UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission Registrants; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-11327 Illinova Corporation 37-1319890
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
1-3004 Illinois Power Company 37-0344645
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) have been subject to such
filing requirements for the past 90 days.
Illinova Yes X No
Corporation ---- ----
Illinois Power Yes X No
Company ---- ----
Indicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date:
Illinova Corporation Common stock, no par value, 71,713,387
shares outstanding at October 31, 1998
Illinois Power Company Common stock, no par value, 65,150,562
shares outstanding held by Illinova
Corporation at October 31, 1998
1
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ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
This combined Form 10-Q is separately filed by Illinova Corporation and Illinois
Power Company. Information contained herein relating to Illinois Power Company
is filed by Illinova Corporation and separately by Illinois Power Company on its
own behalf. Illinois Power Company makes no representation as to information
relating to Illinova Corporation or its subsidiaries, except as it may relate to
Illinois Power Company.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Illinova Corporation
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Illinois Power Company
Consolidated Balance Sheets 7 - 8
Consolidated Statements of Income 9
Consolidated Statements of Cash Flows 10
Notes to Consolidated Financial Statements of
Illinova Corporation and
Illinois Power Company 11 - 17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for Illinova Corporation
and Illinois Power Company 18 - 28
Part II. OTHER INFORMATION
Item 1: Legal Proceedings 29
Item 6: Exhibits and Reports on Form 8-K 30
Signatures 31 - 32
Exhibit Index 33
2
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PART I. FINANCIAL INFORMATION
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant, at original cost
Electric (includes construction work
in progress of $200.5 million and
$214.3 million, respectively) $ 6,841.9 $ 6,690.4
Gas (includes construction work
in progress of $12.3 million and
$10.7 million, respectively) 680.6 663.0
---------- ----------
7,522.5 7,353.4
Less - Accumulated depreciation 2,931.4 2,808.1
---------- ----------
4,591.1 4,545.3
Nuclear fuel in process 6.2 6.3
Nuclear fuel under capital lease 130.2 126.7
---------- ----------
Total utility plant 4,727.5 4,678.3
---------- ----------
Investments and Other Assets 236.6 198.8
---------- ----------
Current Assets
Cash and cash equivalents 14.9 33.0
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 145.0 115.6
Other 100.8 102.3
Accrued unbilled revenue 79.4 86.3
Materials and supplies, at average cost 121.8 118.6
Prepayments and other 45.5 64.4
---------- ----------
Total current assets 507.4 520.2
---------- ----------
Deferred Charges 199.7 185.7
---------- ----------
$ 5,671.2 $ 5,583.0
========== ==========
3
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ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1998 1997
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 200,000,000 shares authorized;
75,681,937 shares issued, stated at $ 1,425.7 $ 1,425.7
Less - Deferred compensation - ESOP 7.3 10.2
Retained earnings (Deficit) (12.1) 51.7
Less - Capital stock expense 7.3 7.3
Less - 3,968,550 and 4,000,000 shares of
common stock in treasury, respectively,
at cost 89.7 90.4
---------- ----------
Total common stock equity 1,309.3 1,369.5
Preferred stock of subsidiary 57.1 57.1
Company obligated mandatorily redeemable
preferred stock of subsidiary 197.0 197.0
Long-term debt 170.0 100.0
Long-term debt of subsidiary 1,737.1 1,617.5
---------- ----------
Total capitalization 3,470.5 3,341.1
---------- ----------
Current Liabilities
Accounts payable 190.1 177.3
Notes payable 256.5 415.3
Long-term debt and lease obligations
of subsidiary maturing within one year 115.3 87.5
Other 162.4 181.6
---------- ----------
Total current liabilities 724.3 861.7
---------- ----------
Deferred Credits
Accumulated deferred income taxes 990.7 969.0
Accumulated deferred investment tax credits 203.1 208.3
Other 282.6 202.9
---------- ----------
Total deferred credits 1,476.4 1,380.2
---------- ----------
$ 5,671.2 $ 5,583.0
========== ==========
4
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<TABLE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
(Unaudited)
(Millions of dollars except per share)
Operating Revenues:
<S> <C> <C> <C> <C>
Electric $ 392.0 $ 394.0 $ 973.1 $ 977.9
Electric interchange 285.1 61.3 494.1 141.4
Gas 38.2 41.8 204.6 265.9
Diversified enterprises 108.0 344.7 274.2 569.9
------------- ---------- ---------- ----------
Total 823.3 841.8 1,946.0 1,955.1
------------- ---------- ---------- ----------
Operating Expenses:
Fuel for electric plants 73.4 66.4 183.0 163.9
Power purchased 317.7 74.2 644.2 155.6
Gas purchased for resale 15.3 18.1 103.7 140.6
Diversified enterprises 115.5 353.4 295.2 612.6
Other operating expenses 92.0 73.4 259.7 196.4
Maintenance 41.0 27.9 105.0 78.1
Depreciation & amortization 51.0 50.1 152.2 148.4
General taxes 27.3 34.1 100.3 105.8
------------- ---------- ---------- ----------
Total 733.2 697.6 1,843.3 1,601.4
------------- ---------- ---------- ----------
Operating Income 90.1 144.2 102.7 353.7
------------- ---------- ---------- ----------
Other Income and Deductions:
