ML20155E818

Illinois Power Co 1987 Annual Rept

ML20155E818
Person / Time
Site:	Clinton
Issue date:	12/31/1987
From:	Kelley W ILLINOIS POWER CO.
To:
Shared Package
ML20155E817	List: ML20155E818 ML20155E846 ML20155E875 U-601211, Forwards 1987 Annual Repts for Util & Associated Cooperatives
References
NUDOCS 8806160217
Download: ML20155E818 (40)

Text

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Illinois Power Company 1

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Illinois Power Company 1987 AnnualReport Illinois Power Company Illinois Power Company is a public utility engaged principally in the g:ncration, transmission, distribution, and sale of electric energy and the distribution and sale of natural gas colely in the State of Illinois. The Company's territory is approximately 15,000 square miles, or one quarter of the state. The Company serves approximately 543,000 customers.

Principal Office Monticello, Illinois 61856 Executive Office 500 South 27th Street, Decatur, Illinois -

62525 Phone (217) 424 6600 Tran:fer Agent and Itegistrar Continental Illinois National Bank and Trust Company of Chicago 231 South laSalle Street, Chicago,111inois 60693 Stockholde -Its y eds and Dividend Disbursing Offic e Patricia E. Perkins Supervisor, She.rcholder Services Illinois Power Company 500 South 27th Street Decatur, Illinois 62525 (217) 424 6609 Invenor Helations Michael R. IIeneghan Director of Investor Relations (217) 424 8715 Annual Stockholders' Meeting The annual stockholders' meeting will be held April 21,1988, at the executive office of the Company at 10 a.m. A proxy statement will be mailed to stockholders about March 14,1988.

This report and the financial statements contailed herein are submitted for the generalinformation of the stockholders of the Company as such and are not intended to induce, or to be used in connection with, any sale or purchase of securities.

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1987 FinancialHighlights

% inerease 1987 1986 (Decrease)

(Millions of Dollars except per share amounts)

Operating revenues . . . .. . $ 1,220 $1,184 3.0 Electric . . . . .. . . S 911 $ 814 11.9 Gas . . . .. . . .. . .. S 309 $ 370 (16.5) -

Operating expenses and taxes . . ... . S 980 $ 976 1.0 Net income . .. . . . .. . .. . S 290 $ 293 (1.0)

Average number of common shares outstanding (millions) . . . . . .. .... .. 67 65 3.1 Earnings per common share . . . . . .. S 3.75 8 3.98 (5.8)

Dividends declared per common share . . . . . .. S 2.64 $ 2.64 -

1987 Operations Highlights January 23 Gas sales and deliveries peaked for the year at 625,050,000 cubic feet February 27 Clinton power station achieved its first, self sustaining nuclear chain reaction April 1 Company purchased downtown Decatur building primarily for new computer center April 10 NRC authorized full power license for Clinton April 24 Clinton in service date July 15 ICC issued order on depreciation rate and funding for de ommissioning of Clinton July 20 Peak electric demand for the year reached 3,308,000 kilowatts August 3 Peak day energy use for the year reached 65,855,000 kilowatt-hours August 14 IIcarings concluded on the first phase of Clinton audit September 1 .

New district office in Columbia opened October 7 Gatekeeper program to keep an eye on the elderly introduced in Company November 1 Larry Brodsky and Wilfred Connell became vice presidents November 10 Company filed a request for rate-moderation plan November 24 ICC approved negotiated settlement on several Clinton related ratemaking issues November 30 NRC issued acceptable review of Clinton's performance 2 llinxs INmrt Ownparn

1 To Our Stockholders:

In reporting to you the significant accomplishments, developments, and events of 1987, I must begin with the most important-

.,, completing construction of our nuclear a" generating station at Clinton and bringing it up to full power operation. For several months now, 1 Clinton has been fully operational, supplying about one-quarter of the electricity needs of our customers. 1 Next in importance, I believe, was the proposal l we filed in November to recover through electric rates the owning and operating costs of the Clinton power station. I am confident that our plan balances the interests of our customers, our E

Sir an an i resident stockholders, and the economic welfare of the territory we serve.

Before getting into more detail about Clinton and our rate proposal,I should report to you that 1987 earnings per share decreased 5.8 percent compared to those of 1986 due to a number of factors.

Earnings per common share fell to $3.75 from

$3.98 in 1986. The cash portion of our earnings increased 16e while the non-cash portion I ain con [ident that our rdan (allowance for funds used during construction balances the interva':; of our and deferred Clinton financing costs) declined custorners, our stockholders, and 39c. This increase in cash earnings reDects our electric rate increase, partially offset by our plan the econornic wr i[are o[ the to reduce residential electric rates during the l territory toe serve.

summer of 1988 and by the resolution of various l

ratemaking issues associated with Clinton. The reduction in non cash earnings redects the inclusion of additional construction work in progress in rate base.

Clinton achieved its first, self sustained  ;

nuclear chain reaction on February 27,1987 following fuel loading in late 1986. A .

unanimous vote by the five commissioners of l 1 # AnnmlRy=,n 3

the Nuclear Regulatory Commission (NRC) on Cash Earnings vs. Total Earnings April 10 gave us a license to operate Clinton per Share up to full power. - - - -

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On April 24, the station went into sme mmmrfyg=m commercial operation. By mid summer, '<1-= =--wE"C"Nt"COT ME~iCC"lm Emh L CTJf0' Clinton was supplym.g about 15 percent of our u p $LO2buci2::!IT"*"' erg3,gg %g:HO g customers' monthly need for electricity. mi $3.80lni ram!

The Federal Emergency Management Agency in August approved Illinois' Q

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le !EL jlllF$3.75 @Hs lui '! cs emergency response plan for the area Ni Ti%

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~> .F qC li surrounding the Clinton power station. The e jaL ink su e emergency response plan for the plant site cc l- jn! juF n! ui, j [.j; itz E5 was approved by the NRC in 198a..

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a ilL r itC in the NRC's annual review of Clinton's W W> sui. lui performance, we received the highest achievable grade in licensing activities and in Q

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jm preoperational and startup testing. We received acceptable ratings in nine other

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'uli j a % $0.581n ;$0.74 h areas. The NRC indicated that there were JHb !Bh j t=

"many favorable trends" at the plant and that M M b b lU M 1986 1987 three areas had improved since our previous 1983 1981 ia85 report card. Total Earnings As we progressed with operation of Clinton, Cash Component we also moved forward on a number of

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significant regulatory matters related to rates.

In July, the Illinois Commerce Commission (ICC) issued an ordar specifying the

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h and surrounding land

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,1 _ i.; providet. recreation for ac . e .i ,- more than 860.000 people

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during the year. In addition, almut M00

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people from 20 countries

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toured or used the Clinton visitors center.

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, g Q' gSW ] , depreciati on rate for Clinton and how the r 4'  ?. decommissioning costs of the Clinton power station will be funded.

C- J - In November, the ICC approved a

% settlement that we had negotiated with several consumer groups and jointly proposed h' -

.y j .j, to ti.e ICC. The agreement established April

, 24,1987 as the in-service date of the Clinton j power station and settled other related accounting issues. Our completed investment l f'  ? in Clinton was $3.8 billion.

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- 4 The audit of the Clinton power station is g nearing completion. In August, the ICC concluded hearings on the first phase of the

'*l audit to evaluate the reasonableness of the i cost of the station, but the ICC did not issue an interim order. The audit firms selected by

,. the ICC are expected to file the second phase of their report in early 1988. We expect the

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4 final order covering both phases from the ICC in late 1988.

With the successful transition from construction to operation of Clinton,it became q' appropriate to propose a plan for including Clinton in our electric rates. Currently $1.5

" * * - billion of Clinton's costs are ircluded in rate l

e. base and earning a return. Ilowever, there  !

• remains the uncertainty of when and how

. 1 One of 624,15-foot long fuel bundles is lowered by crane j into the reactor core at Clinton. Fuel loading began in September 19% and was completed 22 days later.

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M A m. 1' Clinton. k i a ? Au .;./.- a . T IC Annual Rtpw1 5

Summer Rates Electric llevenue by Customer Class ilh.l! ir m %i6nu The two part rate increase approved in 1985 s911_

officially became effective in October 1986 and -

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April 1987. Ilowever, the approved, redesigned 33 4 - 3334f $ 2' 1 s791 m -.:._. ~

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ti months of 1987 and creating a dramatic '

07'  : : i 1 H  : U difference between summer and winter rates. k l $ {, j$  !

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Understandably, some of our customers

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were angry with the electric bills they received j bj 0 during the summer. We had anticipated the :s c  :- t -c - '

high bill problems reflecting the electric rate j j [ ] ] ,

increase and made extensive efforts to inform

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have anticipated the extremely hot weather in h

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early summer, and our efforts did not mollify some of our customers. ] l ]f j g  ;

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, s To help ease the burden that the dramatic difference between summer and winter rates  ; $ 64 ~

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placed on our residential customers, we asked 1983 1981 1985 1986 1987 the ICC to adjust electric rates retroactively itesidential t2 Industrial G and let us credit custemenJ 1987 summer bills. Conunercial E Other O The ICC rejected this proposal, but approved a much of our investment in Clinton nll be proposalin November that will reduce residen-tial electric bills by $23 million in the summer recomM through ektric rates. Dus Mngs of 1988. Our rate phase-in plan of November nw to the rate-moderation proposal 1 proposes a permanent solution to the dramatic *""bned eark difference between summer and winter rates. On N.oveniber 19, w: asked the ICC to merease electric revenue by an average 11

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percent in November 1988 and to increase

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--W rates annually by a smaller amount for six to

1. ' '. g q j nine years thereafter. A rate decrease would 4.< '1 1 follow. Our requested increase reflects the remaining cost of constructing Clinton plus A operating costs for the plant, the effect of the Tax Reform Act of 1986, and changes in other

, . h ,, y g' D operating costs.

0 The annualincreases after 1988 would be based on the rate ofinnation for the previous year. A dollar amount Coor would assure

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h]  ;. minimum annual rate increases averaging about four percent, and a ceiling of 5.9 percent annually would shield customers from

('hamp.ugn Urbana customer sers n e repres ntatn e unmah M inman MaMnc Wriu awisted a < ustomer with his bill com ern Our proposal includes a discount for senior nurme W. the Companis t ustomer sordce citizens, a special rate for certain apartment ri presentatn es w ent the extra mile expl.unmg the rate merca e and i nergy wn . rvaoon. and resoh me bm dwellers, and three billing options for our conci rn s Mdential customers. The ICC has 1I months to decide on our proposal.

We believe our proposal balances the interests of all the parties concerned. It fulfills our commitment to keep our rates competitive with those of other utilities and with the price 6 um %m . wu of alternate energy sources. It minimizes the

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the Com pany's , 6 rate-moderation plan. L=&S.--

j impact of a dramatic rate increase on our compared to 1986 sales in excess of purchases customers. And it recoups our investment in by $38 million.

Clinton and earns for you, our shareholders, a We used 7.4 million tons of coalin our power fair return on your investment, although it plants in 1987, generating more than 16 somewhat delays recovery of costs compared billion kilowatt hours, almost 91 percent of the to traditional ratemaking. total electricity we produced. We bought 85 ,

Total operating revenues were $1.22 billion, P"#C""I I "' C" "I I'"

• IIII" I" " I" "*' i reDecting our commitment to the economy of  ;

up three percent from 19S6. Electric revenues ,

the coal industry in our state. % e used nuclear increased 11.9 percent reDecting the two-part

. fuel to generate 1.6 bilhon kilowatt-hours' electric rate increase, partially offset by the almost nine percent of the total.

provision to reduce electric rates during the ,

Over the next five years, we expet t to summer of 1988. Gas revenues decreased 16.5 generate approximately 46 percent of our percent primarily because of mild winter electricity from coal and 23 percent from weather and an increase in gas transported nuclear fuel.

for customers.

Our electricity demand in 1987 reached an

. hourly peak of 3,30S,000 kilowatts on July 20.

Electricity Fuel Sources for 1987 2'his includes the requirements of a power n_ ". .._.; t _i _: A_.. ,J S ,~,..~ ~ : U,2 _r .._, ,

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coord,i nation agreement with two electric Na;; ::~ . ; 1 .

cooperatives. The peak was 2.6 percent lower .1.2i2~ 1 1: 2 3 than our all time high peak demand set in WE9 Tl . -

1986. Our 1987 peak day energy use of , ;. ny . , . m;;  !

65,855,000 kilowatt hours occurred on August ENy/ Nuclear M.

3 and was 1.9 percent lower than our historic 'hj - E'c_ ;

peak day energy use, also set in :986. Mr a C .'r Because of greater availability of our lower ..X d E g a:"

cost generating units and greater market . a s /v: m - -

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M' coordination agreement were $58 million. The result for the year w as sales to other utilities in excess of purchases by $51 million, w ^noua ner <t 7

Gas sales and deliveries in 1987 peaked Gas Revenue by Customer Class at 625,050,000 cubic feet on January 23. This ' D"H = i n """ "

is 27 >ercent below our record peak da}* E=E ==U D' set in 1982.

.I nr.'E3488mrzn';CIZN 7;Tstr7I2=m m u n e m I:3470 2 .22~ r r 'I m C 3 M M-Our natural gas business has two a "$228J,.C - 8aJ'armK N = m'm

'r1 5 $24 KII':ramcrl :"Z:'Intm segments-direct sales to customers and gas a < E

. EZs40ir m !Z E C E CU T transported for customers. During 1987, direct Q i E i 9' Q$228,' r "$370 rMME sales decreased 21.1 percent, and gas a -

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transport gas, we earn about the same profit $.] jl l l [ -

$[#N]E as we do when we sell gas directly. Gas

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transported-decreased eight percent in 1987 b a n "" E "" n M '- C2 compared to 1986. This reduction in gas consumption reflects mild winter weather and g a j g g d-i g a  :

c.i (W181 5 u n m a J d D IW R the impact of several industrial customers E 4 D N using alternate energy sources. S l ha.d gLMud BQV We drilled a new well at the Ilillsboro gas ~~- - - s is -!M. i! -MILEs 18 %-

storage field to increase the field,s volume and 1983 1981 1985 1986 1987 to reduce gas costs. Running a new natural itesidential a Industrial a gas line under the Kaskaskia River to an c mmercial e Other O existing subdivision of Carlyle enabled us to expand our natural gas sales into an area that '

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t was previously served by propane. We also D i i]b  !

constructed a new gas delivery station near -

• %p 'i Carlyle. This station will allow us to buy more natural gas from one of our lowest cost t y

g1 suppliers, Mississippi River Transmission p *hgv Corporation. y 3 Prices of natural gas to our customers have * ' [f been declining since 1983, driven down 3'

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helped dig a trenc h across the Kaskaakia river bed and through adjacent woods so the 4

Company could begin supplying natural gas to a subdivision near Carlyle.

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primarily by competition among gas .

producers and, for a time, by lower oil prices.  : QUGlity CH8tOmer SerMCCS In the near future, gas prices may be pushed In 1987, we conducted many activities to upward because of producers temporarily maintain our high quality electric and gas removing gas from spot market supplies in service:

response to new transportation regulations.

