101 Facsimile: (215) 841-4474 If to PECO: PECO Energy Company 2301 Market Street Philadelphia, Pennsylvania 19101 Attention: Paul E. Haviland, Vice President Facsimile: (215) 841-3508 With a copy to: Edward J. Cullen, Jr. 2301 Market Street Philadelphia, Pennsylvania 19101 Facsimile: (215) 841-4474 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives as of the date and year first above written. ILLINOIS POWER COMPANY By:__________________________ Title:_________________________ AMERGEN ENERGY COMPANY L.L.C. By:__________________________ Title:_________________________ PECO ENERGY COMPANY By:__________________________ Title:_________________________ ATTACHMENT A-1 AmerGen Billing Clinton Power Station April 1999 A. Direct Charges Capital $ - Storeroom Expense - Preliminary Survey and Investigation - Paid Absence - USE Taxes - Operation and Maintenance Expenses - Direct Nuclear Expenses - Plant Electric use: _____ kwh @_____ rate - -------- $ - B. Material Inventory Balance Balance-Beginning of Month $ - Balance-End of Month - -------- $ - C. Diesel Fuel Balance Balance-Beginning of Month $ - Balance-End of Month - $ - D. Nuclear Fuel Purchases $ - (excludes amortizations) ---------- Total Billing $ - Adjustments $ - Previous Billings $ - Previous Payments $ - $ - ----------- Total Billing $ - ========== * Note: this billing structure is designed to include direct expenses associated with the operation of the plant and reflecting Programs and Project Functions that are known at this time. Additional programs and project functions may be added at a later time to tract other expenses that are a direct cost for the operation of the Clinton Power Station. ** Note: IP shall be responsible for the costs of Plant Electric Use prior to Restart. Restart shall be defined as the commencement of generation of Net Electric Output from CPS. ATTACHMENT A-2 AmerGen Billing Clinton Power Station April 1999 Project Contractors/ FERC Function Labor Consultants Materials Miscellaneous Total Capital 107 107200 $ $ $ $ $ 107222 107227 107232 107233 107235 1073M8 1073N8 1073P8 1073R8 1073S8 1073T8 1073V8 1073W9 107302 107304 107305 107306 107307 107376 1075N8 1075P8 1075R8 1075U8 107512 107534 108 108200 1083M8 1083S8 1083T8 108302 108305 108306 108307 -------------------------------------------------------- Total Capital $ $ $ $ $ ======================================================== * Note: this listing only includes FERC accounts for current expenses. Additional project functions may be added at a later time to track other expenses that are a direct expense of the safe operation of the Clinton Power Station. AmerGen Billing Clinton Power Station April 199 Project Contractors/ FERC Function Labor Consultants Materials Miscellaneous Total Storeroom 163 163301 $ $ $ $ $ 163303 163304 163305 -------------------------------------------------------- Total Storeroom $ $ $ $ $ ======================================================== Preliminary Survey & Investigation 183 183001 $ $ $ $ $ ======================================================== Paid Absence: 184 184101 $ $ $ $ $ 184102 184103 184108 184109 184110 184111 184112 184113 184114 184115 184116 184201 184205 184209 184411 184412 184450 184501 184502 184801 184803 184901 184903 184913 184914 184996 -------------------------------------------------------- Total Paid Absence $ $ $ $ $ ======================================================== USE Taxes: 408 408111 $ $ $ $ $ 408113 -------------------------------------------------------- Total USE Taxes: $ $ $ $ $ ======================================================== AmerGen Billing Clinton Power Station April 1999 Project Contractors/ FERC Function Labor Consultants Materials Miscellaneous Total Operations & Maintenance 500 500001 $ $ $ $ $ 502 502001 505 505001 506 506001 510 510001 511 511001 512 512001 513 513001 514 514001 517 517001 519 519001 520 520001 520002 520003 520004 520005 523 523001 524 524001 524002 524003 524004 524216 525 525001 528 528001 529 529001 529002 530 530001 530002 530003 531 531001 531 531002 532 532001 532002 532003 532006 562 562001 562002 570 570001 570002 570003 582 582001 583 583004 586 586001 AmerGen Billing Clinton Power Station April 1999 Project Contractors/ FERC Function Labor Consultants Materials Miscellaneous Total 593 593002 593003 735 735002 836 836001 863 863001 878 878001 892 892001 902 902003 903 903001 903003 912 912015 915 915001 920 920001 920002 920003 920004 921 921001 921002 921003 921004 923 923001 923003 923004 924 924004 925 925003 925004 925008 925012 926 926002 926003 926008 926010 926011 930 930205 930208 930209 930212 931 931003 -------------------------------------------------------- Total O&M $ $ $ $ $ ======================================================== Direct Nuclear Expenses 524 524216 $ $ $ $ $ ======================================================== Includes costs incurred in other Responsibility Areas that are directly related to CPS e.g. Name and Accounting Distribution EPRI Membership - 8700-12980-524216-430 BWR Owners Group - 8700-13646-524216-430 Reactor Internals Project at EPRI - 8700-23839-524216-430 ATTACHMENT A-3 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002030 RF6 - SIXTH REFUELING OUTAGE 163301 CPS STOREROOM OPERATING EXP 163305 CPS COMMERCIAL GRADE DED PROG 184411 PURCHASE SMALL TOOLS 184412 MAINTENANCE OF TOOLS & EQUIP 408113 USE TAX-CPS 417140 FAB SHOP-NON REG ACTIVITY 510001 MAINT SUPV & ENG-STEAM GEN 514001 MAINT OF MISC STEAM PLANT 517001 OPER SUPV & ENG-NUCLEAR 519001 OPER OF COOLANT & WATER EQUIP 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520003 DECONTAMINATION ACTIVITIES 520004 RADIOACTIVE WASTE DISPOSAL 520005 NUCLEAR FUEL LOAD & UNLOAD 523001 OP TURBS/GENRS/ELEC PLT EQUIP 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NUC 524003 RESEARCH & DEVELOPMENT-NUC 524004 REGULATORY FEES - NUCLEAR 525001 RENTS-NUCLEAR OPERATION 528001 MAINT SUPV & ENG-NUCLEAR 529001 MAINT OF LAKES & CANALS 529002 MAINT NUC BLDGS, GROUNDS, IMP 530001 MAINT REACTOR PLANT EQUIPMENT 530002 MAINT CONTROL ROD DRIVE SYSTEM 531001 MAINT ELECTRIC PLANT EQUIP-NUC 531002 MAINT DIESEL DRIVEN GENER-NUC 532001 MAINT STATION SECURITY SYS-NUC 532002 MAINT MISC EQUIP, SMALL TOOLS 562001 OPER OF NON-CPS TRANS SUBS 562002 OPERATION OF CPS TRANS SUB 570003 MAINT OF CPS TRANS SUB EQUIP 920001 ADMIN & GENERAL SALARIES-ELEC 920003 ADMIN & GENERAL SALARIES-JT 920004 ADMIN & GENERAL SALARIES-NUC 921003 NON-LABOR A&G EXPENSES-JOINT 923004 PROFESSIONAL SERVICES-NUC All expenses charged to construction (FERC 107 & 108) will also be billed Page 1 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002068 PAID ABSENCE - NUCLEAR 184101 VACATION 184102 SICKNESS ALLOWANCE 184103 OTHER PAID ABSENCE 184108 VACATION - CPS EMPLOYEES 184109 SICKNESS ALLOWANCE - CPS 184110 OTHER PD ABSENCE - CPS 002087 RF7 -7TH NUCL REFUELING OUTAGE 517001 OPER SUPV & ENG-NUCLEAR 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520003 DECONTAMINATION ACTIVITIES 520004 RADIOACTIVE WASTE DISPOSAL 520005 NUCLEAR FUEL LOAD & UNLOAD 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NUC 528001 MAINT SUPV & ENG-NUCLEAR 530001 MAINT REACTOR PLANT EQUIPMENT 531001 MAINT ELECTRIC PLANT EQUIP-NUC 570001 MAINT ELEC LOAD DISPATCH EQUIP 920001 ADMIN & GENERAL SALARIES-ELEC 002147 CPS MODIFICATIONS - NUCLEAR 184450 TRAINING - ELECTRIC 184501 SUPERVISION 184502 BUILDING SERVICE & CLERICAL 184801 A & G TO CONSTRUCTION-ELECTRIC 184996 EMPLOYEE BEN CLEAR-NUCLEAR O&M 408113 USE TAX-CPS 417101 EXPENSE NON-UTILITY OPERATIONS 417120 EXPENSES BILLABLE TO ILN GENER 417500 EXP TO BILL ILLINOVA 502001 OPER OF BOILER & ASSOC EQUIP 505001 OPER TURBO GENERS & ELEC EQUIP 506001 MISC OPERATING EXPENSES-STEAM 512001 MAINT OF BOILER & ASSOC EQUIP 513001 MAINT-TURBN GEN & ASSOC EQUIP 514001 MAINT OF MISC STEAM PLANT 517001 OPER SUPV & ENG-NUCLEAR 519001 OPER OF COOLANT & WATER EQUIP 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520003 DECONTAMINATION ACTIVITIES 523001 OP TURBS/GENRS/ELEC PLT EQUIP All expenses charged to construction (FERC 107 & 108) will also be billed Page 2 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002147 CPS MODIFICATIONS - NUCLEAR 524001 BLDG SERV & MISC NUC OPER EXP 528001 MAINT SUPV & ENG-NUCLEAR 529002 MAINT NUC BLDGS, GROUNDS, IMP 530001 MAINT REACTOR PLANT EQUIPMENT 530002 MAINT CONTROL ROD DRIVE SYSTEM 531001 MAINT ELECTRIC PLANT EQUIP-NUC 570002 MAINT OF TRANS SUB EQUIP 583004 OPER OH DIST LINES-UNDER 34.5 586001 TURN ON/OFF CHANGE ELEC METERS 593003 MAINT LESS THAN 34.5 OH LINES & OH SERV 878001 REMOVE/CHANGE GAS METERS ®S 920001 ADMIN & GENERAL SALARIES-ELEC 920002 ADMIN & GENERAL SALARIES-GAS 921003 NON-LABOR A&G EXPENSES-JOINT 926002 ADMINISTRATION OF PENSION PLAN 926003 GROUP INSURANCE CONTRIBUTIONS 930209 COMM WELF CONT-ELEC-FERC 426.1 002174 EMPLOYEE SERVICES ADMIN 184111 VACATION-CSBG EMPLOYEES 184112 SICKNESS ALLOWANCE - CSBG 184113 OTHER PAID ABSENCE - CSBG 184114 VACATION - SSBG/FBG 184115 SICKNESS ALLOWANCE - SSBG/FBG 184116 OTHER PAID