Miscellaneous-net 1.5 1.1 2.8 3.3
Equity earnings in affiliates 2.8 4.7 11.7 11.1
------------- ---------- ---------- ----------
Total 4.3 5.8 14.5 14.4
------------- ---------- ---------- ----------
Income Before Interest
Charges and Income Taxes 94.4 150.0 117.2 368.1
------------- ---------- ---------- ----------
Interest Charges:
Interest expense 36.8 34.5 109.3 108.7
Allowance for borrowed funds
used during construction (1.5) (0.7) (3.8) (3.4)
Preferred dividend
requirements of subsidiary 5.0 5.5 14.9 16.4
------------- ---------- ---------- ----------
Total 40.3 39.3 120.4 121.7
------------- ---------- ---------- ----------
Income Before Income Taxes 54.1 110.7 (3.2) 246.4
------------- ---------- ---------- ----------
Income Taxes 27.5 47.4 (5.8) 107.7
------------- ---------- ---------- ----------
Net Income 26.6 63.3 2.6 138.7
Carrying amount over
consideration paid for redeemed
preferred stock of subsidiary - 1.1 - 1.1
------------- ---------- ---------- ----------
Net Income Applicable to
Common Stock $ 26.6 $ 64.4 $ 2.6 $ 139.8
============= ========== ========== ==========
Earnings per common share (basic
and diluted) $0.37 $0.87 $0.04 $1.87
Cash dividends declared per
common share $0.31 $0.31 $0.93 $0.93
Cash dividends paid per
common share $0.31 $0.31 $0.93 $0.93
Weighted average number of
common shares outstanding
during period 71,713,387 73,009,027 71,709,188 74,770,016
5
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</TABLE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
(Unaudited)
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2.6 $ 138.7
Items not requiring cash, net 119.4 206.5
Changes in assets and liabilities 99.3 (69.4)
------- --------
Net cash provided by
operating activities 221.3 275.8
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (190.5) (131.2)
Other investing activities (36.8) (41.0)
------- --------
Net cash used in investing
activities (227.3) (172.2)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (66.7) (70.1)
Repurchase of common stock - (90.4)
Reissuance of common stock 0.7 -
Redemptions -
Short-term debt (372.4) (168.5)
Long-term debt of subsidiary (109.2) (150.2)
Preferred stock of subsidiary - (4.1)
Issuances -
Short-term debt 213.5 133.0
Long-term debt 322.5 250.0
Other financing activities (0.5) (3.0)
------- --------
Net cash used in financing
activities (12.1) (103.3)
------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (18.1) 0.3
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 33.0 24.6
------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 14.9 $ 24.9
======= ========
6
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ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant, at original cost
Electric (includes construction work
in progress of $200.5 million and
$214.3 million, respectively) $ 6,841.9 $ 6,690.4
Gas (includes construction work
in progress of $12.3 million and
$10.7 million, respectively) 680.6 663.0
---------- -----------
7,522.5 7,353.4
Less - Accumulated depreciation 2,931.4 2,808.1
---------- -----------
4,591.1 4,545.3
Nuclear fuel in process 6.2 6.3
Nuclear fuel under capital lease 130.2 126.7
---------- -----------
Total utility plant 4,727.5 4,678.3
---------- -----------
Investments and Other Assets 4.8 5.9
---------- -----------
Current Assets
Cash and cash equivalents 2.9 17.8
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 145.0 115.6
Other 23.0 16.6
Accrued unbilled revenue 79.4 86.3
Materials and supplies, at average cost 121.0 117.3
Prepayments and other 39.0 61.2
---------- -----------
Total current assets 410.3 414.8
---------- -----------
Deferred Charges 203.6 192.5
---------- -----------
$ 5,346.2 $ 5,291.5
========== ===========
7
<PAGE>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1998 1997
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 100,000,000 shares
authorized; 75,643,937 shares issued,
stated at $ 1,424.6 $ 1,424.6
Retained earnings 57.1 89.5
Less - Capital stock expense 7.3 7.3
Less - 10,493,375 and 9,428,645 shares of
common stock in treasury, respectively,
at cost 237.1 207.7
---------- -----------
Total common stock equity 1,237.3 1,299.1
Preferred stock 57.1 57.1
Company obligated mandatorily
redeemable preferred stock 197.0 197.0
Long-term debt 1,737.1 1,617.5
---------- -----------
Total capitalization 3,228.5 3,170.7
Current Liabilities
Accounts payable 136.3 102.7
Notes payable 256.5 376.8
Long-term debt and lease obligations
maturing within one year 115.3 87.5
Other 113.1 162.1
---------- -----------
Total current liabilities 621.2 729.1
---------- -----------
Deferred Credits
Accumulated deferred income taxes 1,010.8 980.6
Accumulated deferred investment tax credits 203.1 208.3
Other 282.6 202.8
---------- -----------
Total deferred credits 1,496.5 1,391.7
---------- -----------
$ 5,346.2 $ 5,291.5
========== ===========
8
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<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
(Unaudited)
(Millions of dollars)
Operating Revenues:
<S> <C> <C> <C> <C>
Electric $392.0 $394.0 $973.1 $977.9
Electric interchange 285.1 61.3 494.1 141.4
Gas 38.2 41.8 204.6 265.9
---------- ---------- ---------- ----------
Total 715.3 497.1 1,671.8 1,385.2
---------- ---------- ---------- ----------
Operating Expenses and Taxes:
Fuel for electric plants 73.4 66.4 183.0 163.9
Power purchased 317.7 74.2 644.2 155.6
Gas purchased for resale 15.3 18.1 103.7 140.6
Other operating expenses 92.0 73.4 259.7 196.4