• In September, we completed a 9,000-square-foot building in Columbia. We established Financing activities in 1987 were not as this new southern Illinois district to provide heavy as in 1986 because we completed better service to this rapidly developing area.

constructing the Clinton power station and e We began construction of a comparable because we refinanced significant amounts of buildingin Augustin Aledo to replace an debt in 1986. We expect total construction older district office building.

expenditures to drop to $137 million in 1988,

• To add much needed work space for an down from $264 million in 1987. expanded computer center and to demonstrate We issued $75 million of pollution control our commitment to revitalizing our bonds in December. We refinanced $34 million communities, we purchased the vacant of 10% pollution control bonds with 8.30% building of a former department store in pollution control bonds. We also called for downtown Decatur. We expect to move into redemption the remaining $9.7 million of 14YTo the building in 1988.

bonds and $6.8 million of 12% bonds. Our 1986

• We implemented a new training program for and 1987 refinancings together will reduce apprentice linemen that boosts efficiency in work practices and cuts training hours and costs. )

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• More than 2,000 of our employees were ,

1. ' trained to participate in the Gatekeeper and l QQg Fleetwatch programs. Respectively, these 3.M ?fy encourage employees to watch for elderly people g 4 [.9 who may be having problems and refer them to a local social service agency; and to recognize L

f g i and report suspicious activities to police.

• We began performing certain electric line repairs from a helicopter to maintain hard to.

2 reach lines more efficiently. Repair costs were reduced by about 50 percent.

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Nearly as important as sending electricity 2

and gas to our customers is educating our customers. Approximately 40,000 school-children in our service territory learned about electric energy and safety through our lierb 1)ow ney and other senior citizens throughout our entertaining Starship Energy program.

territory know they can count on Company employees such Another 7,800 children and adults learned as Mt. Vernon meter changer Clarence Mays to keep their about electric safety in everyday "yes pen for senior citizens who may be having problems. circumstances through our mechanical Safetv Through the Gatekeeper program, trained Company employees refer customers who appear to need help to 1o. al City model. We conducted energy workshops social service agencies that assist the elderly. for 130 schoolteachers. More than 1,100 students toured our fossil fired power plants.

We presented 940 programs on conservation, rates, safety, and nuclear energy to civic, church, and school groups. And we restructured our speakers' bureau, training about 150 speakers, to inform even more customers through programs in 1988, 1

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interest and preferred stock dividend costs by essence of a new formal program. In February approximately $15 million annually. 1987, we launched a major campaign to At year end, we had approximately $300 improve the quality and productivity of million of bank loans and $55 million of service to our customers, based on suggestions commercial paper cutstanding with various solicited from employees. We expect to report maturities during the next six years. We also some concrete results of the program received $76 million from the automatic next year.

reinvestment and stock purchase phm during At the end of the year,6,548 customers were the year. At year end, we had available participating in the Illinois Residential unused lines of bank credit of $260 million. Affordable Payment Plan. Participants must As we enter 1988, we see the prospect of have incomes of 125 percent or less of the change on the horizon particularly in povuty lael %ey are aHowed to pay only 12 regulation of our electric business. A percent of their income for utility service, sigmficant amount of change already has regardless of the bill amount. During the first occurred in gas regulation, especially at the two years of the three-year program, we have federal level. We are less certain of what the incurred a $1.< milhon shortfall between the changes in electric regulation will be. Some amount billed and amount paid. I he state has have advocated forms of deregulation, while set aside temporary funds that we expect to be others have suggested new forms of to reimburse utilities for such shortfalls.

regulation. We believe we have developed a m)e favor weatherization of low incom good strategy for facing regulatory changes, housing to pron long4am enugy assistance, and we have been a leader m, this regardless of the shape they may take. Our strategy is focused on improving efficiency area kr snaal years. Ihe Enngy Amstance and service to customers while reorganizing our approach to marketing. , ,,

Efficiency in service to our customera is one l I'  !

of our strengths, and we plan to build on that  !

strength. Among Illinois utilities in 1986, we j. I' had the lowest or second lowest expense per j

customer or megawatt hour for meter reading, 7 production, transmission, and distribution of

• electricity, and for total operating and maintenance for gas and electricity. I Keeping a tight lid on operating costs has j

always been a priority for us, and it is the i h'

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Jayceen caulked windows at the home of a widow. This was funded with part of a $3U00 grant from the Energy Assistance Foundation. *1he Jaycees completed their three- )

year pr; ject in Septemler lim 7, weatheruing 31 homes.

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G "k }' [ .k..< l.

industrial applications g ./ } . . g *

'.;.g, engineer lowell Griffith ';. , " . j%Q . . , . r,; M{.%j a .p ,

discussed operations and >

,.7"r products of the plant during a , p i> ' , q' > . g. - wg .

sg?'.$pa%g k b4w  ;

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factory modernization audit. l.. 'u f,,. y 't,, j . ,J o

.- ' N '. 31 .' *" . . .". $ J-3 ' -

p.

The Hattelle Manufacturing .<N " ~ .'.-

L I- ,- ** . .J ;i Group performed the audit for I .E ' . ' . ' - '.. hl .

./ . '.- U A-three industrial customers at the request of Illinois Pow er j'" +W'*'

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Company.

l l

I Foundation, which the Company founded in price, conservation, audits of buildings'  ;

1982, issued 10 grants totaling $68,800 during energy use, and technical information.

l the year to church and service groups. These We also worked with a number of customers i groups, in turn, purchased materials and to objectively demonstrate that their proposed provided labor to weatherize homes in their plans for considering generating their own communities. Our customers and other electricity or switching from natural gas were organizations donated $68,535, and we uneconomic. I matched that amount during the year to help Electricity sales were significantly higher l fund the Foundation. than expected and slightly higher than 1986  !

In 1988, we plan to phase in a new customer sales. On the other hand, total gas

assistance program that will provide a consumption fell below our expectations and

(

customer assistance advisor in each service was eight percent below 1986 sales.

i area to work more actively as a liaison Sales greater than those in 1987 look between customers having difficulty paying promising. One indication is that by the end  ;

their utility bills and local social service of the year,72 prospective industrial  !

agencies. customers were considering locating in our  !

territory, in part reflecting our efforts and i Our electric and gas marketing efforts to customers' confidence in our territory. Our industrial and commercial customers are econo nic development efforts include l focused on providing better service and contacting more international prospects, increasing sales to our customers. Our particularly in Canada, Japan, and Korea; services for both electric and gas customers soliciting potential aluminum casting include customer seminars on energy supplies, industries; and continuing to take advantage i

l# Annual kqun iI i

-- - - . - ------~a. - , - - - - ww. - - - - - , - - - - - - - - . - - - - - - - - - - - - - - - - - - - - - - - - - - - -

of such trends as automotive parts plants planned to add more than 1,200 employees in locating in our territory, our service territory.

In the fall, a manufacturer of auto air Altogether,69 new and existing customers conditioners and heaters moved into a vacant built or expanded facilities, creatiag 4,299 new facility in Decatur. Another manufacturer of jobs in 1987 in our territory. An additional 223 automobile accessories intends to locate in jobs in jeopardy were retained in t ar territory Nashville near an auto supply plant through state and local economic development announced in 1986. The first Nashville plant incentive programs.

and two other auto supply firms in Ottawa and Bloomington have nearly completed their Commercial development also looks ,

facilities and expect to begin production in promising, especially in certain areas. The  ;

1988. University ofIllinois in Champcign Urbana The Diamond Star Motors Corporation auta has planned about 40 high technology or assembly plant in Bloomington Normalis supercomputer projects. This includes a $.50 essentially complete and also will begin million research center being constructed.

production in 1988. Full production with about Retail and hotel businesses are booming in .

2,900 employees is expected in 1990. It will be southwestern Illinois, and a commercial one of our 10 largest industrial customers. passenger and air cargo facility serving both Separately during 1987, manufacturers of military and civilian needs in the greater St.  !

home appliances, typewriters, model toys, louis area is being studied. Insurance, health electronics equipment, military explosives, care, and hotel businesses are expanding in and cardboard containers also added or the Bloomington Normal area. These and I I f ,

4 t

l I - ,

e

• t Bement Grain Company '

operationa manager Steve ' ~

Mechling,left, and Ilhnms l

, Power Company agri energy .

specialist Paul Manman tour -

one of Hement G;ain's -

elevators. Our marketing employees advised managers g ,

, such as Mr. Mechling to take ""

advantage of a new Company rate that shifted grain <lrying .

l i

to lower winter rates. In their -

~

i fear end newsletter. Hement ~

Grain thanked the Company l for a $7.M0 nvings, due to the rate change, at their ,

l

, I.aPlace and Milmine elevators during the han est -

period. _ _._ - - -

4 12 an..isn m ri .nw m i l

[

other developments are due in part to our Comparison ofIP Industrial Average extensive work with rnany community and Electric Price to Midwest regional economic development groups- Industrial Average For our agricultural customers, we scent per Kilowatt hour) introduced three options that will help them cm=mmerm;rmrcar.:==s operate more competitively. Residential and CREJM4NCC CTWC#6 K'""WJm"a:'Jr~us d11 ITA"_3 CSi-commercial grain. drying customers received a =y NIM M N N r>A shift in their billing period so that grain may mCa ira tem in~a be dried at the time the lower winter rates are in effect. Commercial customers' demand

['

E:s ff9 u 5 charges now stand alone each month, rather j j j [~

than being determined for the year by the ru a u 8

] l highest monthly charge. Residential customers who mstalled a combmatmn .; gs g a ,

natural air and electric grain drying system M E E T il B B received rebates. U D E I  ?.3 g >

l Environmental activities consumed a 88

'l@

significant portion of our energies in 1987. A igga iggi 1933 iggo 1987 number of bills to amend the Clean Air Act II' Industrial u 31idwest Industrial e are being considered in Congress but have not IP First Year Itate-31oderation l>lan O been passed. Those aspects affecting us the most are acid rain and toxic air pollution and national air quality standards. the Electric Power Research Institute and the We are concerned about the environmental Gas Research Institute. We also belong to effects of all our operations. But we want several nuclear research groups that focus on Congress to thoroughly assess the need, cost, enhancing the safety and reliability of nuclear and benefits of any additional regulations power plant operations and maintenance.

before they are imposed. We gave testimony to In March 1987, the U.S. Environmental a congressional committee showing that one Protection Agency proposed to approve a rule proposed tax on sulfur dioxide and nitrogen change that we had pursued since 1979. The oxide emissions would cost the Company $8 change will allow us to continue burning billion to S11 billion over the next 40 years. Illinois coal at the Baldwin power station, our We also are concerned with keeping the largest fossil fired generating station.

Illinois coal industry a significant contributor Along with 650 other organizations, we had to the economy of our territory. Along with the used Martha C. Rose Chemical Company in federal government and the state ofIllinois, Missouri to dispose of polychlorinatcd we are actively researching methods to biphenyls (PCBs). In 1986, Rose abandoned develop more uses for Illinois coal. Planning its storage facilities due to lack of funds.

began in 1987 on a clean coal technology Under federal statutes, we and other groups project at our llennepin power station. We are are responsible for cleaning up and restoring one of three host utilities in this project the storage site. In 1987, inventory was taken intended to reduce sulfur dioxide and nitrogen of all material at the site, and a preliminary oxide emissions that come from burning high- groundwater study was conducted. We are sulfur coal. actively involved with resolving the problem, We are active supporters of and participants which probably will take another two to three in several other research programs, including years.

l# Annual Wpet 13

1 The first phase of a study af former gas ICommiitees of the Bbaid Of i manufacturing sites of our predecessor

Directors

j companies showed that residues from past l The current board of directors' committees,' , activities remain at 24 sites and are not

~ ' which present recommendations to the full , present at two other sites. Late in 1987 in

' 1 board,-and their members are as follows: Cairo, we began the first intensive, Finance Committee - This committee -  ; underground investigation of the sites. It will

. i reviews the Company's financial forecast, be completed in 1988. Initial findings financing plans, and pension fund y c nfirmed the presence of residues. We h ive l

?< investments; and makes recommendations to . d

!"I ""? the Ilhnois Environmental a the board concerning such matters. Members l Protection Agency about the 24 sites and of the commit' tee are Gosdon R. Worley,- about our approach to assess the potential 4

chairman, Richard R. Berry, William C. '

risk to human health and welfare.

Gerstner, Larry DJ Haab, Wendell J. Kelley, .

Organizatm.nal changes made this year will

, Donald E. I;asater, Keith R. Potter, Charles W. Wells, and Vernon K. Zimmerman. help strategically position us for the Audit Committee -- This committee, transitional period ahead.

l<irst, the changes on the board of directors.

which consists entirely of non. management directors, recommends the appointment of the On February 18,1988, the board of directors

' Company's independent accountants; confers mmased h nunan oNimtors hm g 6 with the independent accountants; and 13 and elected Richard R. Herry to fill this reviews the scope of audits, the results of ,

vacancy. Howevn, as of Apnl 21, the number will be reduced. and Mr. Herry will replace auditors' examinations, and the activities of the Company's internal auditors. The Keith R. Potter, who will not stand for m(mbers are Vernon K. Zimmerman, reelection.

chairman, Richard R. Berry, Grover J. Mr. P tter, of Easton, Maryland, is a Hansen, Donald E. Lasater, and Eva Jane consultant and retired vice chairman of Milligan. International Harvester Company, a Compensation and Organization manufacturer of trucks and diesel engines. He Committee - This committee reviews and has served on our board of directors since ,

recommends compensation of elected 1973. Although he has reached the board's Company officers; reviews benefit plans; and mandatory retirement age of 70, Mr. Potter will e ntinue to provide counsel as a director recommends nominees to fill vacancies on the board of directors.The members are Boyd F. emeritus.

Mr. Herry is a director and executive vice Schenk,~ chairman, Grover J. Hansen, Wendell J. Kelley, Eva Jane Milligan, and Robert M. president of Olin Corporation m Stamford, Powers. Connecticut. Olin Corporation is a diversified Corporate Activities Committee - This _l manufacturer concentrating on chemicals,

- committee reviews corporate objectives and - rnetals, and aerospace / defense products.

long. term Company plans; reviews the Ou management changes include the m t[on i m May of a new investor relations corporate structure appropriate to meet these objectives; and advises management and the se tion to improve communication between ur Company and members of the financial board on such matters. The members are Keith R. Potter, chairman, Wendell J. Kelley, e mmunity who are mterested m our financial Robert M. Powers, Boyd F. Schenk, and p sition and outlook. Michael R. Heneghan, Gordon R. Worley. d rect r f nyest r rel tions,is responsible for this area.

Also in May, assistant vice president Carl 1s min. m,emw n

E. Mathias retired. lie had served the Company nearly 45 years. Mr. Mathias' .Re8POR8ibility (Or In{0rmation responsibilities included economic The financial statements and all information development in southwestern Illinois. lie in this annual report are the responsibility of continues to be active in this area. management. The financial statements have Vice president James O. Mcliood will retire been prepared in conformity with generally later this year after 40 years of service to the accepted accounting principles consistently .