ABSENCE - SSBG/FBG 920003 ADMIN & GENERAL SALARIES-JT 921003 NON-LABOR A&G EXPENSES - JOINT 923003 PROFESSIONAL SERVICES-JOINT 002203 MAINTAIN PLANT - NUCLEAR 163301 CPS STOREROOM OPERATING EXP 408113 USE TAX-CPS 510001 MAINT SUPV & ENG-STEAM GEN 513001 MAINT-TURBN GEN & ASSOC EQUIP 517001 OPER SUPV & ENG-NUCLEAR 519001 OPER OF COOLANT & WATER EQUIP 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520003 DECONTAMINATION ACTIVITIES 520004 RADIOACTIVE WASTE DISPOSAL 520005 NUCLEAR FUEL LOAD & UNLOAD 523001 OP TURBS/GENRS/ELEC PLT EQUIP 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NUC 528001 MAINT SUPV & ENG-NUCLEAR 529001 MAINT OF LAKES & CANALS All expenses charged to construction (FERC 107 & 108) will also be billed Page 3 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002203 MAINTAIN PLANT - NUCLEAR 529002 MAINT NUC BLDGS, GROUNDS, IMP 530001 MAINT REACTOR PLANT EQUIPMENT 530002 MAINT CONTROL ROD DRIVE SYSTEM 530003 MAINT REACTOR PLANT PIPING 531001 MAINT ELECTRIC PLANT EQUIP-NUC 531002 MAINT DIESEL DRIVEN GENER-NUC 532001 MAINT STATION SECURITY SYS-NUC 532002 MAINT MISC EQUIP, SMALL TOOLS 532003 MISC MAINT MATERIALS & EXP-NUC 562002 OPERATION OF CPS TRANS SUB 570002 MAINT OF TRANS SUB EQUIP 570003 MAINT OF CPS TRANS SUB EQUIP 582001 DIST SUB PCB DISPOSAL COSTS 583004 OPER OH DIST LINES-UNDER 34.5 593003 MAINT LESS THAN 34.5 OH LINES & OH SERV 892001 GAS DIST-MAINT OF SERVICES 915001 COST JOBBING&CONTRACT WRK-ELEC 921003 NON-LABOR A&G EXPENSES-JOINT 926011 OTHER EMPL ACTIVITY EXP-NUC 002204 OPERATE PLANT - NUCLEAR 184501 SUPERVISION 408113 USE TAX-CPS 517001 OPER SUPV & ENG-NUCLEAR 519001 OPER OF COOLANT & WATER EQUIP 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520003 DECONTAMINATION ACTIVITIES 520004 RADIOACTIVE WASTE DISPOSAL 523001 OP TURBS/GENRS/ELEC PLT EQUIP 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NUC 524004 REGULATORY FEES - NUCLEAR 528001 MAINT SUPV & ENG-NUCLEAR 923004 PROFESSIONAL SERVICES-NUC 002205 COMPLY W/NUCLEAR REG.REQUIRE 408113 USE TAX-CPS 514001 MAINT OF MISC STEAM PLANT 517001 OPER SUPV & ENG-NUCLEAR 519001 OPER OF COOLANT & WATER EQUIP 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 523001 OP TURBS/GENRS/ELEC PLT EQUIP All expenses charged to construction (FERC 107 & 108) will also be billed Page 4 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002205 COMPLY W/ NUCLEAR REG. REQUIRE 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NUC 524004 REGULATORY FEES - NUCLEAR 524216 MISC EXPENSES - R&D - NUCLEAR 528001 MAINT SUPV & ENG-NUCLEAR 529002 MAINT NUC BLDGS, GROUNDS, IMP 530001 MAINT REACTOR PLANT EQUIPMENT 532002 MAINT MISC EQUIP, SMALL TOOLS 920001 ADMIN & GENERAL SALARIES-ELEC 920003 ADMIN & GENERAL SALARIES-JT 920004 ADMIN & GENERAL SALARIES-NUC 921003 NON-LABOR A&G EXPENSES-JOINT 921004 NON-LABOR A&G EXPENSES - NUC. 924004 PROPERTY INS PREMIUMS-NUC 925003 INJURIES & DAMAGES INS-JT 925004 INJURIES & DAMAGES INS-NUC 925008 EMPL INJ & DAMAGE CLAIMS-NUC 925012 OTHER INJ & DAMAGE CLAIMS-NUC 926011 OTHER EMPL ACTIVITY EXP-NUC 930208 CO TRADE ASSN DUES & CONT-NUC 002206 PROCURE & MANAGE NUCLEAR FUEL 517001 OPER SUPV & ENG-NUCLEAR 002207 PROCURE & CONTROL MAT'L - NUC. 163301 CPS STOREROOM OPERATING EXP 163303 CLINTON FREIGHT ON MATERIALS 163304 CLINTON MATERIAL INVENTORY ADJ 163305 CPS COMMERCIAL GRADE DED PROG 408113 USE TAX-CPS 517001 OPER SUPV & ENG-NUCLEAR 520001 OPERATING REACTOR & AUX 524001 BLDG SERV & MISC NUC OPER EXP 529002 MAINT NUC BLDGS, GROUNDS, IMP 002208 PROVIDE ADMIN. SUPPORT - NUC. 163301 CPS STOREROOM OPERATING EXP 184209 GARAGE EXPENSES NON-SPECIFIC 184501 SUPERVISION 408113 USE TAX-CPS 517001 OPER SUPV & ENG-NUCLEAR All expenses charged to construction (FERC 107 & 108) will also be billed Page 5 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002208 PROVIDE ADMIN. SUPPORT - NUC. 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520005 NUCLEAR FUEL LOAD & UNLOAD 523001 OP TURBS/GENRS/ELEC PLT EQUIP 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NU 524216 MISC EXPENSES - R&D - NUCLEAR 528001 MAINT SUPV & ENG-NUCLEAR 529001 MAINT OF LAKES & CANALS 529002 MAINT NUC BLDGS, GROUNDS, IMP 530001 MAINT REACTOR PLANT EQUIPMENT 531001 MAINT ELECTRIC PLANT EQUIP-NUC 532002 MAINT MISC EQUIP, SMALL TOOLS 836001 UG STOR-MAIN PURIFY EQUIP 920003 ADMIN & GENERAL SALARIES-JT 920004 ADMIN & GENERAL SALARIES-NUC 921003 NON-LABOR A&G EXPENSES - JOINT 921004 NON-LABOR A&G EXPENSES - NUC. 923003 PROFESSIONAL SERVICES-JOINT 923004 PROFESSIONAL SERVICES-NUC 925004 INJURIES & DAMAGES INS-NUC 925008 EMPL INJ & DAMAGE CLAIMS-NUC 926011 OTHER EMPL ACTIVITY EXP-NUC 002209 MANAGE HUMAN RESOURCES - NUC. 163301 CPS STOREROOM OPERATING EXP 408113 USE TAX-CPS 506001 MISC OPERATING EXPENSES-STEAM 510001 MAINT SUPV & ENG-STEAM GEN 517001 OPER SUPV & ENG-NUCLEAR 519001 OPER OF COOLANT & WATER EQUIP 520001 OPERATING REACTOR & AUX 520002 OPER-RADIOLOGICAL CONTROLS 520004 RADIOACTIVE WASTE DISPOSAL 524001 BLDG SERV & MISC NUC OPER EXP 524002 PLANT SECURITY-NUC 524216 MISC EXPENSES - R&D - NUCLEAR 528001 MAINT SUPV & ENG-NUCLEAR 529001 MAINT OF LAKES & CANALS 529002 MAINT NUC BLDGS, GROUNDS, IMP 531001 MAINT ELECTRIC PLANT EQUIP-NUC All expenses charged to construction (FERC 107 & 108) will also be billed Page 6 Clinton Power Station Direct Programs and Project Functions Project Program Program Title Function Project Function Title 002209 MANAGE HUMAN RESOURCES - NUC. 532002 MAINT MISC EQUIP, SMALL TOOLS 532003 MISC MAINT MATERIALS & EXP-NUC 532006 FABRIC'TN & MACH WRK-IP AREAS 926011 OTHER EMPL ACTIVITY EXP-NUC 002233 JC SSBG & FBG TRANSFER CHARGES 517001 OPER SUPV & ENG-NUCLEAR 520001 OPERATING REACTOR & AUX 523001 OP TURBS/GENRS/ELEC PLT EQUIP 524001 BLDG SERV & MISC NUC OPER EXP 528001 MAINT SUPV & ENG-NUCLEAR 532002 MAINT MISC EQUIP, SMALL TOOLS 532003 MISC MAINT MATERIALS & EXP-NUC 912015 PROMOTE/RETAIN SALES EXP-JT 920001 ADMIN & GENERAL SALARIES-ELEC 920003 ADMIN & GENERAL SALARIES-JT 920004 ADMIN & GENERAL SALARIES-NUC 921001 NON-LABOR A&G EXPENSES - ELEC 921003 NON-LABOR A&G EXPENSES - JOINT 921004 NON-LABOR A&G EXPENSES - NUC. 923001 PROFESSIONAL SERVICES-ELEC 923004 PROFESSIONAL SERVICES-NUC 926008 OTHER EMPL ACTIVITY EXP-ELEC 926010 OTHER EMPL ACTIVITY EXP-JT 926011 OTHER EMPL ACTIVITY EXP-NUC 930205 CO TRADE ASSN DUES & CONT ELEC 002253 YEAR 2000 - ESBG - NUCLEAR 523001 OP TURBS/GENRS/ELEC PLT EQUIP 524001 BLDG SERV & MISC NUC OPER EXP 920003 ADMIN & GENERAL SALARIES-JT 920004 ADMIN & GENERAL SALARIES-NUC 923004 PROFESSIONAL SERVICES-NUC All expenses charged to construction (FERC 107 & 108) will also be billed Page 7 EX-10 3 EX-10.2 William B. Conway Jr. Illinova Corporation 500 South 27th Street Decatur, Illinois 62521 Dear Mr. Conway: This letter is to confirm the terms of your employment with Illinova Corporation. I. Employment Date. Your first day of employment will be April 12, 1999 (the "Employment Date"). I. Salary. Your annual base salary will be $295,000, subject to periodic review to determine whether an increase is appropriate. I. Bonus. You will be entitled to participate in the Executive Incentive Compensation Plan. Your bonus under the Executive Incentive Compensation Plan will be $118,000 (which is 40% of your salary) if the target level of performance is achieved, and your bonus will be $177,000 (which is 60% of your salary) at the maximum achievement level. I. Long-Term Incentive Award. For 1999, your entire long-term incentive award will be in the form of a stock option, the terms of which are reflected in the enclosed stock option agreement. The option will be granted as of the Employment Date, and the exercise price per share will be the fair market value of a share of stock on the grant date. After 1999, 50% of your long-term incentive award will be made as a stock option grant, and the remaining 50% will be made as performance share grant. I. Supplemental Pension. In lieu of participation in the Company's Supplemental Executive Retirement Plan, you will be covered by the enclosed Supplemental Pension Plan. I. Retention Agreement. You will be covered by the enclosed Employee Retention Agreement, which provides benefits in the event of a Change in Control. I. Loan. To compensate you for amounts you have foregone by leaving Troutman Sanders LLP to join Illinova Corporation, you will be entitled to a loan form the Company of $250,000. The terms of the loan are reflected in the enclosed letter and promissory note. I. Lump Sum Death Benefits. If your death should occur while you are employed by the Company, your surviving spouse (or, if she does not survive you, the beneficiary designated by you) will be entitled to a lump sum death benefit of two times the amount of your salary plus your target bonus at the time of your death. In lieu of receiving this lump sum death benefit, your surviving spouse may elect to receive the surviving spouse benefit under the Supplemental Pension Plan. (If your spouse does not survive you, only the death benefit described in this paragraph is payable. The Supplemental