Maintenance 41.0 27.9 105.0 78.1
Depreciation & amortization 51.0 50.1 152.2 148.4
General taxes 27.3 34.1 100.3 105.8
Income taxes 31.1 51.1 5.2 123.1
---------- ---------- ---------- ----------
Total 648.8 395.3 1,553.3 1,111.9
---------- ---------- ---------- ----------
Operating Income 66.5 101.8 118.5 273.3
---------- ---------- ---------- ----------
Other Income and Deductions, Net 1.5 2.1 4.4 4.4
---------- ---------- ---------- ----------
Income Before Interest Charges 68.0 103.9 122.9 277.7
---------- ---------- ---------- ----------
Interest Charges and Other:
Interest expense 34.1 32.7 101.5 102.8
Allowance for borrowed funds
used during construction (1.5) (0.7) (3.8) (3.4)
---------- ---------- ---------- ----------
Total 32.6 32.0 97.7 99.4
---------- ---------- ---------- ----------
Net Income 35.4 71.9 25.2 178.3
Less-Preferred dividend
requirements 5.0 5.5 14.9 16.4
Plus - Carrying amount over
consideration paid for
redeemed preferred stock - 1.1 - 1.1
---------- ---------- ---------- ----------
Net Income Applicable to
Common Stock $30.4 $67.5 $10.3 $163.0
========== ========== ========== ==========
</TABLE>
9
<PAGE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
(Unaudited)
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25.2 $ 178.3
Items not requiring cash, net 127.9 201.1
Changes in assets and liabilities 107.7 (62.2)
-------- --------
Net cash provided by
operating activities 260.8 317.2
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (190.5) (131.2)
Other investing activities 2.0 9.2
-------- --------
Net cash used in investing
activities (188.5) (122.0)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred and
common stock (80.0) (86.9)
Repurchase of common stock (29.4) (119.7)
Redemptions -
Short-term debt (325.0) (114.4)
Long-term debt (109.2) (150.2)
Preferred stock - (4.1)
Issuances -
Short-term debt 204.6 133.0
Long-term debt 252.5 150.0
Other financing activities (0.7) (3.2)
-------- --------
Net cash used in financing
activities (87.2) (195.5)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (14.9) (0.3)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 17.8 12.5
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2.9 $ 12.2
======== ========
10
<PAGE>
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted from this Form 10-Q pursuant to the Rules and Regulations of
the Securities and Exchange Commission (SEC). However, in the opinion of
Illinova Corporation (Illinova) and Illinois Power Company (IP), the disclosures
and information contained in this Form 10-Q are adequate and not misleading. See
the consolidated financial statements and the accompanying notes in Illinova's
1997 Annual Report to Shareholders, (included in the Proxy Statement), the
consolidated financial statements and the accompanying notes in IP's 1997 Annual
Report to Shareholders (included in the Information Statement), Illinova's and
IP's 1997 Form 10-K filings to the SEC, Illinova's and IP's Report on Form 10-Q
for the quarters ended March 31, 1998 and June 30, 1998, and Illinova's and IP's
1998 Form 8-K filings to the SEC for information relevant to the consolidated
financial statements contained herein, including information as to certain
regulatory and environmental matters and as to the significant accounting
policies followed.
In the opinion of Illinova, the accompanying unaudited September 30, 1998
and audited December 31, 1997 consolidated financial statements for Illinova
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheets as of September 30, 1998 and December 31, 1997, the Consolidated
Statements of Income for the three months and the nine months ended September
30, 1998 and 1997, and the Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997. In addition, it is Illinova's and IP's
opinion that the accompanying unaudited September 30, 1998 and audited December
31, 1997 consolidated financial statements for IP reflect all adjustments
necessary to present fairly the Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997, the Consolidated Statements of Income for the three
months and the nine months ended September 30, 1998 and 1997, and the
Consolidated Statements of Cash Flows for the nine months ended September 30,
1998 and 1997. Due to seasonal and other factors which are characteristic of
electric and gas utility operations, interim period results are not necessarily
indicative of results to be expected for the year.
The consolidated financial statements of Illinova include the accounts of
Illinova, IP, Illinova Generating Company (IGC), Illinova Insurance Company
(IIC), Illinova Energy Partners, Inc. (IEP), and Illinova Business Enterprises,
Inc. (IBE). IBE was incorporated in 1998 in the state of Illinois. All
significant intercompany balances and transactions have been eliminated from the
consolidated financial statements. All non-utility operating transactions are
included in the sections titled "Diversified enterprises", "Interest expense",
"Income taxes" and "Other Income and Deductions" in Illinova's Consolidated
Statements of Income.
The consolidated financial statements of IP include the accounts of
Illinois Power Capital, L.P. and Illinois Power Financing I (IPFI). All
significant intercompany balances and transactions have been eliminated from the
consolidated financial statements. All non-utility operating transactions are
included in the section titled "Other Income and Deductions, Net" in IP's
Consolidated Statements of Income.