Company. lie has had responsibilities in applied. In the opinion of management, the .-

many areas, including in service area financial statements fairly reflect our financial operations, planning, power production, position, results of opere dJ, and sources of ~

engineering, construction, the Clinton project, funds provided for gross property additions.

and energy supply. We maintain accounting and internal control The board of directors elected Larry S. systems that we believe are adequate to provide Brodsky and Wilfred Connell vice presidents reasonable assurance that assets are of the Company, effective November 1. safeguarded against losa from unauthorized use Mr. Brodsky is responsible for gas resources, ,

or disposition; and we believe that'the financial electric dispatch, and electric interconnection records are reliable for preparing financial agreements. lie formerly was manager of statements, energy supply. Mr. Connell is responsible for The financial statements have been audited by fossil power production. lie formerly was our independent accountants, Price Waterhouse, manager of nuclear planning and support. in accordance with generally accepted auditing Along with electing the new vice presidents, - standards. Subh standards include the we consolidated gas activities into the new - evaluation ofinternal controls to establish a gas resources department in November. This basis for developing the scope of the change will put us in a better position to examination of the financial statements. In maintain competitive gas prices. addition to the use ofindependent accountants, The board of directors also elected Rodney we maintain a professional staff ofinternal A Smith vice president effective February 1, auditors who conduct financial, procedural, and 1988. Mr. Smith is responsible for public special audits. To assure their independence, affairs. lie formerly was manager of corporate both Price Waterhouse and the internal auditors communications at Virginia Power, a ,

have direct access to the audit committee of the subsidiary of Dominion Resources,Inc. based board of directors.

in Richmond, Virginia.

These organizational changes and other activities are all part of our strategy to move forward through a period of potential political and regulatory change. From a year of progress in 1987, I am confident that we are well positioned and well. prepared to create new opportunities for growth out of the challenges of change still to come. We are committed to earn a fair return on your investments while continuing to provide safe, reliable, and competitively priced services to all of our customers.

Sincerely yours, ]

l 1

Wendell J. Kelley Chairman and President February 18,1988 enc Anna am,n 15 l l

Board of Directors Officers Richard R. Herry Robert M. Powers Wendell J. Kelley  !

Executive Vice President of Olin President and Chief Operating Officer of Chairman and President Corporation (diversified manufacturer A.E. Staley Manufacturing Company. ,

concentrated in chemicals, metals, and a division of Staley Continental Inc.

areospace/ defense products) (a processor of grain and oil seeds)

William C. Gerstner I Executive Vice President I Stamford, Connecticut and Executive Vice President of Staley l

Continental,Inc.(a diversified food William C. Gerstner company) Larry D.11aab i Executive Vice President of the Company Rolling Meadows, Illinois Executive Vice President i Decatur, Illinois Boyd F. Schenk Charles W. Wells Larry D. Ilaab Vice Chairman of IC Industries, Inc. Executive Vice President Executive Vice President of the Company (a diversified manufacturer and marketer f c nsumer and commercial products)

Decatur, Illinois and Chairman of Pet Incorporated (a William E. Warren Senior Vice President processor and marketer of food products Grover J. Hansen and other consumer goods)

Consultant and Retired President and Chicago, Illinois Larry S. Brodsky Chief Operating Officer of First Federal Vice President Savings & loan Association of Chicag Ocean Springs, Mississippi Charles W. Wells Executive Vice President of the Company Wilfred Connell Wendell J. Kelley Chairman and President of the Company Decatur, Illinois

, Gordon R. Worley Arthur E. Gray Retired Executive Vice President-Chief Vice President and Secretary Financial Officer of Montgomery Ward Donald E. Lasater & Co.. Incorporated (a retailer)

Chairman of the Board and Chief Chicago, Illinois Donald P. IIall Executive Officer of Mercantile Vice President Bancorporation,Inc. (a bank holding C mpany)

Vernon K. Zimmerman ""

Director of the Center for International ""#

• St. Iouis, Missouri Vice President Education Research and Accounting, and Professor of Accountancy at the Eva Jane Milligan University of Illinois Paul L. Lang Retired Senior Vice President, General Urbana, Illinois Vice President Personnel Manager of Marshall Field's (a retailer); President of Pro Lines Inc.

(a merchandise senice organization) James O. McIlood 11ilton 11ead Island, South Carolina Vice President Keith R. Potter R dney A. Smith Consultant and Retired Vice Chairman of Vice President International llan ester Company (a manufacturer of trucks and diesel Porter J. Womeldorff en gines) Vice President Easton, Maryland Larry F. Altenbaumer Treasurer Ann II. McEvoy Assistant Secretary Gary L. Secor Assistant Treasurer Note: The principal occupation of each dirntor and officer of Illinois Power Company is that listed.

16 , Ilbrun hmer Gwrpany

Financial Report Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to the Financial Statements On November 19, 1987, the Company filed an and Electric and Gas Statistics for information electric rate-moderation plan with the ICC. The concerning financial condition and results of plan would increase revenue approximately $92.7 operations. The factors having significant impact million, net of anticipated fuel savings and a senior upon financial condition, changes in financial citizen discount, in the first year, followed by a condition, and resulta of operations since January l, series of up to nine annual increases indexed to 1985 are as follows: innation. Under the electric rate-moderation plan, there would be a cash now delay of approximately Liquidity and Capital Resources

$450 million over the first seven years of the plan Gross Property Additions - Gross property addi- due to its mirror CWIP provisions (representing tions for the years 1985 through 1987 were $1.9 m unts collected in rates pnor to the mgervice billion, including approximately $454 million of date of Clinton as a result of having CWIP in rate allowance for funds used during construction base). This amount would be capitalized as a part of Clinton costs for recovery over the life of the plant.

(AFUDC)'

Construction of the Clinton power station (Clin, In addition, under the deferred return provisio,ns of ton) was completed in 1987. The Company owns the plan, cash now of approximately $250 milhon 86.6% of Clinton and two cooperatives own the w uld be delayed during the first five years for remainder. The Company's investment in the plant recovery dunng the remaining years of the, plan.

is $3.8 billion. The Nuclear Regulatory Commission The plan is subj,ect to approval or modification by issued a full power operating license for Clinton on the ICC. The Company expects an order in October April 17,1987. A November 1987 Illinois Commerce 1938-Commission (ICC) order established an in-service . A November 1987 ICC order approved the provi-date of April 24,1987. smns f a neg tiated settlement reached by the We estimate that $644 million will be required for C mpany and several intervenors. The or.ier construction during the 19881992 period, including stablished April 24,1987 as the in. service date. It about $69 million for nuclear fuel. The retirement at als provided for the deferral of depreciation, taxes maturity of currently outstanding long term debt ther than income taxes, and financing costs until a and redeemable preferred stock, and sinking fund rate order, expected m October 1988, reDecting the mclusmn of Clinton m rate base becomes effective.

l payments on first mortgage bonds will require approximately $613 million during this five year Such deferred costs and the related return will be recovered, to the extent that total Clinton costs are P'""3 ' allowed in rate base, over the remaining life of Regulatory Matters - The audit commissioned Clinton. Under this agreement, Clinton operation by the ICC to evaluate the reasonableness of Clin- and maintenance costs will be expensed currently. .i ton construction costs continues. On September 16, Ilowever, the electric revenues previously deferred (

the ICC decided that an order would not be issued as ordered by the ICC to reDect the lower federal a until completion of Phase II of the audit. The income tax rates under the Tax Reform Act of 1986 Company expects the audit report for Phase II to be were included in income and future deferrals cubmitted to the ICC by the end of the first quarter discontinued. Earnings were decreased $19 million of 1988, and an order issued late in 1988. Should the (28e per share) in 1987 due to this settlement, and ICC ultimately determine that a portion of Clinton future earnings will be decreased by an estimated $2 construction costs not be allowed for ratemaking million to $3 million per month until the next ')

purposes, the disallowance would have to be electric rate order is effective. Earnings were also recorded as a loss. Such a loss may be material in reduced by $11 million (16e per share) in 1987 to relation to earnings and financial position. Cash reDect the effect of excluding from the Clinton cost Dow, however, would not be reduced immediately as deferrals the portion not under jurisdiction of the a result of such a loss, but would be reduced over the ICC, because the November 1987 electric rate-life of the plant. moderation plan excluded that portion of the On April 22,1987, a 9% electric rate increase Company's operations. Amendments to generally became ef fective. An earlier 9% electric rate increase accepted accounting principles effective in 1988, became effective in Oc' 'gr 1986. Both increases will not permit an allowance for return on share-were authorized by ar wwt 1985 ICC rate order holders' investment in post construction cost and increased the are mr construction work in deferrals to be capitalized for financial statement progresa (CWIP) in ra'e . . by $384 million and purposes. Such allowance for earnings on share.

$352 million, respectively. At December 31,1987, the holders' investment is estimated to be approxi-Company has $1.54 billion of Clinton costs in rate mately $11 million per month during 1988.

base. These rate increases represented additional The cash now associated with the deferrals under annualized revenue of approximately $125 million. the electric rate moderation plan and the deferrals m Anrmiin,n 17

I i under the negotiated settlement will be delayed made a filing with the ICC on February 5,1988 until the deferrea costs are recovered in rates.

requesting that this amount be includal in income.

The Financial Accounting Standards Board has Financings - Funds provided from operatiors issued Statement of Financial Accounting Stand-amounting to $171 million for the years 1985 ards No. 96, "Accounting for Income Taxes" (FAS through 1987 supplied working capital to meet 96), dated December 1987. This nkw standard operating requirements and a pration of the adopts a "liability method" of tax a; location construction program. In addition, funha obtained relating to transactions that affect book and tax from external sources during this three year peri ~l income in different reporting periods. The Company totaled $1.3 billion. Funds totaling $615 milljon has not completed its evaluation of trie impact that were used for debt retirements during this three- adopting this standard will have on its earnings year period. and financial position. The impact depends in part During the three year period, temporary cash on actions taken by the regulators. Although requirements were provided by short term borrow- adopting this standard may result in a significant ings. At December 31,1987, the unused portion of increase in assets and liaElities, the Company does our total bank line of credit was $260 million. not expect a materiab effect on earnings. The In February 1987, the Company redeemed its $36 Statement must be adopted no later than 1989, million,11.66% serial preferrel stock. The Company flowever, depending upon the KC's actions in the i also refunded $34 million of bug term debt in July pending electric rate-moderation plan, the Com-l 1987 to reduce the interest rate from 10.75% to 8.3%. pany may adopt FAS 96 in 1988.

The Company has had a strong capital structure, adequate short and intermediate term bank borrow- The Company faces many issues related to ing capability and flexible access to the parmanent. Clinton as well as changes in generally accepted capital markets. Our future financial Strangth. accounting principles. See Note 13 in "Notes to depends on a number of factors including tne Financial Statements" for information regarding ultimate outcome of the pending rate request, these matters, which could materially affect construction audit proceedings and litigation. At financial liquidity, results of operations, and December 31,1987, based upon the most restrictive financial position.

earnings test contained in our Mortgage and Deed of Trust, approximately $378 million of additional first mortgege bonds could be issued at an assumed Results of Operations interest rate of 9%. '

Islectric Operations - For the three year period Tax and Accounting Developments - Many as- 1985 through 1987, electric revenues increased pects of the Tax Reform Act of 1986 (Act) have 12.4%, the components of which are summarized as affected our Company in 1987. These include the follows:

corporate income tax rate reduction, repeal of the i9s7 i9se i9 3 investment tax credit, a new depreciation sygtem for (Millions of Dollaro tax purposes, and a corporate alternative minimum '

tax. Although the statutory federal corporate Rate increases .

voiume & other . .

3102 s

5-4: s, ( 41 income tax rate decreased from 46% to 40% for 1987, to.. on . ale or nuclear fuel and the Company's total book tax provisien commitments . - -

( N corresponding'y decnased, the Companis current Fuel cost recovenes . 41h  ! 5 federal income tax lit.bility is about $33 million Reven ue increa* decrease >. s 97 s 43 s < 4o greater than it would have been under prior law.

This results primarily from the Alterr.ative Min- During the above periods, kilowatt hour sales imum Tax (AMT) provisions of the Act. The $33 have been affected by weather, economic conditions million paid in AMT will be used as credits to offset within our service territory, and by ongoing conser.

regular income tax liabilities in future years. vation efforts. In 1985, kilowatt hour sales declined Although the statutory federal income tax tate 6.7%, primarily due to a power coordination agree-decreases to 34% in 1988, the Company expects to ment with two cooperatives under which sales to the again be affected by the AMT provisions of the Act. cooperatives were classified as power interchanged.

In accordance with Internal Revenue Service net ($47.5 million in 1985) rather than as electric requirements, depreciation related deferred tax revenues ($34.6 million in 1984). See Note 3 in balances will continue to be normalized at the "Notes to Financial Statements". In 1986, we weighted average tax rates at which they were experienced a 5.6% increase in kilowatt-hour sales, provided. primarily due to warmer summer weather Due to Pursuant to an ICC order, the Company has the seasonal rate design, the revenue effect of the recorded the benefit of the lower federalincome tax October 1986 rate increase was minimalin 19P6. In rates collected from our gas utility customers as a 1937, we experienced an 11.9E increase in rev mee liability subject to refund ($1.0 million at December primarily due to the increase in rates in October 31, 1987). Ultimate disposition of this liability will 1986 and April 1987, partially offset by a rmvishn not be determined until the ICC completes a review for rate reduction of approximately $?.3 millii.n.

of the overall impact of the new tax act and the This amount reduced electric revenues during 1987 financial condition of gas operations. The Company and will be credited to residential electric customers' 18 m- wo o.nnn>

l 1988 summer bills. This rate reduction, as approved Gas Operations - Effectise October 31,1985, the '

by the ICC, provides a temporary solution to the Federal Energy Regulatory Commission (FERC) residential electric summer / winter rate differential )

issued an order that established new rules for is ue. A permanent solution has been proposed in transportation of natt'ral gas by interstate pipe.

the Company's electric rate moderation plan. lines. One effect of the order was that pipeline The cost of meeting our system requirements is companies cancelled agreements with certain of our reDected in the cost of fuel for electric plants and customers to transport gas owned 'sy such custom-power purchased and interchanged. net. Changes in ers. As a result of this order and because of these costs are summarized as follows: decreased gas costs for customers on our system, 1987 1986 1985 certain customers resumed purchasing gas directly

< Minion. or nolla ro fr m us, as reDected in,1986 gas sales statistics. In Fuel for elwtric plants. s < 2.2) $ < 8 9s s 20.1 1987, more libefahzed u,tenm transportation rules Power purchased and used by the major pipelines caused transported interchanged net . f13 4) 11 4 tM2) therms to increase agair.

Total increase <decrea en . s tis s) s 2.5 s (4sn Gas revenues decreated 34.4% during the three-year period 19S5 through 1987, the components of Changes in the above costs are caused by system which are summarized as follows:

load requirements, availability of generating units 1987 1986 1985 to meet those requirements (including Clinton (Mimon. or non,.w generation in 1987), fuel prices, porchased power Rate inerene idecream . s- s- s (14) ,

prices and volumes, power interchange market Volurne & other . <60) 20 ibh conditions, a power coordination agreement with Tran. ported ga. rm . 4 < a) a two cooperatives, and recovery of fuel costs through Gas mt mhu . <M Hy _,

the fuel adjustment clause. Revenue increase (decreases . s <6D s (3 D s j63 Kilowatt. hour generation increased 6.4X,1.4%, .