Pension Plan does not provide for other survivor benefits.) I. Termination. You may resign from the Company at any time for any reason, and the Board of Directors of the company may terminate your employment at any time for any reason. At the time of your termination of employment, you (or your estate) will be entitled to the compensation and benefits specified in this letter and the enclosed material, as well as to the other benefits you earned while employed by the Company, to the extent such compensation and benefits are payable on your termination of employment. If the foregoing reflects your understanding of the terms of your agreement with the Company, please so indicate by signing and returning a copy of this letter to the undersigned, along with a signed copy of each of the enclosures. Very truly yours, Illinova Corporation Charles E. Bayless Accepted and agreed to this 13th day of April, 1999. William B. Conway Jr. NON-QUALIFIED STOCK OPTION AGREEMENT ILLINOVA CORPORATION 1992 LONG-TERM INCENTIVE COMPENSATION PLAN THIS AGREEMENT, entered into as of the 12th day of April, 1999 (the "Grant Date"), by and between Illinova Corporation, an Illinois corporation (the "Company") and William B. Conway Jr. (the "Employee"), WITNESSETH THAT: WHEREAS, the Company maintains the Illinova Corporation 1992 Long-Term Incentive Compensation Plan (the "Plan"), which is incorporated and forms a part of this Agreement, for the benefit of key employees of the Company and its Subsidiaries; WHEREAS, to induce the Employee to accept employment by the Company, the Company has agreed to grant to the Employee the option described in this Agreement; and WHEREAS, the Employee and the Company desire to enter into this Agreement reflecting the award of such option; NOW, THEREFORE, IT IS AGREED, by and between the Company and the Employee as follows: SECTION ONE GRANT Subject to the terms and conditions of the Plan and this Agreement, the Employee is hereby awarded an option to purchase 30,000 shares of Stock (the "Option"). The Option is not intended, and shall not be treated, as an incentive stock option (as that term is used in Section 422 of the Code). SECTION TWO OPTION PRICE The option price of each share of stock subject to the Option is $21.781. SECTION THREE EXERCISE, EXPIRATION AND CANCELLATION OF OPTION The Option shall be exercisable by the Employee in accordance with the following schedule: If the Employee is employed through The Option shall become exercisable with the following date: respect to the following number of shares on and after that date: - ------------------------------------ ------------------------------------------- One-year anniversary of Grant Date 10,000 shares - ------------------------------------ ------------------------------------------- Two-year anniversary of Grant Date 10,000 shares - ------------------------------------ ------------------------------------------- Three-year anniversary of Grant Date 10,000 shares - ------------------------------------ ------------------------------------------- If the Employee's employment by the Company continues through the 9-1/2 year anniversary of the Grant Date, then any portion of the Option herein granted and not previously exercisable shall become exercisable on such 9-1/2-year anniversary. The Option shall expire as to any unexercised portion on the earliest of: (a) the tenth anniversary of the date first above written; (b) the first anniversary of the Employee's death; (c) five years following the Employee's date of retirement; or (d) the date of the Employee's Termination; provided that if the Employee's employment ceases because of a Termination, any exercise of the Option occurring on or after the Employee's date of Termination shall be void and shall be ineffective. For purposes of this Agreement, the Employee's "date of retirement" shall be the date of Retirement, Early Retirement or Disability Retirement as those terms are defined in the Plan. If the Employee exercises the Option with respect to a portion, but not all, of the shares of Stock subject thereto, the Option shall thereafter cease to be exercisable with respect to the shares of Stock for which it was exercised but, subject to the terms and conditions of the Plan and this Agreement, shall continue to be exercisable with respect to the shares of Stock with respect to which it was not exercised. If the Employee's Termination occurs prior to the date on which any portion of the Option has become exercisable, that portion of the Option shall be forfeited upon such Termination. Notwithstanding the foregoing provisions of this Agreement, the Option shall not become exercisable and shall be forfeited if the Employee does not become an employee of the Company, and the Option shall be forfeited if the Employee becomes an employee of the Company but voluntarily resigns within 30 days after his initial date of employment. SECTION FOUR METHOD OF EXERCISE Subject to the terms and conditions of the Plan and this Agreement, the Option may be exercised, in whole or in part, by filing a written notice with the Secretary of the Company at its corporate headquarters prior to the date on which the Option expires or is otherwise canceled. Such notice shall specify the date as of which the exercise is to occur and the number of shares of Stock which the Employee elects to purchase and shall be in such form and shall contain such other information as the Secretary of the Company may reasonably require. The election shall be accompanied by payment of the option price for such shares of Stock indicated by the Employee's election, together with the amount of any required state, federal or local withholding taxes arising in connection with the purchase of such Stock. Subject to the provisions of the preceding sentence and the terms of the Plan, payment shall be by cash or check payable to the Company, by delivery of shares of Stock having an aggregate Fair Market Value (determined as of the date of exercise) equal to the option price, and if elected in accordance with this Section 4, the Employee's tax withholding obligation for the shares of Stock, indicated by the Employee's election, or a combination of both. SECTION FIVE TRANSFERABILITY The Option shall not be transferable by the Employee other than by will or the laws of descent and distribution and, during the life of the Employee, is exercisable only by the Employee or Employee's guardian or legal representative. SECTION SIX NOTICE OF DISPOSITION OF SHARES The Employee agrees to notify the Company promptly in the event of disposal of any shares of Stock acquired upon the exercise of the Option, including a disposal by sale, exchange, gift or transfer of legal title. SECTION SEVEN ADMINISTRATION The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee, and the Committee shall have all powers with respect to this Agreement that it has with respect to the Plan. Any interpretation of this Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons. SECTION EIGHT PLAN GOVERNS Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Employee from the office of the Secretary of the Company. Unless the context clearly implies or indicates the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined for purposes of this Agreement. SECTION NINE AMENDMENT This Agreement may be amended by written agreement of the Employee and the Company, acting pursuant to authority from the Committee, without the consent of any other person. SECTION TEN CONTINUED EMPLOYMENT, RIGHTS AS SHAREHOLDER This Agreement does not constitute a contract of employment, and does not give the Employee the right to be employed by the Company or its Subsidiaries. This Agreement does not confer on the Employee any rights as a shareholder of the Company prior to the date on which the Employee fulfills all conditions for receipt of Stock pursuant to this Agreement and the Plan. SECTION ELEVEN GOVERNING LAW This Agreement shall be construed and administered in accordance with the laws of the State of Illinois, without regard to the principles of conflicts of law. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first above written. ------------------------------ William B. Conway Jr. Illinova Corporation By:___________________________ Charles E. Bayless Chairman, President and Chief Executive Officer ATTEST: - --------------------------------- ILLINOVA CORPORATION SUPPLEMENTAL PENSION PLAN The Supplemental Pension Plan (the "Plan") is adopted effective as of April 12, 1999. The Plan is established and maintained by Illinova Corporation for the purpose of providing benefits for the Participant, William B. Conway Jr. Accordingly, Illinova Corporation hereby adopts the Plan pursuant to the terms and provisions set forth below: ARTICLE I Definitions Wherever used herein the following terms shall have the meanings hereinafter set forth: 1.1 "Accrued Vested Benefit" of the Participant shall have the meaning determined in accordance with Section 3.1. 1.2 "Board" means the Board of Directors of the Company. 