11
<PAGE>
REGULATORY AND LEGAL MATTERS
OPEN ACCESS AND COMPETITION
On December 16, 1997, Illinois Governor Edgar signed electric deregulation
legislation, An Act in Relation to the Competitive Provision of Utility Services
(P.A. 90-561). P.A. 90-561 gives IP's residential customers a 15 percent
decrease in base electric rates beginning August 1, 1998, and an additional 5
percent decrease effective on May 1, 2002. The rate decreases are expected to
result in revenue reductions of approximately $40 million in 1998, approximately
$80 million in each of the years 1999 through 2001 and approximately $100
million in 2002, based on current consumption. Customers with demand greater
than 4 MW at a single site will be free to choose their electric generation
suppliers ("direct access") starting in October 1999. Customers with at least 10
sites which aggregate at least 9.5 MW in total demand also will have direct
access starting October 1999. Direct access for the remaining non-residential
customers will occur in two phases: customers representing one-third of the
remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002. IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates, and remains obligated to provide delivery service to all at
regulated rates. In 1999, rates for delivery services will be established in
proceedings mandated by the legislation.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
calculated by subtracting from a customer's fully bundled rate an amount
equal to a) delivery charges the utility will continue to receive from the
customer, b) the market value of freed-up energy, and c) a mitigation
factor, which is the higher of a fixed rate per Kwh or a percentage of the
customer's bundled base rate. The mitigation factor is designed to provide
incentive for management to continue cost reduction efforts and generate
new sources of revenue;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) Utilities are permitted to seek rate relief in the event that the change in
law leads to their return on equity falling below a specified minimum based
on a prescribed test. Utilities are also subject to an "over-earnings" test
which requires them, in effect, to share with customers earnings in excess
of specified levels.
The extent to which revenues are lowered will depend on a number of factors
including future market prices for wholesale and retail energy, and load growth
and demand levels in the current IP service territory. The impact on net income
will depend on, among other things, the amount of revenues earned and the
ongoing costs of doing business.
12
<PAGE>
ACCOUNTING MATTERS
Prior to the passage of P.A. 90-561, IP prepared its consolidated financial
statements in accordance with Statement of Financial Accounting Standards (FAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation." Reporting
under FAS 71 allows companies whose service obligations and prices are regulated
to maintain on their balance sheets assets representing costs they expect to
recover from customers, through inclusion of such costs in their future rates.
In July 1997, the Emerging Issues Task Force (EITF) concluded that application
of FAS 71 accounting should be discontinued at the date of enactment of
deregulation legislation for business segments for which a plan of deregulation
has been established. The EITF further concluded that regulatory assets and
liabilities that originated in the portion of the business being deregulated
should be written off, unless their recovery is specifically provided for
through future cash flows from the regulated portion of the business.
Because P.A. 90-561 provides for future market-based pricing of electric
generation services, IP discontinued application of FAS 71 for its generating
segment. IP evaluated its regulatory assets and liabilities associated with its
generation segment and determined that recovery of these costs was not probable
through rates charged to transmission and distribution customers, the regulated
portion of the business.
IP wrote off generation-related regulatory assets and liabilities of
approximately $195 million (net of income taxes) in December 1997. These net
assets related to previously incurred costs that were expected to be collected
through future revenues, including deferred costs for the Clinton Power Station
(Clinton), unamortized losses on reacquired debt, previously recoverable income
taxes and other generation-related regulatory assets. At September 30, 1998,
IP's net investment in generation facilities was $3.1 billion and was reflected
in "Utility Plant, at original cost" on IP's and Illinova's balance sheets.
In May 1998, the Staff of the SEC issued interpretive guidance regarding
the application of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of (FAS 121)," when a regulated enterprise such as an electric
utility discontinues regulatory accounting practices for separable portions of
its operations and assets. Under FAS 121, assets are considered impaired, and
should be written down to fair value, if their projected gross future cash flows
are insufficient to recover their carrying value. IP discontinued the
application of regulatory accounting principles in December 1997 for the
generation portion of its business and performed a FAS 121 impairment analysis
that concluded that gross future cash flows expected to be generated by electric
supply service assets will be sufficient to cover the costs of its generating
assets. As a result of the SEC Staff's May 1998 interpretive guidance, IP
reviewed its impairment evaluation and, as of June 1998, again concluded that
gross future cash flows expected to be generated by electric supply service
assets will be sufficient to cover the costs of its generating assets. However,
ultimate recovery of the cost of IP's generating assets depends on a number of
factors and variables including future market prices of electricity and IP's
ability to operate its generation assets efficiently. Changes in projected
future operating conditions could result in significantly different conclusions
with respect to impairment of the Company's generating assets.
13
<PAGE>
The legislation (P.A. 90-561) enacted in Illinois in December 1997 creates
uncertainty regarding future recovery of electric generation costs and a
reasonable rate of return on generation assets. Due to this and other factors
including the inefficiency of operating a single nuclear plant and the
inordinate amount of management attention consumed by ownership of Clinton,
Illinova's and IP's Board of Directors are evaluating the expected shareholder
value related to specific Clinton-related options. These analyses identify
either the sale or closure of Clinton as potential alternatives to its continued
operation.