2nd 5.1% in 1985,1986, and 1987, respectively, in 1984, the ICC approved our request to reici. {

t During 1985 and 1986, coal. fired generation aver- gas rates and thus promote both the retention of aged more than 99E of our total generation. During existing customers and further industrial expansion s 1987, coal fired generation averaged 91% and within our service territory. This rate reduction left nuclear generation 9% of our total generation. The residential rates essentially unchanged tut resulted weighted average cost per million BTU's of coal in lower rates to industrial customers and decrwsd burned increased 3.2% in 1985, decreased 8.6% in annual gas revenues of approximately $M WU'/en 19S6, and decreased 1.5% in 1987. in 1985. ,

During 1985. fuel for electric plants increased Therm sales, which exclude therms transportd,

$20.1 million. Power purchased and interchanged. decreased 17.9 A in 1185, increased 7.3% in 1966, and '

(

net switched from a net purchase of $16.2 million in decreased 21.1% in 1987. The major factors af fecting 1984 to a net sales credit of $49.0 million. These therm sales for the three year period were changes ,

changes reDect reduced sales to our customers, in economic and weather conditions, customer i increased interchange sales to other utilities, conservation, and gas transpormtion arrangements greater availability of lower cost generating units, as discussed above. In 1085, the combined therm..

and the power coordination agreement discussed sold and transported Jecre3 sed 3.6% redecti,g the above. milder weather experienal during the heating <

During 1956, fuel for electric plants decreased $8.9 season. In 1986, the ecmbination of therms sold and million. The credit for power purchased and transported represented an increase in gas con-interchanged. net decreased $11.4 million. Lower sumption of 0.5%. In 1987, the combination of

(

fuel prices in 1986 resulted from coal contract therms sold and transported represented a decrease l renegotiations and a favorable spot market for coal in gas consumption of 8.0%, redecting mild winter l purchases. Reduced availability of our lower cost weather and the imract of several industrial i generating units in 1986 contributed to decreased customers using alterytte energy sources. Therms '

ir.terchange sales. !ncreased customer requirements of gas transported for customers were 297 millWn in i and increased sales under the power coordination 1985,253 million in 1986, and 327 million in 19f E j ag~ement, coupled with greater availability of low. The cost of gas rurchased for resale, which ,I cost generation from other utilities in the inter. reDects volumes of gas delivered to customers, '

change market, caused increased interchange decreased $49.1 million, $25.0 million, and $50.2 purchases. million in 1985,1986, and 1987, respectively. The During 1987. fuel for electric plants decreased $2.1 average cost per therm ddivered to customers million. The credit for power purchased and deceensed 2.0A in 1985,12.6% in 1956, and 3.1% in interchanged net increased $13.4 million. Lower 1987, reDecting dalining prices and advantageous fuel prices in 1987 resulted from coal contract use of spot market purchases of gas.

renegotiations and a favorable spot market for coal ,

purchases. The increase in interchange sales is Other Expenses and Taxt1 - A comparison of primarily due to greater availability of our lower increases in other expenses and the credit for j cost generating units and market demand for deferred Clinton cost 8 for the last three years is electricity.

i presented in the following tye:

IC Annual Ryen 19 e

F y \

l i.

l (

o 1987'< 1986 1985 was 9.25% in 1985 and 19S6. In 1987, the AFUDC i) i Other operating expenses.

[/i- $58 onulons or noner.)

$18 $15 effective rate was 9.25% after tax for Clinton and 11% before tax for all other construction. AFUDC on a M aintenance . 22 s a Clinton was discontinued effective with the April I( 1 > s Derraiation . 76 2 24,1987 in service date.

S O*E,'$n' ton io.ta . - 2 In accqrdance with the negotiated settlement,

. i $129.2 million was recorded as Clinton deferred Th hanges in other operatinh e.fpenses reflect financing costa for the period A,pril 24,1987 through i December 31, 1987. Such financing costs are the mpact of inhtion, increased enployee wages and benefits, grdter use in 1985 of' professional calculated on Clinton deferred e,osts and, plant costs n t m rate base services relating tynuclear issues, and increased d I'rred financm,gsubject to ICC c sts were junsdiction.

calculated usingClinton a

insurance costs in 1986. The increase in 1986 9.'25,% after tax rate through October 1987 and 8.5%

maintenance ext.enses primarily reflects power plant maintenance requirements. The main reason thereafter.

Li for the 1987 increase in other operating expe,nses, Interest Charges - Interest chargesincreased $28.8 maintenance, depreciation, and general taxes is the million, $24.0 million, and $4.5 million in 1985,19R6, beginning of Clinton opers.sns on April 24,1987. and 1987, respectively. These increases rimarily

,/ In addition, the Compann worded a $78.3 m,ilhon reflect the $1.253 billion of long term d t issued

, ,/ ' reduction to expenses in 1! JM to reflect the portion of during the thrsyear period at a weighted average t ' Clhaon depreciation ord real estate taxes deferred interest rate of 8.51 During this period, we retired for future recovery in nr.praance with the nego' $608 million of long term debt with a weighted tiated settlement. average interest rate of 10.1%

During 1987, p3nsion exl ense decreased approxi-

/v / mately $3.9 milhm resu i ng from the adoption of Earnings per Common Share -The changes in J

Statewcr4 of Financial accountbg Standards No. net income. applicable to common stock in 1985 87,' b lo"er's J Accounting for ! Siiqns" through 19M resulted from the interaction of all the D For a Ntd.ed analysis ofincome tax components, factors discussed herein, including the issuance and see Note 4 in "Notes to Financial Statements" ' retirement of preferred stock. Changes in earnings i , per common sharr also reflect the increased number

', Other Income - Total AFUD,C increased $43 mil- of common sharts outstanding in each year. See hon m 1985 and $5~ ! railhon in 1986, and decreased Notes 8 and 9 in "Notes to Financial Statements";

/ $146J million in 1987. Unanges in AFUDC relate t and Staten.ents of Preferred and Preference Stock.

'\ the amburts of CWIP not meluded m rate base.The j

3 amount of Clinton plant cost included in rete base, Inflation - Inflation, as measured by the Consumer i as approved by the ICC, was $733 million January Price Index, was 3.6%,1.9%, and 3.7% in 1985,1986,

( , through uly 1985, $804 million August 1985 '

• through September 1956, $1.156 billion Octoben ) and inflation 1987, respectively.

on the Company is The thatprimary historicaleffect plant of through Apdl 1987, and $1.54 billion May through ' costs are recovered in the Company's rates rather iI  ! December ! A7. The AFUDC effective after tax rate than current costs.

2 * (

. 3 j 'Neppri ofIndependent Acbountants

/> rice Waterhouse St. Louis, Missouri j v. To the Board of Directors ofIllinels Power Company i/ 1 We have examined the financial statements of Illinois Power Company appearing on pages 21 through 34 of this report. Our examinations were made in accordance with generally accepted auditing standards

> +

and ecothgly included such tests of the accounting records and such other auditing procedures as we cchsidergnecessary in the circumstances. .,

, 4 As discussed in Note 13, the Financial Accounting Standards Boa'r d inued a statement which provides.

among n h v things, that the cos.$ of a plant disallowed by a ryulator be recognized as a loss. This stateme. hill be ad ted, as ermitted,in 1988.

' As described more lly in ote 11 there are uncertainties with respect to various matters related to the l l  ! Clinton power station. Management'is unable to determine the effects,if any, that the resolution of these uncertainties may have on the Company's 1987 financial statements.

'f , In our opinion, subject to the effects on the 1987 financial statements of such adjustments,if any, as 3 might have been required had the outcome of the uncertabtjes referred to in the preceding paragraph been

), j known, the financial statements examined by us present fairly the financial position of Illinois Power Cump at December 31,1987 and 1986, and the results of its operations and the sources of funds provi for gross property additions for each of the three years in the period ended December 31,1987,in conformity with generaily accepted accounting principles consistently applied.

February 11,1988 g

20 . Hine Powf Conpun

For the Years Ended December 31, Statements ofIncome 1987 1986 1985 Operating Hevenues* (Thousands of Dollars) lectric . ...... ....... .... ....... ...... .... ... .... 8 910,844 $ 814,144 $ 766,467 as. . .. .. .... ., .. . . ......... ...... .. . . . 308,679 369,721 400,897 Total . . . . . . . ..... ......., .. ... .. . .. ..... 1,219,523 1,183,865 1,167,364 Operating Expenses and Taxes Fuel for electric plants . . . . . . . . . . . . . . . .... .. .. ..... .. 262,592 264,807 273,687 Power purchased and interchanged-net . . . . , .. .. .. ....... (50,975) (37,553) (48,975)

Gas purchased for resale. . . . . . . . . .. .. .. . .. ... .... 188,994 239,214 264,221 Other operating expenses . ..... . ... . ............ . .... 190,990 133,275 115,410 Maintenance . . . . . ..... . . .... ....... . . ... . . . .... 80,332 58,590 50,706 Deprecia tion . . . . . . . . . . . . . . . . . .. ... . .... ... ....... 147,408 71,732 70,097 Amortization of abandoned plant costs..... .... . . ... .... 6,379 6,380 2,556 General taxes .. . . ... . .. . .. .... . . . .. 115,989 105,310 104,060 ,

Deferred Clinton costs . . .... ... . . .. .. . . . . .... (78,264) - -

, Income taxes . . .. . . .. .. .. . .. . .. .. . 122,756 134,652 131,322 Total . . . . . . . . . . .. .. . . . . .. 986,201 976,407 963,084 Operating income . . . .. .. . . . .. .. 233,322 207,458 204,280 -

Other Income l Allowance for equity funds-Construction . . . . . . . . ..... ... .. . .. .. 51,523 158,238 117,622 Deferred Clinton financing costs .. . . .. . .... . ... . .. 91,726 - -

Miscellaneous-net . . . ... . . ... .. . . ... .. 57,083 64,679 48.367 Total . . ... .. . .. . 200,332 222,917 165,089 Income before interest charges . .. .. . .. 433,654 430,375 370,269 Interest Charges Interest on long-term debt . . .. ... . .. ... 188,762 186,781 168,073 Other interest charges . . . . . . . . 14,309 11,786

. .. .. ... 6,540 Allowance for borrowal funds-Construction . . . . . . . . .. . .. . .. . .. . (21,532) (60,913) (44,343)

Deferred Clinton financing costs . . .

..... ... . (37,441) - -

Total . .. ..... . . . .. .. .. . 144,098 137,654 130.270 Net income . . . . . . . . . .. ... .. 289,556 292,721

.... ... 239,999 Preferred dividend requirements . .. . .. 37,697 36.242 32.759 Net income applicable to common stock . . $ 251,859 256,479

.. . ... $ $ 207.240 Weighted average number of common shares outstanding during the period . ... .. . .. ,.. . 67,250,913 64.502.690 59,618,728 Earnings per common share . .. ..... 83.75

... .. .. $3.98 $3.48 Cash dividends declared per common share . 82.64

$2.64 $2.64

• Includes revenue.related taxes added to customer billings in each of the years 1987,1986, and 1985 in the amount of

$59.201,000, $58.997,000, and S61.885.000, respectively.

Retained Earnings 1987 For the Years Ended December 31, 1986 1985 (Thousands of Dollars)

Balance at fleginning of Year. . .. . . ... $ 481,192 $ 398,755 350,552 Net income. . . .. . . . . .. . . 289,556 292,721 239.999 770,748 691,476 590,551 less-Cash dividends-Preferred stock .. . .. . .. ... .. . 37.440 36.845 33.070 Common stock .... ......... ... . . .. .... .. 178,493 171,111 158,726 Reacquisition costs of preferred stock . .... .. . .. - 2,328 -

215 933 210,284 191,796 llalance at End of Year . . . ..... . . . . , .. .. . . $_,554,815 $ 481,192 $ 398,755 See notes to financialstatements which are an integralpart of these statements.

IW Annel Repwt . . 2I

Balance Sheets December 31, 1987 1986*

ASSETS (Thousands of Dollars)

Utility Plant, at original cost Electric (includes construction work in progress of $45,753.000 and

$3,679,959.000, res pectively) . . . . ... .. .............. ..................... ...... .. $ 5,700,684 $ 5,494,656 Gas (includes construction work in progress of $5,591,000 and $4,701,000, respectively) . . . . 423,892 409,182 6,121,576 5,903,838 Less.Accumuisted depreciation ... . . . .... ... . ... ... ...... .. . ...... . . 1,078,809 944,853 5,015,767 4,958,985 Nuclear fue' nder capitallease . .. .................................. ........ . . 200,034 191,276 Acquisition ".justment (less amortization of $3,399,000 and $3,154,000, respectively) . .. . . 533 778 5.246,334 5,151,039 Investments and Other Assets ...... .... ....... .... ... . . ... ... ..... . .... 9,697 14,934 Current Assets Cash and temporary cash investments . . . . .. . . . .. ...................... . .. ... .. 73,114 129,862 Accounts receivable (less allowance for doubtful accounts of $6,f40,000 and $6,000,000, respectively)

Service . . .., ... . ... ... .. . ,. . .. . ...... . .. .. ......... 75,480 77,077 O the r . . . . . . . . . . . . . . .. ...... .. . .... .... . .... .. ... .. 41,161 6,356 Materials and supplies, at average cost Fossil fuel . . . . ... . . ... . . . .. . . . .. .... .. .. . .. . . 39,012 32,276 Gas in underground storage . . . . .. ..... . . . . .. . ... . . . .. .. 17,972 21,253 Operating materials . . .. .... . ... .. . ... .. ... . .. .... . . . . 60,743 49,357 Prepaid and refundable income taxes . . . .. . ... . . . . .. . 72,075 60,471 Prepayments and other . . .. . ... .. . .. .. .. .. . 7,654 10,5,72 387,211 387,224 Deferred Charges Deferred Clinton costs . . . . . . . . . . ... .. ... ,. . 207,431 -

Unamortized deferred abandonment cost . . . . . .. .... . . 16,581 22,960 Unamortized debt expense . . .. . . .. .. ... . . . 52,233 43,354 Other. . . , ,. . .. ... .. . .. . 3,247 3,531 279,492 69.845 8 5.922,734 $ 5,623,042 CAPITAL AND LIABILITIES Capitalization Common stock-No par value,80.000,000 shares authorized; 68,588,901 and 65,608,876 shares outstanding, respectively, stated at .. . .. . . $ 1,298,207 $ 1,221,838 Retained earnings . .. . . . .. . .. . ..... . 554,815 481,192 Less-Capital stock expense . . .. . .. . . 11,634 11,152 Total common stock equity. . . . .. .. . . ... .. 1,841,388  ;,691,878 Preferred and preference stock .. . . . .. . ... .. .. 315,171 315.171 Redeemable preferred stock . .. ., .. . , . ... 160,000 196.000 long term debt . . .. . . .. .. .. .. ... . .. ... 2,279,219 2,246,367 Total capitalization . . .. .. . . . . . ... 4,595,778 4.449.416 Current Liabilities Accounts payable . . . . .... . . ... 109,778 122,829 Notes payable . . . . . ...... .. .... . . . . .. . 103,170 128,863 long-term debt ara lease obligations maturing within one year . . . .. ... . . . . 81.174 43,728 D;vidends payable . . . . . . . .. .. .. ... . .. . .. 54,963 52.988 General taxes accrued. .. . . ... . .... . .. . 34,878 35,676 Interest accrued ..... .. .. . . . 69,138 64,270 Provision for rate reduction . .. .. . . . .. ... . 23,129 -

Other., . . .. . .. . . . . . . ... . . .. 59.955 12,514 536,lM5 470,868 Other Accumulated deferred income taxes . ..... . .. .. . . .. 443,494 356,764 Accumulated deferred investment tax credits . . . .. . . ... . .... .. 347,277 345,994 790,771 702,758 Commitments and Contingencies (Notes 12 and 13)

• Restated for the elfect of capitalized nuclear fuellease (Note 1).

See notes to financialstatements which are an integralpart of these statements.