1.3 "Cause" means: (a) the Participant's conviction of any criminal violation involving dishonesty, fraud, or breach of trust, (b) the Participant's willful engagement in any misconduct in the performance of the Participant's duty that materially injures the Company, (c) the Participant's performance of any act which, if known to the shareholders or regulators of the Company or any of its subsidiaries, would materially and adversely affect the business of the Company or any of its subsidiaries, or (d) the Participant's willful and substantial nonperformance of assigned duties; provided that such nonperformance has continued more than ten days after the Company has given written notice of such nonperformance and of its intention to terminate the Participant's employment because of such nonperformance. 1.4 "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any regulations relating thereto. 1.5 "Company" means Illinova Corporation, an Illinois corporation, or, to the extent provided in Section 7.8, any successor corporation or other entity resulting from a merger or consolidation into or with the Company or a transfer or sale of substantially all of the assets of the Company. 1.6 "Earnings" of the Participant for any calendar month means the Participant's accrued salary and bonus for that month and, for this purpose, shall include any portion of such salary or bonus that would otherwise have been includible for the month but is contributed by the Company on behalf of the Participant pursuant to the Participant's election under a "qualified cash or deferred arrangement" (as defined in section 401(k) of the Code) that is part of any qualified profit sharing plan maintained by the Company. For purposes of this definition, the Participant's bonus for any month is the bonus amount earned under the Executive Incentive Compensation Plan (or any other successor plan providing for an annual bonus) for that month. For each calendar year, the annual bonus shall be deemed to be earned evenly during each of the months in which the Participant was employed by the Company during that year. 1.7 "Final Average Earnings" means the average of the Participant's monthly Earnings during the 36 consecutive calendar months that produces the highest average and that occurs during the last 60 calendar months ending with the calendar month in which the Participant's employment with the Company terminates. If the Participant total employment period with the Company is less than 36 calendar months, his Final Average Earnings shall be determined by averaging (on a calendar month basis) the Earnings received by him from the Company during his entire period of employment. 1.8 "Normal Retirement Date" means the first day of the calendar month coinciding with or next following the Participant's 65th birthday. 1.9 "Participant" means William B. Conway Jr. 1.10 "Plan" means the Illinova Corporation Supplemental Pension Plan. 1.11 "Qualified Plan" means the Illinois Power Company Retirement Income Plan for Salaried Employees or any successor plan. 1.12 "Qualified Plan Retirement Benefit" means the benefit payable to a Participant pursuant to the Qualified Plan by reason of his termination of employment with the Company for any reason other than death. 1.13 "Qualified Plan Surviving Spouse Benefit" means the benefit payable to the Surviving Spouse of the Participant pursuant to the Qualified Plan in the event of the death of the Participant at any time prior to commencement of payment of his Qualified Plan Retirement Benefit. 1.14 "Supplemental Retirement Benefit" means the benefit payable to the Participant pursuant to the Plan by reason of his termination of employment with the Company for any reason other than death. 1.15 "Surviving Spouse" means a person who is married to the Participant at the date of his death and for at least one year prior thereto. 1.16 "Supplemental Surviving Spouse Benefit" means the benefit payable to a Surviving Spouse pursuant to the Plan. 1.17 The Participant's "termination" of employment with the Company shall be deemed to occur on the day immediately following the date on which he is last employed by the Company. 1.18 Words in the masculine gender shall include the feminine and the singular shall include the plural, and vice versa, unless qualified by the context. Any headings used herein are included for ease of reference only, and are not to be construed so as to alter the terms hereof. ARTICLE II Eligibility The Participant shall be eligible to receive a Supplemental Retirement Benefit to the extent provided in Article III of the Plan. If the Participant dies prior to commencement of payment of his Qualified Plan Retirement Benefit, the Surviving Spouse of the Participant shall be eligible to receive a Supplemental Surviving Spouse Benefit to the extent provided in Article IV of the Plan. ARTICLE III Supplemental Retirement Benefit 3.1 Amount. The Supplemental Retirement Benefit shall be payable to the Participant in the form of a straight life annuity over the lifetime of the Participant only, commencing on his Normal Retirement Date, and shall consist of a monthly amount equal to the excess of the amount described in paragraph (a) over the amount described in paragraph (b) below: (a) the Participant's Accrued Vested Benefit; LESS (b) the monthly amount of the Qualified Plan Retirement Benefit actually payable to the Participant under the Qualified Plan. The amounts described in (a) and (b) shall be computed as of the date of termination of employment of the Participant with the Company in the form of a straight life annuity payable over the lifetime of the Participant only commencing on his Normal Retirement Date. The Participant's "Accrued Vested Benefit" shall be determined in accordance with the following: (i) if the Participant's employment with the Company terminates for any reason prior to January 1, 2000, his Accrued Vested Benefit shall be zero, and he shall not be entitled to any benefits under the Plan; (ii) if the Participant's employment with the Company terminates after December 31, 1999, and the termination occurs by reason of his being discharged by the Company without Cause, or if the Participant's employment with the Company terminates on or after April 12, 2009 for any reason, the Participant's Accrued Vested Benefit shall be equal to 40% of the Participant's Final Average Earnings as of the date of his termination of employment; and (iii)if the Participant's employment with the Company terminates after December 31, 1999 and prior to April 12, 2009, and the termination occurs for any reason other than his being discharged by the Company without Cause, the Participant's Accrued Vested Benefit shall be equal to 40% of the Participant's Final Average Earnings as of the date of his termination of employment, multiplied by the vesting percentage determined in accordance with the following schedule: - ----------------------------------------- -------------------------------------- If the Participant's employment with the The vesting percentage shall be: Company terminates during this period: - ----------------------------------------- -------------------------------------- On or after April 12, 2000, and before April 12, 2001 10% - ----------------------------------------- -------------------------------------- On or after April 12, 2001, and before April 12, 2002 20% - ----------------------------------------- -------------------------------------- On or after April 12, 2002, and befor April 12, 2003 30% - ----------------------------------------- -------------------------------------- On or after April 12, 2003, and before April 12, 2004 40% - ----------------------------------------- -------------------------------------- On or after April 12, 2004, and before April 12, 2005 50% - ----------------------------------------- -------------------------------------- On or after April 12, 2005, and before April 12, 2006 60% - ----------------------------------------- -------------------------------------- On or after April 12, 2006, and before April 12, 2007 70% - ----------------------------------------- -------------------------------------- On or after April 12, 2007, and before April 12, 2008 80% - ----------------------------------------- -------------------------------------- On or after April 12, 2008, and before April 12, 2009 90% - ----------------------------------------- -------------------------------------- After April 12, 2009 100% - ----------------------------------------- -------------------------------------- 3.2 Form of Benefit. The Supplemental Retirement Benefit payable to the Participant shall be paid in the same form under which the Qualified Plan Retirement Benefit is payable to the Participant. The Participant's election under the Qualified Plan of any optional form of payment of his Qualified Plan Retirement Benefit shall also be applicable to the payment of his Supplemental Retirement Benefit. 