FAS 121 requires that all long-lived assets for which management has
committed to a disposal plan, whether by sale or abandonment, should be reported
at the lower of carrying amount or fair value less cost to sell. Concurrent with
any decision by the Board of Directors to sell or close Clinton, IP would be
required to write-down Clinton to its fair value and record an impairment loss,
which would result in an accumulated deficit (negative retained earnings). This
write-down would be expected to have an estimated impact of a $.8 to $1.0
billion charge to the statement of income, net of the establishment of a
regulatory asset. The regulatory asset would represent the amount of expected
Clinton costs anticipated to be collected from transmission and distribution
customers during the regulatory transition period. If the Board of Directors
decides to implement one of the contemplated Clinton exit strategies, the Board
would also expect to consider the approval of possible quasi-reorganization
accounting for Illinova and IP. SEC concurrence with the proposed
quasi-reorganization and related accounting matters is required.
A quasi-reorganization is an accounting procedure that eliminates an
accumulated deficit in retained earnings and permits the company to proceed on
much the same basis as if it had been legally reorganized. A
quasi-reorganization involves restating a company's assets and its liabilities
to their fair values with the net amount of these adjustments added to or
deducted from the deficit. The balance in the retained earnings account is then
closed through a reduction in paid-in-capital accounts, giving the company a
"fresh start" with a zero balance in retained earnings. In addition to
eliminating the accumulated deficit in retained earnings and restating assets
and liabilities to fair value, if a quasi-reorganization were implemented,
Illinova and IP would also be required to implement any accounting standards not
yet adopted, including FAS 133, "Accounting for Derivative Instruments and
Hedging Activities." Illinova's and IP's Board of Directors have not yet made a
decision with regard to the Clinton strategy or a quasi-reorganization.
P.A. 90-561 allows acceleration in the rate at which any utility-owned
assets are expensed without regulatory approval provided such charges are
consistent with generally accepted accounting principles. Under this
legislation, up to an aggregate of $1.0 billion in additional expense for the
generation-related assets could be accelerated through the year 2008. The amount
of expense accelerated through the year 2008 is contingent on the changes in
revenue resulting from P.A. 90-561, cost mitigation efforts, fuel costs and
changes in the cost of capital resulting from the issuance of transitional
funding instruments. Any such reduction in the net book value of IP's
generation-related assets would help position IP to operate competitively and
profitably in the changing business environment. This accelerated charge would
have a direct impact on earnings but not on cash flows.
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The Financial Accounting Standards Board (FASB) issued FAS 128, "Earnings
Per Share (EPS)" in February 1997, effective for financial statements issued
after December 15, 1997. FAS 128 establishes standards for computing and
presenting EPS and replaces the presentation of primary EPS and fully diluted
EPS with a presentation of basic EPS and diluted EPS, respectively. Basic and
diluted EPS are equivalent for Illinova at September 30, 1998.
The FASB issued FAS 130, "Reporting Comprehensive Income" in June 1997,
effective for fiscal years beginning after December 15, 1997. FAS 130
establishes standards for reporting and display of comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. Illinova and IP do not currently have any
components of comprehensive income in any period presented herein. Illinova and
IP will continue to analyze the disclosure requirements of FAS 130.
The FASB issued FAS 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997, effective for periods beginning after
December 15, 1997. FAS 131 supersedes FAS 14, "Financial Reporting for Segments
of a Business Enterprise." FAS 131 establishes standards for the way public
business enterprises report financial and descriptive information about their
reportable operating segments in their financial statements. Generally,
financial information is required to be reported on the same basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Illinova and IP are evaluating the provisions of FAS 131
to determine the impact of the revised disclosure requirements on their 1998
year end financial statements.
The FASB issued FAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in February 1998, effective for fiscal years beginning
after December 15, 1997. FAS 132 amends FAS 87, "Employers' Accounting for
Pensions" and FAS 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." FAS 132 revises employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or recognition
of those plans.
The FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. FAS 133 supersedes FAS 80, "Accounting for Futures
Contracts," FAS 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," and FAS 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments." FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. FAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
133 is effective for Illinova's and IP's financial statements beginning in the
year 2000 unless a quasi-reorganization is implemented which would require
adoption of FAS 133 upon the effective date of the quasi-reorganization.
Illinova and IP continue to evaluate the provisions of FAS 133 to determine the
impact of the revised accounting and disclosure requirements on their financial
statements beginning in the year of adoption. The Company's 1998 financial
statements will contain the disclosures required by this standard.
The EITF of the FASB has been discussing Issue No. 98-10: "Accounting for
Energy Trading and Risk Management Activities." This issue addresses (1) whether
certain types of contracts for the sale and purchase of energy commodities
should be marked to market (i.e., as trading activities, derivatives, or when
adopted, accounted for in accordance with FAS 133) or accounted for under
accrual accounting (i.e., recorded as the contracts are settled with accruals
established if and when losses on such contracts become probable and estimable),
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and (2) how the results of such activities should be displayed in the financial
statements.
In their discussions, EITF members tentatively agreed that sale and
purchase activities being performed need to be classified as either trading or
non-trading. Further, the EITF reached a tentative conclusion that in the case
where the activities of an entity are determined to be trading in nature, the
current practice of accrual or settlement accounting would not be appropriate.
The EITF did not reach a tentative conclusion on the definition of "trading."