22 . zumo.mmn cunpany

Stdtements ofLong-Term Debt December 31, 1987 1986*

First mortgage bonds- (Thousands of Dollars) 4 % series due 1988 . . . . . . . . .. ..... . ............ . ...... .......... . .. $ 25,000 $ 25,000 144% series d ue s '90 . . . . . . . . . . . . . . . . ..... .. ., ........ ...... . .. ......... - 9,653 4 h% series d ue 19v3 . . . . . . . . . . . . . . . . . . . . . . . . ..... ............. ..... ....... 35,000 35,000 5.85% series due 1996. . . . . . . . . . . ...... .. .. . . . . . . . ......... ...... .... 40,000 40,000 6M series due 1998 ... .. .. . .., . . ........ .......... ... .... .... 25,000 25,000 6% se ri es d u e 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 45.000 8.35% series due 1999. . . . . . ... .. ...... .. . ... ... ...... ..... .. ..... 35,000 -35,000 9 % series due 2000 . . ,, . ... ... . . . ....... . ... .. ., .. .... ........ 35,000 35,000 7.60L series due 2001. . ..... . . . . ... ..... ..... ......... .. ...... 35,000 35,000 7W series due 2003 . . . . . . . . . . . . . . ..... .. ..... ... . ...... .. ... ........ ... 60,000 60,000 6.60% series due 2004 (Pollution Control Series A) . ..... . ... .. ..... ......... ... 8,050 8,050 9% series due 2004 . . . . . . . . . .. .., .......... . ..... . . ............ 85,000 90,000 10% series due 2004 . . . . . . . . . . ... . ........ .... . ... ....... . ..... ... 50,000 50,000 8% series due 2006 . . . . . ....... ..... . ............. . . .... ....... ........ 100.000 100,000 6 % series due 2007 (Pollution Control Series B) . . ...... .. .. . ... ...... ...... 18,700 18,700 8W series due 2007 . . . . . . . . . . . . . . . . .... ...... . .. . . ... . ... ..... 100.000 100.000 8W series d ue 2008 . . . . . . . .. ..... . . . . . . ....... . . . . . . . .. . .. 100,000 100,000 12 % series due 2012 . . . . . . ..... ...... .... .. ........ . .. . . .. .... - 6,827 10n series due 2013 (Pollution Control Series C) . .. . ... .. .. . ...... . 125,000 125,000 11W series due 2014 (Pollution Control Series D). . . .. . . ....... . .. .. .. 75,000 75,000 10m series due 2015 : Pollution Control Serio E) . .. ......... . .. . ...... I16,245 150,000 10n series due 2016 . . . . .. . .... .. . . .. .. ... . .. .. .. 125,000 125.000 9M series due 2016 .... ... . . . . . . . . .. .. ...... . ... . 75,000 75.000 9% series due 2016 . . . . . ..... ...... ....... .......... ... ... . ... . .. 125,000 125,000 7M series due 2016 (Pollution Control Series F, G. and II)(1) . . . . . . . . . . . . .. .. 150,000 -

8.30% series due 2017 (Pollution Control Series I) . . . . .. ... . . . .. 33,'i55 -

Total first mortgage bonds . . ... . . . . , . .. .. ... 1,621,750 1,493.230 12W debentures due 1992 (2) . . . . . . . . . . . . .. . . .. . 100,000 100,000 Long term bank notes due 1987. . ..

Long term bank notes due 1992.

17.000

. . .. .. .. . . . . . . . .. - 34,000 Revolving loan agreements (3). . . .. .. , , ,. . . ... . ...... . 200,000 200,000 10.75% Ioan agreement due 1992. . . . . . 8,930 8.930 long term loan agreement due 1992 (4) . j

. . ... . ..... ... . . 60,000 -

8% debt securities due 1994 . . . . . . . . . . . . . .. . . . ,. .. .... ,, . . 100,000 100,000 Variable rate long term debt due 2016 ID. . . .. . . .. . .... , ..... . ... -

150,000 Variable rate long-term debt due 2017 e5). . . .. . . . .......... ... .. 75,000 -

Total long term debt . . ....... . . . .. . . 2,165,680 2.103,160 Unamortized premium and discount on debt . . . . .. . . .. (9,584) (10,097)

Long term debt maturing within one year. . ... . . .. ..... . (33,333) (17,000) 2,122,763 2.076.063 Obligation under capital leases noncurrent . . , . . . .... . ... 156,456 170,304

$ 2,279,210 $ 2.246,367 i i

(1) Interest rate was adjustable daily. This debt was issued on December 31,1986 and had an interest rate of 4.5%. This bbt was replaced on February 10.1997 with 7% First Mortgage Bonds (Pollution Control Series F, G, and H) due 2016 totaling SI50.000.000.

(2) The debentures, issued by IPF, are guaranteed as to payment of principal and interest by the Company.

(3) Repayment of the first $100.000.000 loan is required to begin January 31,1991 with 10 subsequent quarterly payments.

Repayment of the second $100.000.000 loan is required to begin December 10,1988 with !! subsequent quarterly payments.

However, the first loan is subject to extension options and may also be repaid in advance at the Company's option. The interest rate is currently based on Reference Bank Certificate of Deposit Rate plus 0.5%. and at December 31,198; was 8.04% and 8.64%.

respectively. l (4) Interest rate is adjusted semiannually and ranged from 7.687% to 8.5% at December 31,1987.

(5) Interest rate is adjusted weekly and was 6.75% at December 31.19't7.

• Restated for the elfeet of capitalized nuclear fuellease (Note 1).

See notes to financial statements which are an integralpart of these statements.

19N' Annual Repw1 . 23

Statements of Preferred and Preference Stoch Serial Preferred Stock, cumulative, $50 par value (1)- Authorized 5,000,000 shares; 4,280,000 shares and 5,000,000 shares outstanding, respectively Decembn 31, (includir g 720,000 shares of redeemable preferred stock at December 31,1986) 1987 1986 Series Shares Hedemption prices (Thousands of Dollars) 4.08 % 300,000 $51.50 $ 15,000 $ 15,000 4.26 % 150,000 51.50 7,500 7,500 4.70 5 200,000 51.50 10,000 10,0(X) 4.4 2 R, 150,000 51.50 , 7,500 7,500 4.200 180,000 52.00 9,000 9,000 8.24 0 600,000 51.90 . , 30,000 30,000 7.56 % 700,000 51.685 . 35,000 35 000 8.94 6 1,000,0(X) { 52 90 prior to March 1,1991 } , 50,000 50,000 t 51.60 thereafter 1 8.000 1,000,000 50,000 50,000 jt 53.29 prior W August 1,1992 } .

52.29 thereafter Premium on preferred stock 1,171 1,171 Total Preferred Stock, $50 par value , 215,171 215,171 Serial Preferred Stock, cumulative, without par value-Authorized 5,000,000 shares; 4,600,000 shares outstanding tincluding 2,600,000 chares of redeemable preferred stock)

Series Shares itedemption prices

$51.50 after February 1,1988 and Ar2) 1,000,000 prior to February 1,1993 50,000 50,000 50.00 thereafter 51.50 after May 1,1990 and 1k3) 1,(KX),000 prior to May 1,1995 50,000 50,000 50.00 thereafter Total Preferred Stock, without par value 100,000 100 000 Preference Stock, cumulative, without par value-Authorized 5,000,000 shares; none outstanding . - -

Total Preferred and Preference Stock 8 315,171 $ 315,171 Hedeemable Serial Preferred Stock, cumulative-Series Shares Par Value 11.7544) 1,000,000 none. 5 50,000 $ 50,000 8.5245) 1,000,000 none. 50,000 50,000 MkW6; f40,000 none. 60,000 60,000 11.6697) 720,000 $50.00 16fKk)

Total Redeemable Preferred Stock 5 160,000 $ 196,000 (1) Redeemable at the option of the Company sn u hole orin part at any Isme upon not less than thirty days and not more than ssxty days notice by pubhcatson.

(2) Adjustable Rate Series A issued on Sfarch 3,1983. Quarterly dwsdend rates are determined based on marke t interest rates of certain U.S. Treasury secunties. See "Tun Year lheidends and Stock Prices by Quarters" on page 35 for the 1987 quarterly dwsdend rates. The dividend rate for any dwidend penod u all not be less than 6% per annum nor greater than 17% per annum applied to the hquiderion preference value of $50 per share.

(3) Adjustable Rate Senes B issued on hiay 15. 1985. Quarterly dwidend rates are determtned based on market interest rates of certain U.S. Treasury securstues. See "Tuo-Year [htidends and Stock Prices by Quarters" on page 35 for the 1987 quarterly dwidend rates. The duidend rate for any dwidend penod scall not be less than 1% per annum nor greater than 14v% per annum applied to the hquidation preference value of $50 per share.

(4) Subject to mandatory redemptson sn an amount suffscient to retare on each Not ember 1. begsnntng an 1990,200.000 shares at $50 per share plus accrued dwidends. Beginning November I,1990. the Company may redeem up to 200.000 additsonal shares each year at $50 per share.

(5) Subject to mandatory redemptson in an amount sufficient to retars on each February 1, beginnung in 1992. 200.000 shares at $50 per share plus accrued dwedends. Beginning February 1,1992, th, Company may redeem up to 200,000 addstwnal shares each Scar at $50 per share.

16) Subject to mandatory redemption sn an amount suffscient to retsre n n each February 1, beganning in 1993,120.000 shares at $100 per share plus accrued dividends. Beginnmg February 1,19% th Company may redeem up tu 120,000 addstwnal shares each year at $100 per share.

(i) All outstandang shares u ere redeemed on February 1,199llor $52.50 per share.

See notes to (snanc>alstatements u hich are an integralpart of these statements 24 Ilbrm IWor ( onem

Statements of Sources of Funds Provided For Gross Property Additions For the Years Ended December 31, 1987 1986* 1985' (Thousands of Dollars)

Funds Provided from Operations Net income . ...... ......... ... . .... .. ... . .... ......... . $ 289,556 $ 292,721 $ 239,999 Items not requiring working capital-Depreciation and amortization . . ......... . .... .. ..... ....... . 176,063 83,758 79,745 Deferred income taxes-net .. . ...... , ........ .. .... . . ...... 86,730 46.313 25,932 Deferred investment tax credit-net . .. . . . ............. . .. . 1,283 61,590 64,944 Deferred Clinton costs .. ... ........ . .... .. ... .. .. (78,264) - -

Deferred Clinton financing costs ............ .. ... ... ... . .. (129,167) - -

Allowance for funds used during construction . . ...... .. . ... . .. . (73,055) (219,151) (161,965)

Total funds provided from operations .. ...... .. ... ... .. 273,146 265,231 248.655 Dividends on-Preferred stock. . . . . . . . . . . .. .. . .. .. ........ (37,440) (36,845) (33,070)

Common stock . . ... ........ . . ... ..... ... .... (178,493) (171.111) (158,726)

Net funds provided from operations . . . . . . . . . . .. .. ... 57,213 57,275 56,859 Funds Obtained from External Sources Proceeds from sales of-Common stock . .. .. . .. . ... . . . 76,369 71,216 155.753 Preferred stock . . . . . . . . . . . . . . .. .. .. . -

110.000 50,000 Capital stock expense . . .. ....... . . . ... . .... . .. .... . (482) (1,061) (1,745)

Proceeds from sales of long term debt . . . . . .. . . . .. ... 338,755 575,000 - 358,930 Proceeds from sale of nuclear fuel . . . . . . . . . . . .. . . .. .... . - -

54.576 Pollution control construction funds held by trustee . . . . . . .... - -

16.891 Net inerease (decrease)in notes payable . ..... .. .. ... (25,693) 128,863 (1,000)

Retirement oflong term debt .. ... ... .... . ..... .. . (276,235) (333,870) (5,000)

Redemption of preferred stock .. . .. . . ... ... .. (36,000) - -

Total funds obtained from external sources . .. . .. .. . 76,714 550,148 628,405 Other Funds Provided (Used)

Net decrease (increase)in working capital" .. . . ..... .. 53,577 (98,462) 13.543 Sale of investment in long term bank notes . . .. . . . . ... ... 7,000 14.000 18,000 Miscellaneous-net . . . . . . . . . . ..... . .. . .. . .. ... . (11,281) (35.203) (8.764)

Increase in obligations under capital lease . . . .. .. . . ... 7.265 18,688 57,259 Total other funds provided (used). .. . .. ..... 56,561 (100,977) 80,038 Total Funds from Above Sources . . .. .. .. ... . . .. 190,488 506.446 765.302 Allowance for funds used during construction. ... ... . .... .. 73,055 219.151 161,9 _65 Gross Property Additions . .. ... .. ....... 8 263,543 $ 725.597 $ 927,267 Decrease (Increase)in Components of Working Capital" Cash and temporary investments.. .. .. .. .. . .. $ 56,748 $ (80,940) $ (12,760)

Accounts receivable. (33,208) J

... ... . . ... 8.291 (6,187)

Materials and supplies . . (14,841) 21,193 2.610 Accounts payable . .. .. .. (13,051) 43,533

. . ... . ... (23.231)

Dividends payable . . . . .. .. . 1,975 2,880 5,407 Accrued taxes. . . . . . . . .. . . .

(798) 450 (8,336)

Interest accrued. . . .. .. . 4,368 2,320 8,883 Other-net. . . . . . .. . . . 51.884 (10,842) (38,190) 8 53,577 $ (98,462) $ 13.543 Gross Property Additions and Retirements For the Years Ended December 31, 1987 1986* 1985' (Thousands of Dollars)

Additions -Electric . .. . .. . ... .. 8 243,850 $ 700.867 $ 911,256 Gas . . .. , .. . . .. 19,693 24.730 16.011 8 263,543 $ 725,597 $ 927,267 Retirements-Electric . . .. . . . . .. .. .. 8 27,')71 $ 10,048 $ 9,875 Gas . , . ..... . . .... . , .... .. 4,982 4,453 4,163

$ 32,053 $ 14,501 $ 14.038

• Restated for the effeet of capitalized nuclear fuellease (Note 1).