3.3 Commencement of Benefit. Payment of the Supplemental Retirement Benefit to the Participant shall commence on the same date as payment of the Qualified Plan Retirement Benefit to the Participant commences. Any election under the Qualified Plan made by the Participant with respect to the commencement of payment of his Qualified Plan Retirement Benefit shall also be applicable with respect to the commencement of payment of his Supplemental Retirement Benefit. 3.4 Approval of Company. Notwithstanding the provisions of Sections 3.2 and 3.3 above, an election made by the Participant under the Qualified Plan with respect to the form of payment of his Qualified Plan Retirement Benefit or the date for commencement of payment thereof shall not be effective with respect to the form of payment or date for commencement of payment of his Supplemental Retirement Benefit hereunder unless such election is expressly approved in writing by the Company with respect to his Supplemental Retirement Benefit. If the Company shall not approve such election in writing, then the form of payment or date for commencement of payment of the Participant's Supplemental Retirement Benefit shall be selected by the Company in its sole discretion. If benefits are payable to the Participant under this Plan, but no benefits are payable to the Participant under the Qualified Plan, the time and form of benefit shall be selected by the Participant, subject to the consent of the Company, from among the alternatives that would be available under the Qualified Plan (or such other alternatives permitted by the Company). 3.5 Actuarial Equivalent. A Supplemental Retirement Benefit which is payable in any form other than a straight life annuity over the lifetime of the Participant, or which commences at any time prior to the Participant's Normal Retirement Date, shall be the actuarial equivalent of the Supplemental Retirement Benefit set forth in Section 3.1 above as determined by the same actuarial adjustments as those specified in the Qualified Plan with respect to determination of the amount of the Qualified Plan Retirement Benefit. ARTICLE IV Supplemental Surviving Spouse Benefit 4.1 Amount. If the Participant dies either: (i) while employed by the Company; or (ii) prior to commencement of payment of his Supplemental Retirement Benefit under this Plan, but after his employment with the Company has terminated with an Accrued Vested Benefit that is greater than zero; then a Supplemental Surviving Spouse Benefit is payable to his Surviving Spouse as hereinafter provided. The monthly amount of the Supplemental Surviving Spouse Benefit payable to a Surviving Spouse shall be equal to the excess of the amount described in paragraph (a) over the amount described in paragraph (b) below: (a) the monthly amount of the Qualified Plan Surviving Spouse Benefit to which the Surviving Spouse of the Participant would have been entitled under the Qualified Plan, but determined by applying the Surviving Spouse Benefit provisions of the Qualified Plan as though the amount of the monthly benefit (payable in the form of a straight life annuity commencing at the Participant's Normal Retirement Date) which the Participant had earned on the date of his death had been equal to the amount of his Accrued Vested Benefit (as defined in Section 3.1 of this Plan); LESS (b) the monthly amount of the Qualified Plan Surviving Spouse Benefit actually payable to the Surviving Spouse under the Qualified Plan. Notwithstanding any other provision of the Plan, the Surviving Spouse shall be entitled to benefits under this Section 4.1 only if she waives all rights to receive the lump sum death benefits to which she would otherwise be entitled under the provisions of the April 12, 1999 letter to the Participant from the Company, with such waiver to be made within 90 days after the Participant's death in accordance with the procedures established by the Company. 4.2 Form and Commencement of Benefit. A Supplemental Surviving Spouse Benefit shall be payable over the lifetime of the Surviving Spouse only in monthly installments commencing on the date for commencement of payment of the Qualified Plan Surviving Spouse Benefit to the Surviving Spouse and terminating on the date of the last payment of the Qualified Plan Surviving Spouse Benefit made before the Surviving Spouse's death. ARTICLE V Administration of the Plan 5.1 Administration by the Company. The Company shall be responsible for the general operation and administration of the Plan and for carrying out the provisions thereof. 5.2 General Powers of Administration. All provisions set forth in the Qualified Plan with respect to the administrative powers and duties of the Company, expenses of administration and procedures for filing claims shall also be applicable with respect to the Plan. The Company shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports furnished by any actuary, accountant, controller, counsel or other person employed or engaged by the Company with respect to the Plan. ARTICLE VI Amendment or Termination The Plan may be amended or terminated at any time by the Board, provided however that, notwithstanding any other provision of the Plan, no amendment or termination that would adversely affect the rights of the Participant or his Surviving Spouse (including, without limitation, his right to accrue future benefits) may be made by the Company except with the written consent of the Participant (or, in the event of his death, with the written consent of the Surviving Spouse). ARTICLE VII General Provisions 7.1 Funding. The Plan at all times shall be entirely unfunded and no provision shall at any time be made with respect to segregating any assets of the Company for payment of any benefits hereunder. No Participant, Surviving Spouse or any other person shall have any interest in any particular assets of the Company by reason of the right to receive a benefit under the Plan and any such Participant, Surviving Spouse or other person shall have only the rights of a general unsecured creditor of the Company with respect to any rights under the Plan. 7.2 General Conditions. Except as otherwise expressly provided herein, all terms and conditions of the Qualified Plan applicable to a Qualified Plan Retirement Benefit or a Qualified Plan Surviving Spouse Benefit shall also be applicable to a Supplemental Retirement Benefit or a Supplemental Surviving Spouse Benefit payable hereunder. Any Qualified Plan Retirement Benefit or Qualified Plan Surviving Spouse Benefit, or any other benefit payable under the Qualified Plan, shall be paid solely in accordance with the terms and conditions of the Qualified Plan and nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of the Qualified Plan. 7.3 No Guaranty of Benefits. Nothing contained in the Plan shall constitute a guaranty by the Company or any other entity or person that the assets of the Company will be sufficient to pay any benefit hereunder. 7.4 No Enlargement of Employee Rights. No Participant or Surviving Spouse shall have any right to a benefit under the Plan except in accordance with the terms of the Plan. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the service of the Company. 7.5 Spendthrift Provision. No interest of any person or entity in, or right to receive a benefit under, the Plan shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment, or other alienation or encumbrance of any kind; nor may such interest or right to receive a benefit be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such person or entity, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 7.6 Applicable Law. The Plan shall be construed and administered under the laws of the State of Illinois. 7.7 Incapacity of Recipient. If any person entitled to a benefit payment under the Plan is deemed by the Company to be incapable of personally receiving and giving a valid receipt for such payment, then, unless and until claim therefor shall have been made by a duly appointed guardian or other legal representative of such person, the Company may provide for such payment or any part thereof to be made to any other person or institution then contributing toward or providing for the care and maintenance of such person. Any such payment shall be a payment for the account of such person and a complete discharge of any liability of the Company and the Plan therefor. 7.8 Corporate Successors. The Plan shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company's assets and business, and the successor shall be substituted for the Company under the Plan. 7.9 Unclaimed Benefit. The Participant shall keep the Company informed of his current address and the current address of his spouse. The Company shall not be obligated to search for the whereabouts of any person. If the location of the Participant is not made known to the Company within three (3) years after the date on which payment of the Participant's Supplemental Retirement Benefit may first be made, payment may be made as though the Participant had died at the end of the three-year period. If, within one additional year after such three-year period has elapsed, or, within three years after the actual death of the Participant, the Company is unable to locate any Surviving Spouse of the Participant, then the Company shall have no further obligation to pay any benefit hereunder to such Participant or Surviving Spouse or any other person and such benefit shall be irrevocably forfeited. 