The members also agreed that determining whether or when an entity is involved
in energy trading activities is a matter of judgment that depends on the
relevant facts and circumstances.
The EITF has reached a tentative conclusion that contracts entered into as
trading activities should be marked to market with the gains and losses shown
net in the income statement. The EITF also agreed that any consensus ultimately
reached on this issue would be effective for financial statements issued for
fiscal years beginning after December 15, 1998. Both IP and IEP enter into
contracts for the sale and purchase of energy commodities and each practices
accrual accounting. Should any of the activities carried out by IP or IEP be
considered trading activities based on indicators provided by the EITF, a change
in those entities' accounting practices may be required. The ultimate impact of
this change in accounting on the Financial Position and Results of Operations of
Illinova and IP has not been determined. The EITF is scheduled to resume
discussion of the issue in November 1998.
ELECTRIC POWER EXCHANGES AND SALES
An accrual of probable losses related to forward power exchanges and sales
agreements for IP was recorded in the third quarter of 1998. A $6.7 million
accrual was recorded in conjunction with these agreements based on current
market prices and anticipated generation capacity. In the fourth quarter of
1998, IP expects to accrue an additional amount of approximately $20 million to
provide for other 1999 and 2000 sales agreements that it previously expected to
fulfill through IP generation.
In the event that Clinton does not return to service by the summer of 1999,
IP could face additional costs related to interchange purchase and sales
commitments. These costs could be material. Management is considering various
options, including demand side management initiatives, power purchases and
selected financial and insurance products to mitigate these potential future
costs.
MANUFACTURED GAS PLANT SITES
IP's estimated liability for Manufactured Gas Plant (MGP) site remediation
is $60.7 million. This amount represents IP's current best estimate of the cost
that it will incur to remediate the 24 MGP sites for which it is responsible.
Because of the unknown and unique characteristics at each site, IP cannot
presently determine its ultimate liability for remediation of the sites.
In October 1995, to offset the burden imposed on its customers, IP
initiated litigation against a number of insurance carriers. As of June 1998,
settlements or settlements in principle have been reached with all thirty of the
carriers. Settlement proceeds recovered from the carriers will offset a
significant portion of the MGP remediation costs and will be credited to
customers through the tariff rider mechanism which the Illinois Commerce
Commission (ICC) has previously approved. Management expects that cleanup costs
in excess of insurance proceeds will be fully recovered from IP's transmission
and distribution customers.
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TREASURY STOCK
Through September 30, 1998, IP has purchased a total of 10,493,375 shares
of its common stock from Illinova, all of which are held as treasury stock and
are deducted from common equity at the cost of the shares purchased. 1,064,730
shares of IP common stock were purchased during the first nine months of 1998.
At the October 14, 1998 Illinova Board of Director's meeting, the Board approved
the repurchase of up to 12 million shares of Illinova common stock over the next
six to twelve months in conjunction with IP's upcoming issuance of securitized
debt. For more information, see "Liquidity and Capital Resources" of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 19 of this report.
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ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains estimates, projections and other forward-looking
statements that involve risks and uncertainties. Actual results or outcomes
could differ materially from those provided in the forward-looking statements as
a result of such important factors as: the outcome of state and federal
regulatory proceedings affecting the restructuring of the electric and gas
utility industries; the impacts of new laws and regulations on Illinova and its
subsidiaries relating to restructuring, environmental and other matters; the
effects of increased competition on the utility businesses; risks of owning and
operating a nuclear facility; changes in prices and cost of fuel; factors
affecting non-utility investments, such as the risk of doing business in foreign
countries; construction and operation risks; and increases in financing costs.
All forward-looking statements are based upon information presently available,
and Illinova and IP assume no obligation to update any forward-looking
statements.
Reference is made to the Notes to the Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations presented in Illinova's 1997 Annual Report to Shareholders (included
in the Proxy Statement), the Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented in IP's 1997 Annual Report to Shareholders (included in the
Information Statement), and Illinova's and IP's Form 10-K for the year ended
December 31, 1997 and Illinova's and IP's Report on Form 10-Q for the quarters
ended March 31 and June 30, 1998, and Illinova's and IP's 1998 Form 8-K filings.
ILLINOVA SUBSIDIARIES
IP, a subsidiary of Illinova, engages in the generation, transmission,
distribution and sale of electric energy and the distribution, transportation
and sale of natural gas in the State of Illinois. IP has publicly traded
preferred shares outstanding but its common stock is wholly-owned by Illinova.
IGC is a wholly-owned independent power subsidiary of Illinova and invests
in energy supply projects throughout the world. IGC's strategy is to invest in
and develop "greenfield" power plants, acquire existing generation facilities
and provide power plant operations and maintenance services.
IEP is a wholly-owned subsidiary of Illinova. IEP develops and markets
energy-related services to the unregulated energy market throughout the United
States and engages in the brokering and marketing of electric power and gas.
IIC is a wholly-owned subsidiary of Illinova and was licensed by the State
of Vermont as a captive insurance company. The primary business of IIC is to
insure certain risks of Illinova and its subsidiaries.
IBE is a wholly-owned subsidiary of Illinova and was created to account for
miscellaneous business activities not regulated by the ICC or the Federal Energy
Regulatory Commission (FERC) and not falling within the business scope of other
Illinova subsidiaries.