• • Excluding notes payable, long term debt. and lease obligations maturing within one year. l See notes to financial statements which are an integralpart of these statements. l l

19c Annus amort . 25 l 1

l

Notes to Financial Statements Note 1-Summary of Significant Accounting Policies:

The Company is subject to regulations of the defines AFUDC as the net costs for the period of ,

Illinois Commerce Commission (ICC) and the construction of borrowed funds used for construc-Federal Energy Hegulatory Commission (FEltC). tion purposes and a reasonable rate on other funds Because of the ratemaking process, certain differen- when so used. AFUDC is capitalized at a rate that is ces arise in the application of generally accepted related to the approximate weighted average cost of accounting principles between regulated and non- capital. In 1936 and 1985, the rate was reduced by regulated businesses. Such differences concern the income tax effect of the interest portion thereof.

mainly the time at which various items enter into in 1987, AFUDC on Clinton continued to be the determination of net income in order to follow capitalized at a net-of tax rate, but AFUDC on all the principle of matching costs and revenues. The other construction was capitalized at a pre tax rate, Company's principal accounting policies are des. and the associated tax effects were deferred. The cribed below, rate used in computing AFUDC was 9W through-Principles Applied in Consolidation - The Fi. out 1986 and 1985. In 1987, the rate used was 9W for nancial Statements include the accounts of IPF Clinton construction and 11% for all other construc- '

Gllinois Power Finance) Company N.V., a wholly- tion projects. While cash is not realized currently owned subsidiary. All significant intercompany from such allowance, it is realized under the ,

transactions have been eliminated. ratemaking process over the service life of the Utility I'lant - The cost of additions to utility plant related property through increased revenues result-and replacements for retired property units is ing from a higher rate base and higher depreciation -

capitalized. Cost includes labor, material, and an expenses.

allocation of general and administrative costs plus In accordance with ICC rate orders, the Company an allowance for funds used during construction excluded $733 million effective January 1,1985 and (AFUl>Ci as described later in this note. Mainte. $804 million effective August 7,1985 of electric nance and repairs, including replacement of minar plant construction work in progress (CWIP) from items of property are charged to maintenance the base on which AFUDC was computed for expense as incurred. When units of depreciable Clinton during 1965. The amount of Clinton costs in property are retired, the original cost and disman. rate base was increased to $1.156 billion effective tling charges, less salvage, are charged to accumu. October 4.1936, after receiving permission from the lated depreciation. Nuclear llegulatory Commission (NitC) to begin Depreciation - For financial statement purposes, fuel loading. Clinton costs in rate base increased to the Company depreciates the various classes of $1.54 billion effective April 22,1987, after receiving depreciable property over their estimatai lives by a full power license from the NitC for Clinton. Both applying composite rates on a straightline basis. of these increases were authorized in the August Provisions for depreciation of electric utility plant 1985 ICC rate orhr. Because these orders author-in 1986 and 1985 were equal to 3.4 L of the average ized that Clinton costs be included in the rate base deprteiable cost. In 1987, provisions for deprecia. upon which the Company realized revenues, there tion were 2.736 r of the average depreciable cost for was no material effect on net income. On April 24, '

the Clinton power station (Clinton) and 3.4 i of the 1987, Clinton was placed in service and AFUDC average depreciable cost for all other electric utility thereon ceased.

plants. Provisions for depreciation of gas utility Deferred Clinton Costs - A November 1957 ICC plant, as a percentage of the average depreciable order specifies the deferral of certain Clinton post-cost, were equivalent to 4.0L in 19S7,1986, and construction ope _1 ting costs, until rates to reflect 19s5. such costs are effective. During this period a llevenue and Energy Cost - The Company records deferred financing cost is computed on Clinton revenues as billed to its customers on a monthly plant not in rate base and the deferred costs. The cycle billing basis. At the end of each month, there deferred financing cost is capitalized at a rate that is an amount of unbilled electric and gas service is similar to AFUDC. In 1987, the rate used to that has been rendered from the latest date of each compute deferred Clinton financing costs was 9W cycle billing to the month end. through October and 8% thereafter. These deferred The electric fuel adjustment and purchased gas costs will be recovered over the remaining life of the adjustment clauses provide that changes in allow. plant to the extent that Clinton construction costs able energy costs from the Company's filed tariffs are included in rate base, are passed on to customers. Accordingly, allowable Clinton I ower Station Decommissioning -

energy costs that are to be passed on to customers in Det ommissioning of Clinton will be funded by a subsequent billing period are deferred. contributions to an external trust fund in accor-Allowance for Funds Used During Construe. dance with an ICC order issued ,luly 15,1987. An tion - The FEllC Uniform System of Accounts annual contribution of $2.1 milhon over 39' years is s  % r,,e ym E

estimated to be required to decommission the Note 2-Short-Term Loans Company's share of Clinton. Gild L/11es O[ Credit,,

Amortization of Nuclear Fuel-The Company leases nuclear fuel from Illinois Power Fuel Com- The Company had total lines of credit represented pany (Fuel Company). In accordance with the by bank commitments amounting to $568 million of provis;ons of Statement of Fmancial Accounting which $260 million was unused at December 31 Standards No. 71 "Accounting for the Effects of 1987. These bank commitments support the amount Certmn Types of Regulation", the Company retroac- of commercial paper outstanding at any time and tis ely capitahzed its nuclear fuel lease with the, Fuel are available to support other Company activities.

Company., This change did, not affect earnings. The Company has a $50 million revolving loan Amortization of nuclear fuelis determmed on a unit commitment through November 13,1992. No of production , basis. A provision for spent fuel borrowings were made under this agreement during disposal costs is charged to fuel expense based on 1987. The agreement is on a fee basis of .15% for the kilowatt. hours generated, unused line of credit. In addition, the interest rate Unamortized Deferred Abandonment Cost - under this agreement on funds borrowed is based The ICC order of August 7,1985 authonzcd the upon the borrowing rate of key banks in the lendon Compan,y to amortize and recover through rates interbank market.

$31.9 milh,on of its investment in Clinton Unit 2 In June 1987, the Company obtsined a $100 over a five year period. No return was allowed on million, five-year revolving loan commitment the unamortized, mvestment balance. A,dditional through June 4,1992. There was an $80 million costs of $2.9 milhon were wntten off to hhscellane' revolving loan made under this agreement with $60 ous net m, the third quarter of 1985. million still outstanding at year end. For the unused Unamortized Debt Expense - Debt issuance costs portion of the commitment, the Company pays a fee are amortized over the lives of the related issues. of 3/16% per annum on the amount of available Costs related to refunded debt are amortized over credit. The interest rate on borrowings under this the lives of the related new debt issues. agreement is, at the Company's option, based upon Ineome l' axes - The Company normalizes the the lending banks' reference rate, their Certificate of mcome tax effects of transactions causing timing Deposit rate, the borrowing rate of key banks in the differences between inclusion in financial state lendon interbank market, or a bid option.

ment and taxable income. The Company computes In addition, the Company has a credit agreement deferred income taxes based on the statutory entered into in 1985 that provides for a revolving income tax rates in effect during the period that the loan agreement of $175 million with the provision timing differences ongmate. d.efernd meome taxes for conversion to a three-year term loan. Fees for are amortized to income as the urderlying timmg this agreement are primarily based on 0.3% of the differences reverse. unused portion of the commit:nent. Interest rates on Pnneipal sources of timing differences causm.g borrowings are, at the Company's option, based deferred taxes are a? follows: upon the banks' prime rate, their 90-day Certificate

- Use of the most liberah. zed depreciable lives of Deposit rate, or the borrowing rate at key banks and methods allowed by the Internal Revenue in the london interbank market. There was a $100 Code, million revolving loan outstanding under this

- Capitalizat,on of certain construction over-i agreement during 1957 (see "Statements of long-heads, dismantling, and other costs for book Term Debt").

purposes that are claimed as current deduc- In 1984, the Company entered into a $180 million, tions for income tax purposes, three year revolving loan agreement that has a

- Hevenues and energy costs recognized in provision for conversion to a three-year term loan.

different periods for financial statement There was a $100 million revolving loan purposes than for income tax purposes, and outstanding under this agreement during 1987 (see

- Alternative minimum tax payable m the "Statements of long Term Debt"). For the unused current year that can be used to offset future portion of the commitment, the Company pays an tax liabilities. annual fee of 1/4%, partially offset by a credit For income tax return purposes, net depreciable related to average balances maintained at the utility plant does not include the allowance for hanks. The interest rate on borrowings under this funds used during construction that is capitahzed agreement is, at the Company's option, based upon for financial statement purposes. the lending banks' prime rate, their 90 day Investment tax credits, which reduce federal Certificate of Deposit rate, or the borrowing rate of income taxes have been deferred and are bemg key banks in the lendon interbank market.

amortized to income over the life of the property The Company also has lines of credit totaling which gave rise to the investment tax credits. approximately $63 million with commercial banks Federal and state income taxes are allocated for short term bank borrowings. Bank borrowings between operating and non-operating income and under such commitments have a maximum 360-day expenses. The tax effects relating to non operating maturity from the time of issuance and at the actisities are included m Other Incorne-Miscel- Company's option carry an interest rate less than or laneous-net. equivalent to the prime rate in effect at the time of enc unmimm,n 27 i

l l

l issuance, adjusted to the prime rate in effect on the statement. See "Note 13-Clinton Power Station" l first day of each calendar quarter thereafter. for information relating to a lawsuit filed September

llorrowings were made under these agreements in 22,1986 against the Company.

1987 for about $48 million. The borrowings had a Each party is responsible for its portion of weighted average interest rate of 7.9% during 1987 financing, construction, and operating expead.

and were still outstanding at year end. itures. The Company's investment in Clinton In December 1987, the Company obtained letter of including AFUDC and land at December 31,1987 is credit agreements in the total amount of $80,547,948 $3.8 billion. The agreements include the provisions from the Mitsubishi Bank in support of the issuance that the Company has control over construction of S75 million Pollution Control Variable Rate Debt. and operation of the generating station, that the The Company pays a fee of.30% per annum on the parties share electricity generated in proportion to unused amount of the credit. Interest rates on their interests, and that the Company will have unreimbursed drawings under the letters of credit certain obligations to provide replacement power to are at the Federal Funds rate as defined by tb bank the Cooperatives when the unit is out of service.

plus .5% per annum for up to 30 days, at the oank's in a related agreement, the Cooperatives and the prime rate for 31 days through one year and at the Company signed a Power Coordination Agreement bank's prime rate plus 1% per annum for over one in October 1984. Under the agreement, which was year, effective January 1,1985, the Company will provide Notes payable at December 31,1987 consisted of the Cooperatives with 10.7% (400 megawatts) of about $48 million of commercial bank borrowings electrical capacity from its fossil. fueled generating as noted above and $55 million in commercial paper plants through 1992,8 % in 1993 and 1994, and 4% in bearing interest at a weighted average rate of 7.8% 1995 through 2004 and will transmit energy for the and maturing between January 5,1988 and Cooperatives through the Company's transmission January 29, 1988. At December 31,19S6, notes -and subtransmission system. This will be in payable consisted of about $52 million of addition to the capacity the Cooperatives receive as commercial bank borrowings and about $77 million part owners of Clinton. The Com pa ny is in commercial paper, bearing interest at a weighted compensated with capacity charges and for energy average interest rate of 6.0%, which matured costs and variable operating expenses.

between January 15 and January 29,1987. There were no outstanding notes payable at December 3.,

1985.

The maximum total amount of short term Note 4-Income Taxes:

borrowings at any month end during 1987, 1986, Income taxes included in the Statements of and 1985 was $124.9 million, $230.6 million, and Income consist of the following components:

$60.0 million, respectively. The average daily short.

ter.n borrowings during these periods approximated Year

• Eaded

$104.3 million, $111.2 million, and $14.3 millior,, """"h"

respectively with a weighted average interest rate of 1987 ,19sa 1985 7.3%, 7.3%, and 8.4%, respectively. The Company co,,,ni t,,,,_ ri hou..nd. or notier.)

calculated the borrowings as an average of the daily ineioaca m op,.r ung borrowings outstanding. The Company calculated Espenae. and T.ne. . s . 2.22: s u.2i i s 39.939

,rne-the interest rates by dividing the interest expense landa'daihn in m ,,, m during the period for such borrowmgs by the in ,, g ,,,9 n 9, m average short term borrowings indicated above. *dI'"""""". n 2.289: <2 % < 6ans, Derrrred tane.-

nook tax depreciation Note 3-Facilities Agreements: d,rferenec -net -

Certain os erhead.

ss.'o2 12.3:n sp*

'h" "*'"

Pursuant to agreements as amended, Soyland d;","'*"')j8

,, .n'"d mm m w Power Cooperative, Inc. (Soyland) and Western Deterred canton co.t. . 2:378 - -

Illinois Power Cooperative, Inc. (WIPCO) have un Alternathe minimurn i. . va2.em - -

d investment of $450 million in the direct costs of "" kn,,'," y" '.','

, [""f,","n uon placing Clinton in commercial operatmn. l'h e dirrerence. . . is.ssai mam 2xm Cooperatives have paid their portion of construction Chnton t.' nit 2 expenditures. This results in an ownership in a b " " d"" '""" ' - (3 '8S 'l'*" "#"

Clinton of 7.02% for Soyland and 6.36% for WIPCO. Total deferred tame.. 79.2 su 34.ssi 26.439 The Company's ownership percentage of 86.625 is Deferred ins entment tax reflected in utility plant, at original cost; and '"d a - net n as2 si x m accumulated depreciation on the balance sheet. s asas2 s 7 mas min Each respective participant is responsible for their share of nuclear fuel. The Company's share of Income taxes are less than the amount which Clinton operating expenses is included in the would be computed by applying the statutory corresponding operating expenses on its income federal and state income tax rates to pre tax income 2N l!hnnn fuer ( ungung

(43.8% in 1987 and 49.5% in 1986 and 1985); the Combined federal and state effective income tax principal differences are as follows: rates were 19,1%, 20.5%, and 262% for the years 1987,1986, and 1985, respectively, Y'*" Fad'd Statement of Financial Accountir,g Standards

" * * " " " ' No. 96, "Accounting for Income Taxes" adopts a 1987 1986 1985 liability method of tax allocation relating to Computed tas expense at (thousands of Dollars) transactions th,at affect book and tax income in statutory federal and state different reporting periods. The statement must be income tax rates . . $ 156,691 $ 182.045 $ 160.818 adopted no later than 1989. See discussion of this

" item in Management's Discussion and Analysis on Tn"**r%S"s'"e**i' ins from- t page 18.

Allowance for funds used during construction . ,, 31,993 104,383 80,101 Deferred Clinton financing costs .. 56,567 - -

Other-net . (111) ti,711) (4.458)

Totalincome taxes. 8 68,242 $ "'5.373 $ 85.175 Note 5-Segments of Businesm The Company is a public utility engaged in the generation, transmission, distribution, and sale of electric energy and the distribution and sale of natural gas.

1987 1986 " 1985 "

Total Total Total Electric Gas Company Electric Gas Company Electric Gas Company (Thousands of Dollars) (Thousands of Dollars) (Thousands of Dollars)

Operation information-Operating revenues . .8 910,844 $ 308,679 $1,219,523 $ 814,144 $ 369,721 $ 1,183,865 $ 766,467 $ 400,897 8 1,167,364 Operating expenses, excluding provision for income taxes a nd deferred Chnton costs ...... . 667,5I9 274,190 941,709 518,559 323,196 841,755 456.951 344,811 831,762 Deferred Clinton custs . (7H,264) - (78,264) - - - - - -

Pre-tax operating income . . . . . . . . . . . . 321,589 34,489 356,078 295,585 46,525 342,110 279,516 56,086 335,602 Allowance for funds used during con-struction(AFUDC) . 72,871 184 73,055 218,977 174 219.151 161,819 146 161,965 Deferred Chnten financing costs . 129,167 - 129,167 - - - - - -

Pre-tax operating income. including AFUDC and deferred Clinton financing costa . .8 523,627 $ 34,673_ 558,300 $ 514.M2 8 46,699 561,261 $ 441.335 $ $6.232 497,567 Other tincome) and deductions . (57,083) (64.679) (48.367)

Interest charges . 203,071 198,567 174,613 a

Provision for income taxes . 122,756 134f42 131.322 Net income . $ 289,556 $ 292.721 8 239.999 Other information-Depreciation . ..$ 131,596 8 15, Mig s 147,408 $ M.507 $ 15.225 $ 71.732 $ 14.768 $ 70,097 55.329 $_

Capital expenditures . . .$ 243,850 8 19,003 $ 263,543 $ 7m.667 $ 24,730 $ 725.597 8 911.256 $ 16,011 $ 927.267 Investment information-Identifiable assets' . .85,285,930 $ 300,265 $5,586,195 $ 452.694 $ 300.144 8 N252.838 $ 4.312.502 8 313.847 $ 4.626,349 Nonutihty plant and other investments . 9,697 14.934 27,584 Assets utilized for overall Company operations . .