7.10 Limitations on Liability. Notwithstanding any of the preceding provisions of the Plan, neither the Company nor any individual acting as an employee or agent of the Company shall be liable to any Participant, former Participant, Surviving Spouse or any other person for any claim, loss, liability or expense incurred in connection with the Plan. IN WITNESS WHEREOF, the undersigned, on behalf of the Company, has executed this Plan to witness its adoption by the Company April _____, 1999, and the Participant has executed this Plan to witness his understanding that it reflects his agreement with the Company. ILLINOVA CORPORATION By:________________________ Accepted and agreed to this ____ day of April, 1999. William B. Conway Jr. ILLINOVA CORPORATION EMPLOYEE RETENTION AGREEMENT THIS EMPLOYEE RETENTION AGREEMENT (the "Agreement") is entered into the 12th day of April, 1999 by and between ILLINOVA CORPORATION, an Illinois corporation (the "Company") and William B. Conway Jr. (the "Employee"). WHEREAS, the Company desires to retain the services of Employee in connection with any change in control of the Company; NOW, THEREFORE, in consideration of continued employment and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Employee agree as follows: 1. Change in Control Benefits. The provisions of paragraphs (a), (b), (c), (d) and (e) below shall apply if a Termination Event occurs: (a) The Employee shall be entitled to receive from the Company, within 30 days of the Termination Event or, in the case of a Termination Event that occurs under paragraph 2(a)(iv)(C) (relating to termination prior to a Change in Control at the request of an acquiror), within 30 days following the Change in Control, a lump sum cash payment equal to three times the sum of: (I) the greater of the Employee's annual salary rate in effect on the date of the Change in Control, or the Employee's annual salary rate in effect on the date Employee's employment with the Company terminates; plus (II) the amount of the latest annual bonus earned by Employee, provided that the amount described in this paragraph (II) shall be zero unless the Employee has received an annual bonus in one or more of the three calendar years last preceding the termination. (b) Notwithstanding any provision in the promissory note or the tax letter to the contrary, any obligation of the Employee for payment of principal and interest otherwise due under the promissory note shall be forgiven, and the Employee shall be entitled to the tax gross-up payment as described in the tax letter with respect to such forgiven interest (but not with respect to the forgiven principal). For purposes of this paragraph (b), the term "promissory note" shall mean the promissory note dated April 12, 1999 with respect to the borrowing of $250,000 by the Employee from the Company, and the term "tax letter" shall mean the letter from the Company to the Employee dated April 12, 1999 providing for the tax gross-up with respect to the forgiveness of interest under the promissory note. (c) Notwithstanding any provision in the Supplemental Pension Plan to the contrary, the Employee's Accrued Vested Benefit under the Supplemental Pension Plan shall be equal to 40% of the Employee's Final Average Earnings (as defined under the Supplemental Pension Plan) as of the date of his termination of employment with the Company. (d) The Employee and his dependents, if any, shall, for thirty-six (36) months following the Employee's termination of employment or until the Employee reaches 65 years of age or is employed by another employer, if sooner, continue to participate in any benefit plans for the Company which provide health (including medical and dental), life or disability insurance, or similar coverage; provided, however, that if the Employee has attained 50 years of age prior to his date of termination, the Employee and dependents, if any, shall be eligible to participate in any benefit plans of the Company which provide health and life insurance or similar coverage as are then extended to employees of the Company electing early retirement at age 55 on the same terms and subject to the same conditions as are applicable to such employees; provided that such coverage shall not be furnished if the Employee waives coverage by giving written notice of waiver to the Company. (e) Notwithstanding any provision of the applicable stock option agreement to the contrary, any stock option or portion thereof that is exercisable on the date of the Employee's Termination (as that term is used in the applicable stock option agreement) shall not be forfeited on the date of Termination, but shall instead remain exercisable for the 30-day period following the Termination (or, if greater, the period otherwise specified by the applicable option agreement); provided that, in no event shall such the option be exercisable after the date on which the option would otherwise expire if the Employee had continued in the employ of the Company. The Employee shall not be required to mitigate damages by seeking other employment or otherwise. Except as specifically provided above with the respect to the Employee's becoming an employee of another employer, the Company's obligations under this paragraph 1 shall not be reduced in any way by reason of any compensation received by the Employee from sources other than the Company after termination of the Employee's employment with the Company. The benefits under this paragraph 1 shall be in lieu of, and not inaddition to, any benefits to which the Employee might otherwise be entitled under any other severance plan maintained by the Company providing benefits upon involuntary termination of employment. If a Termination Event occurs under paragraph 2(a)(iv)(C) (relating to termination prior to a Change in Control at the request of an acquiror), then the Employee's entitlement to compensation and benefits under this paragraph 1 shall be determined as though: (i) the Employee is rehired by the Company immediately prior to the Change in Control at the salary rate equal to his highest salary rate during the one-year period prior to the date of the Change in Control; (ii) his employment with the Company is terminated under circumstances described in paragraph 2(a)(iv)(A) (relating to termination by the Company without Good Cause) immediately after the Change in Control; (iii) he had retained any options and other benefits that were forfeited by reason of his termination prior to the Change in Control; and (iv) this Agreement is in full force and effect at the time of the Change in Control, and at the time of his deemed termination of employment. If the Employee is employed by the Company on the date of a Change in Control then, with respect to any stock option granted to the Employee by the Company prior to the Change in Control that is outstanding on the date of the Change in Control, that option shall vest and be exercisable on and after the date of the Change in Control. Except as otherwise provided in the preceding sentence with respect to exercisability of options, the options shall remain subject to the expiration provisions and other terms of the option awards without regard to the preceding sentence; and the preceding sentence shall not apply to any stock option to the extent that the terms governing such option expressly reference this Agreement and expressly provide that the provisions of such sentence are inapplicable. 