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LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES AND REQUIREMENTS
Cash flows from operations during the first nine months of 1998,
supplemented by external financing, were sufficient to meet ongoing operating
requirements and to service existing common and preferred stock dividends, debt
requirements, IP's construction requirements and Illinova's investments in its
subsidiaries. However, Illinova's and IP's liquidity has decreased as a result
of higher than expected replacement power costs and higher Clinton costs
combined with lower revenues caused by the rate reduction mandated by P.A.
90-561 and lower than anticipated subsidiary earnings.
Illinova expects to use cash flows, supplemented by external financing, to
meet operating requirements and to continue to service existing debt, IP's
preferred and Illinova common stock dividends, IP's sinking fund requirements
and Illinova's and IP's anticipated subsidiary investments and construction
requirements for the remainder of 1998.
On January 28, 1998, Illinova issued $40 million of 6.46% medium-term notes
due October 1, 2002 under an existing $300 million shelf registration statement.
On September 9, 1998 Illinova issued an additional $30 million of 6.15%
medium-term notes due September 10, 2001 under the same shelf registration.
Illinova currently has authority to issue an additional $130 million in debt
securities under this shelf registration. Illinova's $110 million revolving
credit agreement is subject to termination if Clinton is not operational by
January 31, 1999. In anticipation of this possibility, Illinova has initiated
action to replace this revolving credit agreement with a new facility. There is
no assurance that this can be done on terms as favorable as the current
agreement. IP pays Illinova dividends on the IP common stock held by Illinova to
provide Illinova cash for operations. IP also is allowed to periodically
repurchase its common stock from Illinova in accordance with authority granted
by the ICC, contingent on IP meeting certain cash flow tests. Although IP
currently satisfies this cash flow test, it is anticipated that it will not
satisfy the test at year-end 1998 and for a portion of 1999. This test failure
will not impact the ability to repurchase Illinova equity shares using
securitization proceeds. Illinova's current $130 million capacity under the
existing shelf registration should meet its cash requirements through the first
quarter of 1999. Illinova is developing additional financial capabilities to
meet future needs.
IP issued a redemption notice for all outstanding bonds of its 6.00%
Pollution Control First Mortgage Bonds due 2007 ($18.7 million) and its 8.30%
Pollution Control First Mortgage Bonds due 2017 ($33.8 million). Both series
were called April 1, 1998. On March 6, 1998, IP issued $18.7 million of 5.40%
Pollution Control Mortgage Bonds due 2028 and $33.8 million of 5.40% Pollution
Control Mortgage Bonds due 2028. On May 8, 1998, IP filed an SEC Form S-3
registration for a $200 million debt shelf authorization. This debt shelf became
effective May 27, 1998. On July 21, 1998, IP issued $100 million of 6.25%
Mortgage Bonds due 2002 against this registration. On September 16, 1998, IP
issued $100 million of 6.00% Mortgage Bonds due 2003 against this same shelf
registration. On September 28,1998, IP issued a call notice on the 6.60% Series
A Pollution Control Bonds due May 1, 2004. The bonds were called at par on
November 1, 1998.
IP's capital requirements for construction were approximately $190 million
and $131 million during the nine months ended September 30, 1998 and 1997,
respectively. Through 2000 IP plans to complete improvements in its generation
facilities including pollution control equipment, equipment to support use of
Powder River Basin coal and new combustion turbine peaking units. These
improvements will cost approximately $300 million. In addition to these
investments, IP will be required to deposit $62 million in cash with the IP Fuel
Company Trustee for noteholders and take title to the partially depleted nuclear
fuel in the reactor at Clinton Power Station on March 2, 1999 if Clinton does
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not return to service by January 31, 1999. IP currently has the authority to
issue $250 million in long-term debt and $500 million in short-term debt, which
includes $350 million in committed bank lines of credit. Of these authorized
amounts, IP has $128 million in remaining capacity that may be utilized to issue
commercial paper and extend floating rate notes. IP anticipates that this
liquidity will be sufficient to address its requirements into the second quarter
of 1999. IP is developing additional financial capabilities to meet future
needs.
On June 24, 1998, IP filed an application with the ICC seeking approval for
securitization notes totaling $864 million. This represents 25% of the company's
capitalization at December 31, 1996 as allowed by the 1997 Electric Utility
Transition Funding law. The proceeds from these notes will be used to lower IP's
cost of capital by repurchasing stock and retiring debt. The ICC approved and
issued the Transitional Funding Order on September 10, 1998. On September 16,
1998, IP filed a shelf registration statement on Form S-3 with the SEC. On
September 30, 1998, the Internal Revenue Service issued a private letter ruling
to IP holding that, among other things, the notes will be obligations of IP for
federal income tax purposes. Interest paid on the notes generally will be
taxable to a United States Noteholder as ordinary interest income.
Presently, IP's mortgage bonds are rated Baa1 by Moody's, BBB+ by Duff &
Phelps and BBB by Standard & Poor's. IP's preferred stock is rated Baa2 by
Moody's and BBB- by both Duff & Phelps and Standard & Poor's. Illinova's senior
and medium-term notes have a rating of Baa3 from Moody's and BBB- from Standard
& Poor's. On July 6, 1998, a change in outlook was issued. The outlook from
Moody's changed from stable to negative and the outlook from Standard & Poor's
changed from positive to stable.