326,842 355.270 240,455 Total assets . $5,922,734 $ 5.623,042 $ 4.894.3A8

• Utility plant, nuclear fuel and acquisition adjustment (less accumulated depreciation and amortization), materials and supplies, unamortized deferred abandonment cost, deferred Clinton costs, prepaid gas, deferred energy costs, and deposit with pollution control authorities, j

"Restated for the effect of capitalized re: clear fuellease (Note !).

19H? Annual Relwwt . C9

= . - .- .

1 Note 6-Pension anfl Oth,er accounting principles. These costs were $3,136,000 and $2,059,000 in 1986 and 1985, respwtively. The IyOSt-Employment Benefit Costs:

l Company did not make any cash contributions The Company has defined benefit pension plans during 1987,1986, and 1985 for the pension plan due covering all officers and employees. Benefits are to its overfunded status.

In addition, the Company provides certain health based on years of service and the employee's earnings. The Company's funding policy is to care and life insurance benefits for substantially all contribute annually at least the minimum amount acttve and retned employees. These benefits are required by government funding standards, but not provided through an insurance company, and premiums are based on actual claims expenence.

more than can be deducted for federal income tax purposes. In 1987, the Company adopted Statement .l'he Company recognizes the cost of these benefits of Financial Accounting Standards No. 87 as pemiums are pa,id. Costs for 1987,1986, and "Employers' Accounting for Pensions" (FAS 87). 198% net of contributmns by both active and retired Adoption of FAS 87 decreased annual pensien costs empi yees, were $8,469,000, $8,341,,000, and by approximately $5.6 million, a portion of which $7,788,000, respectively. The cost of providing those was capitalized benefits for about 1,030 retirees is not separable Pension cost for 1987 included the following from the cost of providing beneSta for about 4,530 components: active employees.

Service cost on benenta earned crhou.and.of nollara) Note y

7-Debt Retirement during the year. ........... $ 8.911 TOUIS/On S!

interest cost on projected benefit obligation . . I1.222 During the five years from December 31,1987, the Return on plan aneta . . . . . . . (42.713) amounts of debt maturing annually are $33,333,000 Net amortization and deferral 20.110 in 1988,1989, and 1990, $61,364,000 in 1991, and Total pension cost (benefio . $ (2.470) $205,294,000 in 1992. These amounts exclude capital lease requirements. See "Note 11-Capital Leases".

In addition, certain supplemental indentures to The estimated funded status of the plans at De. the Mortgage and Deed of Trust require that the cember 31, 1987, using a measurement date of Company make annual deposits in cash as a September 30,1987, a discount rate of 8V5 and a rate sinking fund. For the 9Wu series due 2004, an annual ofincrease of future compensation levels of 6E, was deposit of $5,000,000 is required. For the 6.605 series as follows: due 2004 (Pollution Control Series A), an annual deposit of $125,000 in 1988, increasing $25,000 in (Thousandn of Dollars) 1989 and every two years thereafter is required.

Act,uarial present value of: These amounts are not subject to reduction.

I ga $ p5.47: Certain other supplemental indentures require annual deposits, as a sinking and property fund, in Accumulated twnefit amounts not to exceed $5,600,000 in 1988, $6,600,000 obligat on . $ 108.828 in 19S9 and 1990, and $7,100,000 in 1991 and 1992.

i>rojected benefit obligauon . $4140.460; These amounts are subject to reduction in accor.

Plan aueta at tair value . 244.336 dance with the mortgage, and historicall3 have Execu of anets over projected been met by pledging property additions.

benefit obligation h.en Theonabove bonds areallsecured of the by a first mortgage 103.876 Unamortized net gain . (40.472) substantially fixed property, Unrecognized net asset at franchises, and rights of the Company with certain transition . <68.40m minor exceptions expressly provided in the mort-Accrued pension cost included in gage securing the bonds. The remaining balance of Accounts Payable . $ (5 002) net bondable additions at December 31,1987 was approximately $2,099,000,000.

The plan assets consisted primarily of common Note s-Ireczeemcible 1>referre<z stocks, fixed income securities, and real estate. The Stoch; actuarial present value of accumulated plan ben.

efits at January 1,1987 was $107,189,000 (including The Company issued $50 million of 8.52% redeem-vested benefits of $93,825,000). Activity in the able serial preferred stock and $60 million of 8.00L capital markets subsequent to September 30,1987 redeemable serial preferred stock in 1986. In 1987, has caused plan assets to decline by approximately the Company redeemed $36 million of 11.66%

15% as of December 31,1987. redeemable serial preferred stock.

The pension cost for 1987 was calculatai using a During the five years from December 31,1987, the measurement date of January 1,1987, a discount amounts of redeemable preferred stock outstanding rate of 8%, rate of increase of futtire compensation at such date, required to be redeemed at stated value levels of 6%, and return on assets of 9L. The are $10 million in 1990, $10 million in 1991, and $20 Company's pension costs prior to 1987 were million in 1992. No shares are required to be accounted for in accordance with previous redeemed in 1988 and 1989.

30 nun, n ur < onwm i

Note 9-Common Stock and Retained Earnings:

The Company has an Automatic Reinvestment tions. Under this Plan, 216,331 shares of common and Stock Purchase Plan and an Employees Stock stock were designated for issuance at December 31, Ownership Plan (ESOP) for which at December 31, 1987.

1987,1,820,535 and 20,761 shares, respectively, of The Company also has an Incentive Savings Plan common stock were designated for issuance. (Plan) for salaried employees. Under the Plan, the The Company also has a Tax Reduction Act Stock Company matches a portion of the employee contri-Ownership Plan (TRASOP) pursuant to federal butions. The Company's matching contribution is income tax laws, under vihich Company contribu. used to purchase common stock. Under this Plan, tions of common stock are based on a percentage of 43,472 shares of common stock were designated for payroll costs. Because the tax benefit for contribu- issuance at December 31,1987.

tions to the plan was repealed under the 1986 Tax Changes in common stock during 19S7,1986, and Reform Act,1987 was the last year for contribu. 1985 were as follows:

1987 1986 1985 Sha res Amount

• Shares A mou n t

• Shares Amoun7 Balance beginning of year. 65,608,876 $ 1,221,H38 62.800.583 $ 1,150.622 56.3e1,448 $ 994.869 Public offenngs . - - - - 3.000.000 78,480 Automatic Retnvestment and Stock...... ....

2,723,349 69,457 2.573.622 64 / 54 3,160.678 71,136 Purchase Plan .

ESOP. . . . . 33,3M8 N58 28,675 759 32fl0 757 TRASOP.. ..... 199,659 5,397 194.218 5.279 210.243 5.012 Incentive Savings Plan.. 23.629 657 11.778 324 15.404 3M Halance end of year . 6M,5MN,90 I $ 1,29M.207 65fAAf76 $ 1.221.m M 62fou.M3 $ 1.150.672

• Thousands of dollars None of the Company's retained earnings at December 31, 1987 was restricted with respect to the declaration or payment of dividends.

, Note 10-Quarterly Financialinformation (Unaudited):

First Quarter Second Quarter Third Quarter Fourth Quarter 1987 1986 19M7 1986 1987 1986 _ 1987 1986 (rhousands of Dollars Except Earnings Per Common Share)

Operating revenues , . $325,701 5355.900 $253,727 $24539 $347,735 $303fl8 $292,360 $278AM Operating income . 51,384 50.747 50,272 41,829 98,775 67.456 32,N91 47.426 N et income . . . . . . . . . . 71,742 69 # o 63,427 62.396 113,764 92.416 40.623 68.o59 Net income ar.phcable to r mmon stoc k . ..... 62,108 61.110 54,144 53.203 104,464 83.2 4 31,143 58.M3 Earmngs per common share . $ .94 $ 96 8 .81 $ A3 $ 1.54 $ 1 23 $ ,46 $ SO Quarterly carnings per commun share are based on u'eighted average number of shares outstanding during the quarter and the sum of the quarters may not equal annualearnings per common share.

The IPS7 fourth quarter net income was reduced Clinton cost deferrals the portion of the Company's by $19 million (28c per share) due to the provisions electric utility business not under the jurisdiction of of the negotiated settlement. See "Note 13-Clinton the ICC, because the November 1987 retail rate Power Station" Additionally, the 1987 fourth filing excluded that portion of the Company's quarter net income was reduced by $11 million (16e operations.

per share) due to the effect of excluding from the Note 11-Capital Leases:

Illinois Power Fuel Company (Fuel Company), million, including $9.2 million of financing costs.

which is 50% owned by the Company, was formed in The Company is obligated to make subordinated January 1981 for the purpose of financing a portion loans to the Fuel Company at any time the of the nuclear fuel requirements of Clinton. The obligations of the Fuel Company that are due and Company entered into a lease agreement with the payable exceed the funds available to the Fuel Fuel Company under which the Company leases Company. The Company has an obligation for nuclear fuel. Lease payments, which are equal to the spent nuclear fuel disposal costs of leased nuclear Fuel Company's cost of fuel as consumed (including fuel.

related financing costs), began in 1987 when At December 31, 19S7 and 1986 current Clinton began pre-comme-cial operation. Billings obligations under capital lease for nuclear fuel are under the lease agreement during 1987 were $26.5 $46,150,000 and $25,235,000, respectively. At I# Annual Rm rt . 31

I 1

December 31,1987 and 1986 current obligations for limited to assessments of $10 million per year. The other property under capital leases are $1,691,000 Company cannot predict the final outcome of the and $1,493,000, respectively. legislative proposals.

Over the next five years projected lease payments Effective January 1,1988, a new Master Worker under capitalleases are as follows: Policy will cover workers who claim bodily injury, sickness, or disease as a result of initial radiation (Thousands of Dollars) exposure occurring on or after January 1,1988. The 1968.. . . $ 48.000 policy will have an aggregate limit of $160 million 1989. - . . . 33.000 applying to the nuclear utility industry as a whole.

1990. . . .. . 30 M As claims are paid under the policy there is a 1[g['

mal .

$ provision for automatic reinstatement of policy limits up to an additional $160 million.There is also

$ W.000 a provision for assessment of additional premium if claims exceed funds available in the insurance Note 12-Commitments anfl company reserve accounts to pay claims. The Company,a maxircum share of additional premium Contingencies: in future years for this contingency could be up to Construction Program - The 1988 construction approximately $2.7 million, budget is $137 million, which includes $102 million Other-The Company is involved in legal or for electric facilities, $23 million for gas facilities administrative proceedings before various courts and $12 million for nuclear fuel. The five-year and agencies with respect to matters occurring in construction program for 1988 through 1992 is the ordinary course of business, some of which estimated to be $644 million. involve substantial amounts. Management believes Insurance - The Company has insurance coverage that the final disposition of these proceedings will for loss due to physical damage, including n t have a material adverse effect on the financial contamination, to Clinton. This insurance is p sition of the Company.

structured through a level of primary coverage .

provided by nuclear insurance pools and excess Note 13-C,[lnlon Power Statr.on:

coverage from a combination of nuclear insurance pools and an industry-owned mutual msurane The Company received a full. power operating company. The primary coverage provides limits of license for Clinton from the Nuclear Regulatory

$500 milhon and the excess coverage currently Commission (NRC) on April 17,1987, and based on provides limits of $1.025 billion, for a total available an order of the ICC approving a negotiated coverage of $1.525 billion. In addition, the Company settlement, an in service date of April 24,1987 was has replacement power insurance coverage for the is fully operational as a base extra cost to purchase replacement power in case of established.

I ad generatingClinton,t uni supplying electric service to a temporary accidental shutdown of the plant. ur cust mers.

The Company's portion of the cost of Clinton is A major loss involving Clinton or other stations insured by the industry-owned mutual insurance $3.8 bilhon. At December 31,,1987, $1.5 bilhon of company could result in additional annual premium Clinton costs are meluded m rate base and are assessments to the Company of up to approximately earning a return.

$10.2 million. In addition, while the Company has Ownership of an operating nuc; lear generating no reason to anticipate a serious nuclear incident at pnit e includ,xposes the Company Clinton,if such an incident should occur, the claims ing increased regulatory, to significant safety, risks and environ-for property damage, replacement power costs, and/ mental requirements. The Company expects to be or other costs and expenses could materially exceed allowed to continue to operate Clinton; however, if the limits ofinsurance coverage available, any unf reseen r unexpected developments would All nuclear power station operators are subject to prevent the Company from doing so, the Company the Price-Anderson Act (Act). Although the Act could be materially adversely affected.

ex,pired on August 1,1987, all commercial reactors with construction permits or operating permits Rate & Regulatory Matters issued before August 1,1987 remain covered under Clinton Construction Audit - In Illinois the cost of the old law. Under the Act public liability for a a new eletric generating plant may not be recov-nuclear incident is currently limited to $720 million. ered in a utility's rates unless it is reasonable.

Coverage of the first $160 million is provided by Therefore, an audit is being conductai by Touche private insurance, with the excess coverage Ross & Co. and The Nielsen. Wurster Group under provided by retrospective premium assessments contract with the ICC.

against each licensed nuclear reactor in the United A Phase I audit report filed on January 9,1986 States. The Company's maximum assessment covered the time frame from the beginning of the would be $5 million per incident, but not more than project through March 31,1985 (at which time the

$10 million per year. One of the proposals to amend Company's investment in Clinton was $2.4 billion),

the Act, under consideration in Congress, would in this audit report, Touche Ross/ Nielsen Wurster increase the maximum retrospective assessment contend that a portion of Clinton costs associated against cach operating reactor to $63 million, with the stop work orders issued in early 1982 is 32 , lihrkas hmer ( twrpam

unreasonable. The report estimates that these costs Under the electric rate moderation plan, there are between $294 million and $464 million. Nielsen- would be a cash now delay of approximately $450 Wurster has stated in written testimony to the ICC million over the first seven years of the plan due to that $294 million is the appropriate point in this its mirror CWIP provisions (representing amounts ran ge. collected in rates prior to the in service date of Three nationally known firms, Theodore Barry & Clinton as a result of having CWIP in rate base).

Associates Ebasco Services incorporated, and This amount would be capitalized as a part of Burns and Roc Company, were retained on behalf of Clinton costs for recovery over the life of the plant.

the Company to evaluate management of the In addition, under the deferred return provisions of Clinton project through independent audits. The the plan, cash now of approximately $250 million independent audits are separate from the one being would be delayed during the Grst five years for condacted by the two firms hired by the ICC, and recovery during the remaining years of the plan.

Phase I audits show that construction of Clinton .

generally has been managed reasonably by the Deferred Costs,- The Company is deferring certam.