2. Definitions. (a) For purposes of this Agreement: (i) "Good Cause" shall mean: (A) the Employee's conviction of any criminal violation involving dishonesty, fraud, or breach of trust, (B) the Employee's willful engagement in any misconduct in the performance of the Employee's duty that materially injures the Company, (C) the Employee's performance of any act which, if known to the shareholders or regulators of the Company or any of its subsidiaries, would materially and adversely affect the business of the Company or any of its subsidiaries, or (D) the Employee's willful and substantial nonperformance of assigned duties; provided that such nonperformance has continued more than ten days after the Company has given written notice of such nonperformance and of its intention to terminate the Employee's employment because of such nonperformance. (ii) "Good Reason" shall exist if, without an Employee's express written consent, the Company shall: (A) reduce the salary of the Employee; or (B) materially reduce the amount of paid vacations to which the Employee is entitled, or the Employee's fringe benefits and perquisites; or (C) significantly change the nature or decrease the scope of the Employee's authority; or (D) change by 50 miles or more the principal location in which the Employee is required to perform services. (iii) "Change in Control" shall be deemed to occur on the earliest of the existence of one of the following and the receipt of all necessary regulatory approvals therefor: (A) The acquisition other than from the Company, by any entity, person or group (including all Affiliates or Associates of such entity, person or group) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 20% of the outstanding shares of capital stock of the Company entitled to vote generally in the election of directors, but excluding for this purpose any such acquisition by the Company or any of its subsidiaries or any employee benefit plan (or related trust) of the Company or its subsidiaries, or any corporation with respect to which, following such acquisition, more than 80% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the common stock and voting securities of the Company immediately prior to such acquisition in substantially the same proportion as their ownership, immediately prior to such acquisition, of the then outstanding shares of common stock of the Company or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors, as the case may be; (B) The effective time of a reorganization, merger or consolidation of the Company, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger, or consolidation beneficially own, directly and indirectly more than 80% of respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or of a complete liquidation or dissolution of the Company or of the sale or other disposition of a Substantial Portion of the Property of the Company; or (C) The election to the Board of Directors of the Company of directors constituting a majority of the number of the directors in office unless such directors were recommended for election by the existing Board of Directors. (iv) A "Termination Event" means the date that the Employee's employment with the Company terminates under one of the following circumstances: (A) The Employee's employment is terminated by the Company without Good Cause within two (2) years following a Change in Control. (B) The Employee voluntarily terminates employment with Good Reason within two (2) years following a Change in Control. (C) The Employee's employment is terminated prior to a Change in Control at the request of an acquiror. For purposes of the definition of Termination Event, a termination will not be deemed to have occurred solely because of the transfer of the Employee between the Company and a subsidiary of the Company, or between two subsidiaries of the Company. (b) For purposes of the foregoing, (i) "Affiliate" or "Associate" shall have the meaning set forth in Rule 12b-2 under the Securities Exchange Act of 1934, and (ii) "Substantial Portion of the Property of the Company" shall mean 80% of the aggregate book value of the assets of the Company and its Affiliates and Associates as set forth on the most recent balance sheet of the Company, prepared on a consolidated basis, by its regularly employed, independent, certified public accountant. (c) Notwithstanding the foregoing, a Change in Control shall not be deemed to occur for the Employee by virtue of any transaction in which such an Employee is a participant in a group effecting an acquisition that constitutes a Change in Control if, after such acquisition, the Employee holds an equity interest in the entity that has made the acquisition. 3. Litigation Expenses. The Company shall pay to the Employee the attorneys' fees incurred by the Employee in connection with any claim or legal action or proceeding involving this Agreement, whether brought by the Employee or by or on behalf of the Employee or by another party; provided, however, the Company shall not be obligated to pay to the Employee out-of-pocket expenses, including attorneys' fees, incurred by the Employee in any claim or legal action or proceeding in which the Employee is a party adverse to the Company if the Company prevails in such litigation. The Company shall pay prejudgment interest on any money judgment obtained by the Employee, calculated at the published prime interest rate charged by the Company's principal banking connection, as in effect from time to time, from the date that payment(s) to the Employee should have been made under this Agreement. 4. Post-termination Payment Obligations Absolute. The Company's obligation to pay the Employee the amounts and to make the other arrangements provided for herein to be paid and made after termination of the Employee's employment with the Company shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right that the Company may have against the Employee or anyone else. The Company hereby waives any contract formation defenses that it may have with respect to the Employee Retention program and this Agreement. 5. Withholding. The Company may withhold from any payment that it isrequired to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state, or local law 6. Successors. The obligations of the Company provided for in this Agreement shall be the binding legal obligations of any successor to the Company by purchase, merger, consolidation, or otherwise. Rights under this Agreement may not be assigned by the Employee during the Employee's life, and upon the Employee's death will inure to the benefit of the Employee's heirs, legatees and the legal representatives of the Employee's estate. 7. Interpretation. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Illinois. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision. 8. Amendment. This Agreement may be amended or cancelled only by the mutual agreement of the parties in writing without the consent of any other person. So long as the Employee lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 9. Tax Payments. This paragraph 9 shall apply if all or any portion of the payments and benefits provided to the Employee under this Agreement, or any benefit (including any plan adopted in the future), would otherwise constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the tax imposed by Section 4999 of the Code (or similar tax and/or assessment). If, after the application of such tax and/or assessment, the amount of such payment and benefits would be less than if the payment and benefits had been reduced to an amount that would result in there being no excess parachute payments, then such payments and benefits shall be so reduced (the minimum extent necessary so that no excess parachute payments result). If reduction is necessary hereunder, the Employee shall elect which of the payments and benefits shall be reduced. Determination of whether payments and benefits would constitute excess parachute payments, and the amount of reduction so that no excess parachute payments shall exist, shall be made, at the Company's expense, by the independent accounting firm employed by the Company immediately prior to the occurrence of any change of control of the Company which will result in the imposition of such tax. IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement on the ____ day of April, 1999. This Agreement supersedes and replaces any prior agreement between the Company and the undersigned, regarding this subject. ILLINOVA CORPORATION By:______________________________________ ----------------------------------------- WILLIAM B. CONWAY JR. PROMISSORY NOTE $250,000.00 April 12, 1999 Decatur, Illinois FOR VALUE RECEIVED, the undersigned, William B. Conway Jr., an individual (the "Employee"), promises to pay to the order of Illinova Corporation, an Illinois corporation (the "Company"), on the date on which the Employee's employment with the Company terminates (the "Maturity Date"), the principal sum of $250,000.00 and any accrued interest on this Note, subject to the provisions of this Note relating to forgiveness of such obligations. This Note evidences obligations in connection with a loan made by the Company to the Employee as part of the inducement to the Employee to become employed by the Company. The unpaid principal amount of this Note from time to time outstanding shall bear interest at a rate per annum (based upon a 365/366 day year) equal to the applicable Federal rate as of April 12, 1999, as determined for purposes of section 1274(d) of the Internal Revenue Code of 1986, as amended, compounded annually. After the Maturity Date, any unpaid and unforgiven principal amount and accrued unforgiven interest on the unpaid principal amount of this Note shall be payable on demand. As of each of the first five one-year anniversaries of April 12, 1999, if the Employee is employed by the Company on such anniversary, an amount equal to $50,000.00 of the principal amount due under this Note, together with the amount of interest that has accrued with respect to the entire unpaid principal and interest amount since the preceding April 12 shall be forgiven. If the Employee's employment with