Company. The conclusions of these audit reports post-constructwn costs of Clinton, based on the ICC and the Touche Ross/ Nielsen Wurster Phase I audit prder approving the negotiated settlement, melud.

report generally agree but differ on one point. mg depreci,ation, taxes other than mcome taxes, and financmg costs on both the amount of plant Touche Ross/ Nielsen Wurster contend that a portion of the cost of Clinton associated with the costs not m rate base and these deferred costs from th, in service date until a rate order reDecting the stop work actions issued in early 1952 was unreaso.

nable. The ICC has completed hearings on Phase I inclusion of Clinton in rate base becomes effective of the audit, but is deferring the issuance of an order (the regulatory lag period). As a result of the until the audit and hearings on Phase II, which negotiated settlement, all Clinton operation and mamtenance costs are bemg expensed. Ilowever, as l covers the period from April 1,1985 through completion of the project, have been completed. a partial offset, the negotiated settlement also The Phase II audit report, which is expected to be provided that the clectric revenues previously submitted to the ICC by the end of the first quarter deferred, as ordered by the ICC to renect the lower of 1968. could allege additional unreasonable costs. federal income tax rates under the Tax Reform Act An order is expected from the ICC in late 1988. As in of 1986, be included m income and all future Phase I, independent audits to evaluate manage. deferrals be discontmued. The negotiated settle-ment of Clinton during this period are being ment caused a net reduction in 1987 earnings of $19 performed on behalf of the Company.

million (net of income taxes) or 28e per share, and In an interim order regarding the completion of future earnings will be decreased by an estimated $2 Clinton, the ICC rated that any Clinton costs million to $3 million per month until the electric rate expended above the amount of $2,698,361,000 for order requested on November 19,19S7 is effective.

which the Company fails to present affirmative During 1987, the Company recorded post con-struction cost deferrals of $207 million ($177 million, evidence of reasonalIleness shall not be included in rate base, even if no other party has presented any net of income taxes). Such deferred costs will be evidence challenging these costs as being unreason, included,in rates to the extent that Clinton costs are able. The Company believes that the burden of proof allowed m rates and recovered over the remaining under this order is no greater than that currently life of the plant. Cash now associated with these required under the Public Utilities Act generally. deferrals will be delayed until those costs are recovered m, rates.

llate llequest - On November 19, 1987, the Com-pany filed with the ICC a request for an electric rate. Decommissioning and Nuclear Fuel Disposal moderation plan to incorporate Clinton into rates. Costs -The Company is responsible for its owner-The rate of return regeested in the plan reflects ship share of the costs of decommissioning Clinton current capital cost and is 10.25% compared to the and for spent nuclear fuel disposal costs. The 11.95; currently allowed. The rate plan incorpo, establishment of an external trust fund was rates a mirror CWIP plan, and a deferred return authorized by the ICC to invest funds for the future phase in plan. The request includes a first year dismantlement and decommissioning costs of electric revenue increase of 11.1% effective No. Clinton (estimated to be $87.6 million in 1987 vember 1958, producing approximately $92.7 mil. dollars). Decommissioning costs are currently being lion of revenue annually net of anticipated fuel deferred ($1.4 million during 1987) and will begin to savings and a senior citizen discount. This first. be collected through rates upon approval of the year increase would be followed by annualincreases electric rate request before the ICC.

'beginning in 1989, for six to nine years. These Under the Nuclear Waste Policy Act of 1982, the annual increases would be tied to the rate of U.S. Department of Energy (DOE)is responsible for innation and would range from a minimum of about the permanent storage and disposal of spent 4% to a maximum of 5.9 E. Although the rate request nuclear fuel. DOE currently charges one mill per provides the needed future rate increases to recover kilowatt hour generated for future disposal of spent the Company's investment in Clinton and related fuel. The Company is recovering this amount operating costs,it is subject to approval or modifica. through its rates.

tion by the ICC. An order from the ICC is expected in October 1988.

iw Annu i numri 3a

Accounting Developments Legal Proceedings In December 1986, the Financial Accounting On September 22, 1986, members of 22 Illinois Standards Board (FASB) issued Statement of rural electric power distribution cooperatives filed a Financial Accounting Standards No. 90, "Regu. lawsuit against the Company concerning the lated Enterpnses - Accounting for Abandonments Company's construction management of Clinton.

and Disallowances of Plant Costs, an amendment The action purported to be brought derivatively on of FASB Statement No. 71" (FAS 90), which is behalf of the member cooperatives of WIPCO and applicable to partial disallowances of plant costs Soyland and, in turn, on behalf of WIPCO and and plant abandonments. The statement is effective Soyland, and as a class action on behalf of the i for the Company in 1988 and the Company intends individual members of the distribution coopera. '

i to adopt it on a prospective basis. This statement tives. On January 7,1988, on the motion of WIPCO requirea that a partial disallowance of plant costs una Soyland, the Circuit Court for Sangamon by a regulatory commission be recorded as a loss County, Illinois, ruling orally from the bench, j when such a disallowance becomes probable and a dismissed the derivative claims but granted leave to reasonable estimate can be made. Under generally WIPCO and Soyland to be realigned as plaintiffs accepted accounting principles, as effective through and to nie their five-count complaint against the 1987, a disallowance would not have required an Company (Soyland complaint). In the Soyland immediate charge to income unless it resulted in a complaint, WIPCO and Soyland alleged that the negative rate of return on :he Company's invest. Company breached fiduciary duties to them and ment in Clinton, but it would cave been reflected as was negligent in connection with the planning, a reduction in the Company's nrnings over the life construction, and licensing of Clinton.The Soyland of the plant. In addition, once adopted. the state. complaint seeks recovery of an unspecified amount ment requires that AFUDC be capitalized only ifits of compensatory damages from the Company. The subsequent inclusion in allowable costs for rate. Company has moved for an extension of time to making purposes is probable. respond to the Soyland complaint until after a The Company did not adopt the provisions of FAS wri; ten order detailing the Court's January 7 ruling

'30 prior to 1988. If the Company had adopted the has been entered.

new standard, the Company believes that no loss In the one remaining count of the original provision for a disallowance would have been complaint fil <1 by the members of the distribution required in 1987 or prior financial statements cooperatives, those plaintiffs seek to proceed on because no reasonable estimate of loss can be made behalf of a enss of all customers of cooperatives i and the low end of the range of possible disallo. that obtain e.ectrical power from Clinton. This I wance is zero. count alleg?s that such customers have been and In August 19S7, the FASB issued Statement of will be "injuret due to drastically increased energy Financial Accounting Standards No. 92, "Regu. supply costs". The plaintiffs seek unspecified lated Enterprises - Accounting for Phase.in Plans, compensatory damages from the Company. On an amendment to FAS 71" (FAS 92), which January 14,1987, the Circuit Court for Sangamon established the criteria for financial statement County, Illinoia denied the Company's motion to purposes that must be met in order for costs to be dismiss the class action count of the original deferred for recovery in the future. The statement is complaint for lack ci s'anding. The Court has not effective for the Company in 1988 and the Company yet addressed other grounds asserted by the intends to adopt it on a prospective basis. Company in support of its motion to dismiss that The Company's proposed deferred return phase-in count.

plan meets the criteria of FAS 99 FAS 92 also states that an allowance for earnings on shareholders' investment may only be capital. The Company bdieves that it has managed the ized during construction, as AFUDC, or as part of a e nstruction of Clinton prudently and efficiently qualified phasein plan. The Company's deferral of and that it should be allowed to recover the full cost certain post-construction costs in the regulatory lag f that umt through its rates. Almost all recent period dees not meet the criteria of a phasein plan cases of which the Company is aware in which as established by this statement. Accordingly, regulatory commissions have conducted prudence beginning in 1988 for financial statement purposes, ""dIl8.m e nnectmn with placmg new generatmg the Company may not capitalize an allowance for units m rates have resulted m some m, vestment earnings on sharetmlders' investment as part of being disallowed or proposed to be disallowed. In post construction cost deferrals. Such allowance for *"".y such cases, the amounts mvolved were earnings on shareholders' investment would have 82 R

• fiC""l-Man gement it unable to predict the ultimate been approximately $11 million per month during l 1988. Ilowever, pursuant to the ICC order, such utcome of the ur certaint,as discussed m this note amounts may be recovered over the life of the plant which could have a matenal adverse effect on the to the extent that Clinton costs are allowed in rate Company's earnings and/or financial position, base.

34 tilmon N=ct (o tvarn

Two-Year Dividends and Stock Prices by Quarters The common stock is listed on the New York Stock Exchange and the Midwest Stock Exchange. The prices below are the prices reported on the Composite Tape. The preferred stocks are listed on the New York Stock Exchange and the prices below are the prices on that Exchange.

1987 Stock Prices 1986 Stock Prices 1 2 3 4 1 2 3 4 Dividendat t) Hish low High Low High low High kw High Low High Low High Low High tow Common $ .66 31S 27% 28% 25% 27 24". 27 21% 29 23% 29% 23% 32 25% 31% 284 4.08% Pfd. .51 251 23 244 21 22S 194 20% 18% 23 18% 23% 20 2n 204 25 22 4.26% Pfd. .53% 25% 24 24% 22% 234 21 22% 20 24 18% 24% 204 2a 214 26% 24 4.70% Pfd. .58% 28 26N 26% 23 25% 22% 24% 21 25 20% 26% 224 28% 23 28% 25%-

4.42% Pfd. .55% 26N 24 25% 21% 23% 21% 22% 19N 24 19 254 21 25% 224 27% 23%

4.20% Pfd. .52% 26 244 25% 21N 24 21% 23% 19 234 19 25 20% 25% 22 26N 234 8.24% Pfd. 1.03 49% 45% 47N 42 44 39 41% 36 464 38 47 41N 48% 41% 49% 44%

7.56% Pfd. .944 45% 41% 44% 36% 40% 354 41 30 42% 33 43 37 44% 37% 454 40s 8.94% Pfd. 1.11% 31S 47% 48% 41N 46% 41% 42% 37 49N 39 50 44% 50% 44% 51% 47 8.00% Pfd. 1.00 47% 4 4'. 47 39% 41% 37% 38% 33 444 35% 46 39% 45% 39 48 44%

11.66% Pfd. (4) 1.45% 54% 52" 56 52% 57 52% 585 55% 584 55 Adj. Rate Pfd. A (2) 43 38% 41 37% 41% 33% 42 38% 464 37 45% 41 44% 40 44% 37 l Adj. Rate Pfd. B (3) 51% 47 50% 46 51 49% 51 48 52 491 52% 491 50s 46 51% 47 l 11.75% Pfd. 1.46% 62 564 58% 55 58% 549 574 55 58 52% 58 56% 58 55 594 57 l 8.52% Pfd. 1.065 54 54 53 50 - -

50 47 -- -

50% 50 51% 504 52 52 8.005 Pfd. 2.00 - -

102% 97% 994 96% 96N 96% - - - - - - - -

(!) The amount declared in each quarter during 1987 and 1986.

(2) Dividend rate changes. Rates for dividends declared in 1987 were $0.75, $0.75, $0.75, and $0.8375 in the first. second, third, and

, fourth quarters, respectively. Rates for dividends declared in 1986 were $0.7875, $0.75. $0.75, and $0.75 in the first, second. third, and fourth quarters, respectively.

(3) Dividend rate changes quarterly. Rates for dividends declared in 1987 u ere $0.875,30.875 $0.900, and $!.0688 in the first, second,

> third, and fourth quarters, respectively. Rates for dividends declared in 1986 were $1.0188, $0.875. $0.875, and $0.875, in the first, second, third. and fourth quarters, respectively.

(4) Shares u ere redeemed on February I,1987 at $52.50 per share.

There were 90,655 registered holders of common stock at January 11,1988.

1 Selected Financial Data

• 1987 1986 1985 1984 1983 Total operating revenues . . . ... ..... . $ 1,219,523 $1,183,865 $1,'.U7,364 $1,280,537 $1,278,259 Net income. .. ... .. .. .. .. $ 289,556 $ 292,721 $ G9,999 $ 235,478 $ 207,736 Net income applicable to common stock .. . $ 251.859 $ 256,479 $ 207,240 $ 210,221 $ 184,096 i

Earnings per common share . .. . . . $ 3.75 $ 3.98 $ 3.48 $ 4.02 $ 3.80 Cash dividends declared per common share . . $ 2.64 $ 2.64 $ 2.64 $ 2.64 $ 2.52 Total assets" .. ... . . ..... . ... . . $5,922,734 $5,623,042 $4,894,388 $4,083,670 $3,543,900 long term debt ** . . . . .., .. . . . . . . . . . $2,2 79,219 $2,246,367 $2,012,672 $1,621,201 $1,398,518

Redeemable preferred stock . . . . . . . .. .. $ 160,000 $ 196,000 $ 86,000 $ 86.000 $ 36,000 Ratio of earnings to fixed charges"* . . . .. 2.51 2.57 2.66 3.15 3.56 f

• Thousands of dolla rs except ea rnsngs per common s ha re, cash dividends declared per common s hare, and ratio of earnings to (szed j charges.

"Restated for the ef(cet of capitalized nuclear fuellease.

, '"The ratio of earnings to fixed charges represents the number of times that earnings before income taxes and fixed charges cover the fixed charges. Earnings used in the calculation of the above ration include allowance for funds used during construction and deferred Clinton financing costs and are before the deduction ofincome ta ses and fixed charges that include interest on long term debt. related amortization of debt discount, premium and enpense, other interest, and that portion of rent expense that is estimated to be representative of the interest component.

I w Annual k pni . 35

Electric Statistics 1987 1986 1985 Revenues crhousands of Dollars)

Res i d e n ti al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351,910 $ 293,041 $ 276,210 Co m m e rci a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,527 187,592 179,685 I n d u s t ri a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325,484 290,321 276,903 Other................................................. 19,895 16,601 16,057 Revenues-ultimate consumers . . . . . . . . . . . . . . . . . . . . . 905,816 787,555 748,835 Rural cooperatives, municipal and other utilities . . . . . . . 23,541 21,611 21,036 M i scell a h ec u s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,513) 4,978 (3,404)

$ 910,844 $ 814,144 $ 766,467 Customers at End of Year Re s i d e n ti al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484,809 482,802 479,675 Co m m e rci al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,958 56,734 56,315 I n d u s t ri a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 339 340 Other........ ............ .. ........................ 715 720 717 542,836 540,595 537,047 Sales in KWH rrhousands)

Res id e n t i al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,240,936 4,197,687 3,926,997 Commercial . . . . . . . . . . . ............ ..... ......... 2,861,725 2,821,336 2,706,217 Industrial .. . ...... ......... ............... ...... 7,323,167 7,341,567 6,932,903 Other.................................. ........... 321,697 320,121 314,455 Sales-ultimate consumers . . . . . . . . . . . . . . . . . . . . . . . . 14,747,527 14,680,711 13,880,572 Rural cooperatives, municipal and other utilities . . . . . . . 588,179 554,746 546,328 15,335,706 15,235,457 14,426,900 Gas Statistics 1987 1986 1985 Revenues (Thousands of Dollars)

Residential . . . . . . . . . . . . ..... ............... ... $ 191,555 $ 205,814 $ 228,299 Com mercial . . . . . . . . . . . . . . . ... ....... ........... 66,225 77,832 88,683 Industrial . . . ............. .. .......... . ....... 34,506 73,163 68,100 Revenues-ultimate consumers . . . . . . . . . . . . . . . . . . . . 292,286 356,809 385,082 Interdepartmental revenues . . . . . . ....... . .. .. ... 1,272 355 316 Miscellaneous . . . . . . . . .. .................. . . 15,121 12,557 15,499

$ 308,679 $ 369,721 $ 400,897 Customers at End of Year Residential .. .. ... . . .. ....... ............ 350,331 349,691 348,994 Commercial ....... .. ........ . . . ... . ...... 33,271 33,027 32,963 Inaustrial . . . . . . . . . . . . ...... .. .. ... . ....... . 486 483 485 384,091 383,201 382,442 Sales in Therms enousands)

Residential ..... .... ... .. ................ ..... 331,640 356,965 365,082 Co m m e rci al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,232 161,011 165,689 I n d u s t ri a l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,690 197,815 136,392 Sales-ultimate consumers' . . . . . .... ............. 564,562 715,791 667,163 Interdepartmental sales . . . . . . . . . . . ............... 5,122 1,232 827 569,684 717,023 667,990

• Excludes therms transported for others amounting to 326.801,000 in 1987. 253.280,000 in 1986, and 297.070.000 in 1985.

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