the Company terminates prior to April 12, 2004, and such termination is the result of being discharged by the Company for reasons other than Cause, any remaining principal and interest shall be forgiven. If the Employee's employment with the Company terminates (i) prior to April 12, 2004 by the Company for Cause, or (ii) prior to April 12, 2004 by reason of the Employee's death, disability, or voluntary resignation, then any remaining principal and interest shall become due and payable on the date of such termination of employment. For purposes of this Note, the term "Cause" shall mean: (a) the Employee's conviction of any criminal violation involving dishonesty, fraud, or breach of trust, (b) the Employee's willful engagement in any misconduct in the performance of the Employee's duty that materially injures the Company, (c) the Employee's performance of any act which, if known to the shareholders or regulators of the Company or any of its subsidiaries, would materially and adversely affect the business of the Company or any of its subsidiaries, or (d) the Employee's willful and substantial nonperformance of assigned duties; provided that such nonperformance has continued more than ten days after the Company has given written notice of such nonperformance and of its intention to terminate the Employee's employment because of such nonperformance. Subject to the other terms and conditions hereof, the Employee may voluntarily prepay all or any portion of the unpaid and unforgiven principal amount of this Note from time to time outstanding and any accrued and unforgiven interest thereon, without premium or penalty. All payments of principal of and interest on this Note shall be payable in lawful currency of the United States of America at Decatur, Illinois or such other place as the Company shall designate to the Employee in writing, in cash or by check. If payment hereunder falls due on a day which is either a Saturday, Sunday or any other day on which banks in Decatur, Illinois are not generally open for business to the public (i.e., not a "Business Day"), then such due date shall be extended to the immediately succeeding Business Day, and additional interest shall accrue and be payable for the period of any such extension. The Employee agrees that if any of the following events of default (each an "Event of Default") shall occur and be continuing: (i) default in the performance or observance of any other agreements of the Employee contained herein, or (ii) the institution of any bankruptcy, insolvency, receivership or similar proceeding relating to the Employee or his assets, and if such case or proceeding is not commenced by the Employee, it is consented to or acquiesced in by the Employee or remains for 60 days undismissed; then the Company may declare this Note and all unpaid and unforgiven principal of and interest on this Note and all accrued costs, expenses and other amounts under this Note to be due and payable, whereupon all unpaid and unforgiven principal of and interest on this Note and all such costs, expenses and other amounts shall immediately become due and payable following such declaration. The Employee hereby represents and warrants to the Company as of the date hereof (i) that this Note is the legally valid and binding obligation of the Employee, enforceable against the Employee in accordance with its terms, and (ii) that the execution, delivery and performance by the Employee of this Note does not conflict with or contravene (a) any law, rule or regulation binding upon the Employee or affecting any of the Employee's assets, (b) any provision of any contract, instrument or agreement binding upon the Employee or affecting any of the Employee's assets, or (c) any writ, order, judgment, decree or decision of any court or governmental instrumentality binding upon the Employee or affecting any of the Employee's assets. All notices, certificates and other communications ("Notices") hereunder shall be in writing and may be either delivered personally, by nationally recognized express courier for overnight delivery, or by facsimile (with request for assurance of receipt in a manner appropriate with respect to communications of that type, provided that a confirmation copy is concurrently sent by a nationally recognized express courier for overnight delivery) or mailed, postage prepaid, by certified or registered mail, return receipt requested, addressed as follows: If to the Company: Illinova Corporation 500 South 27th Street Decatur, Illinois 62521 Attention: General Counsel If to the Employee: William B. Conway Jr. Illinova Corporation 500 South 27th Street Decatur, Illinois 62521 All notices hereunder shall be sent to the Employee or the Company, as appropriate, at such party's address shown above, or at such other address as such party may, by written notice received by the other party hereto, have designated as its or his address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given five days after the date mailed by registered or certified mail, postage prepaid; and notices sent by hand delivery shall be deemed to have been given when received. This Note has been made and delivered at Decatur, Illinois and shall be construed in accordance with and governed by the internal laws of the State of Illinois. Wherever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the least extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. IN WITNESS WHEREOF, the Employee has caused this Note to be executed as of the day and year first above written. ----------------------------- William B. Conway Jr. April 12, 1999 William B. Conway Jr. Illinova Corporation 500 South 27th Street Decatur, Illinois 62521 Dear Mr. Conway: This letter is to confirm our verbal agreement that Illinova Corporation (the "Company") will loan you $250,000.00. The Company is making the loan to compensate you for amounts you have foregone by leaving Troutman Sanders LLP to join the Company. As a condition of receiving the loan, you must sign and return one copy of this letter and the enclosed promissory note. As indicated in the promissory note, 20% of the principal amount of the loan will be forgiven on each of the first through fifth anniversaries of April 12, 1999, if you are employed by the Company on such anniversary. Also, as of each such anniversary, the entire amount of interest accrued on the outstanding principal during the prior one-year period shall be forgiven. As of each anniversary, the amount of the forgiveness of principal or interest on that date will be taxable income to you. As of each date on which the forgiveness occurs, you will become entitled to a tax gross-up payment from the Company in an amount equal to the aggregate of the additional Federal, state and local income taxes payable by you by reason of the forgiveness of the interest amount (but not by reason of the forgiveness of the principal amount), and by reason of your receipt of the gross-up payment. If, prior to April 12, 2004, your employment is terminated by the Company for reasons other than Cause (as defined in the attached promissory note), the amount of any outstanding balance of principal and interest will be forgiven, and you will become entitled to a tax gross-up payment in an amount equal to the aggregate of the additional Federal, state and local income taxes payable by you by reason of the forgiveness of the interest amount (but not by reason of the forgiveness of the principal amount), and by reason of your receipt of the gross-up payment. However, if your employment is terminated (i) prior to April 12, 2004 by the Company for Cause, or (ii) prior to April 12, 2004 by reason of your death, disability, or voluntary resignation, then the amount of any outstanding balance of principal and interest will become immediately due and payable. After termination of your employment, if amounts are due from you to repay the loan, and such amounts are otherwise unpaid, the Company retains the right to offset such liability against amounts otherwise due to you from the Company. If the foregoing reflects your understanding of the terms of your agreement with the Company, please so indicate by signing and returning a copy of this letter to the undersigned, along with a signed copy of each of the enclosures. Very truly yours, Illinova Corporation By: Charles E. Bayless Accepted and agreed to this ____ day of April, 1999. William B. Conway Jr. EX-27 4 FDS --
UT This schedule contains summary financial information extracted from the balance sheet, income statement and cash flow statement of Illinois Power Company and is qualified in its entirety by reference to the balance sheet, income statement and cash flow statement of Illinois Power Company. 0000049816 Illinois Power Company 0 0 1,000,000 Default 3-mos Dec-31-1999 Jan-01-1999 Mar-31-1999 1 Per-book 4470 3 371 1134 0 5978 1089 0 19 1108 195 53 2028 25 0 173 162 0 51 20 2163 5978 472 14 403 417 55 7 62 39 23 4 19 0 27 (27) 0 0
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