To avoid any possible constraint imposed by Federal or State laws as
discussed above, on October 14, 1998, the Board of Directors declared IP
preferred stock dividends for the first quarter of 1999 and declared IP common
stock dividends which were paid in November totaling $.62 per share.
ACCOUNTING MATTERS
For further information on accounting issues, see "Accounting Matters"
under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial
Statements" on page 13 of this report.
CLINTON POWER STATION
In September 1996, a leak in a recirculation pump seal caused IP operations
personnel to shut down Clinton. Clinton has not resumed operation.
In January 1997 and again in June 1997, the Nuclear Regulatory Commission
(NRC) named Clinton among plants having a trend of declining performance. In
June 1997, IP committed to conduct an Integrated Safety Assessment (ISA) to
thoroughly assess Clinton's performance. The ISA was conducted by a team of 30
individuals with extensive nuclear experience and no substantial previous
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involvement at Clinton. Their report concluded that the underlying reasons for
the performance problems at Clinton were ineffective leadership throughout the
organization in providing standards of excellence, complacency throughout the
organization, barrier weaknesses and weaknesses in teamwork. In late October, a
team commissioned by the NRC performed an evaluation to validate the ISA
results. In December, this team concluded that the findings of the ISA
accurately characterized Clinton's performance deficiencies and their causes.
On January 5, 1998, IP and PECO Energy Company (PECO) announced an
agreement under which PECO will provide management services for Clinton.
Although a PECO team will help manage the plant, IP continues to maintain the
operating license for Clinton and retain ultimate oversight of the plant. PECO
employees have assumed senior positions at Clinton, but the plant will remain
primarily staffed by IP employees. IP made this decision based on a belief that
bringing in PECO's experienced management team would be the most efficient way
to get Clinton back on line and operating at a superior level as quickly as
possible.
On January 21, 1998, the NRC placed Clinton on its Watch List of nuclear
plants that require additional regulatory oversight because of declining
performance. Twice a year the NRC evaluates the performance of nuclear power
plants in the United States and identifies those which require additional
regulatory oversight. Once placed on the Watch List, a plant must demonstrate
consistent improved performance before it is removed from the list. The Watch
List issued on July 29, 1998 still included Clinton. The NRC will monitor
Clinton more closely than plants not on the Watch List. This may include
increased inspections, additional required documentation, NRC-required approval
of processes and procedures and higher-level NRC oversight.
On February 19, 1998, IP filed Clinton's Summary Plan for Excellence with
the NRC. The Plan for Excellence provides a comprehensive set of strategies and
associated actions necessary to improve performance, permit safe restart of the
plant and achieve excellence in operations. IP is implementing the actions
required prior to plant restart. This recovery/restart program to get Clinton
back online is going through a formal parallel review process by the NRC.
The NRC has advised IP that it must submit a written report to the NRC at
least two weeks prior to restarting Clinton, giving the agency reasonable
assurance that IP's actions to correct recurring weaknesses in the corrective
action program have been effective. After the report is submitted, the NRC staff
will meet with IP's management to discuss the plant's readiness for restart.
IP announced October 19, 1998 that it now appears likely the plant's
restart will be after the first of the year. Moving restart into next year will
increase the expense for the station's recovery process. IP currently expects
Clinton's 1998 operating and maintenance expenses to be at least $88 million
more than Clinton's 1997 expenses, totaling approximately $210 to $215 million
for 1998.
The prolonged outage at Clinton is having an adverse effect on Illinova's
and IP's financial condition, through higher operating and maintenance and
capital costs, lost opportunities to sell energy, and replacement power costs.
The magnitude of these costs and lost opportunities is unknown because of
uncertainty regarding the timing of Clinton's return to service, the ultimate
cost of restart and uncertain market conditions. If Clinton is not back in
service by the end of January 1999, IP must deposit $62 million with the IP Fuel
Co. Trustee for noteholders for the acquisition of core fuel from IP Fuel Co.
Previously disclosed earnings expectations are subject to the effects of these
uncertainties and changes.
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REGULATORY MATTERS
RATE REDUCTION FILING
IP submitted written filings with the ICC in June 1998 to begin the process
of implementing a 15 percent residential rate reduction effective August 1,
1998. On July 22, 1998, IP filed a plan with the ICC for a one time reduction in
residential and small commercial customers' electric bills of approximately 7.5
percent for the month of August in consideration of their energy conservation
efforts this summer. The reduction was in addition to the 15 percent residential
rate reduction that was effective August 1, 1998 and had the effect of beginning
the 15 percent residential electric rate reduction two weeks early.
ATTORNEY GENERAL COMPLAINT
On July 17, 1998, a complaint against IP was filed at the ICC by the
Illinois State Attorney General. The complaint alleges that IP failed to meet
its statutory obligations to provide adequate and reliable service in connection
with this summer's electric supply situation (for further disclosure, see "Power
Supply and Reliability" on pages 25-26). It asks the ICC to conduct a management
audit of IP and seeks an order requiring IP to offer compensation to customers
for voluntary conservation and service interruptions. The Company believes it
can effectively defend itself against these allegations, however, the outcome at
this point is uncertain.
SOYLAND POWER COORDINATION AGREEMENT
The FERC approved an amended Power Coordination Agreement (PCA) between
Soyland and IP in July 1997. Under the amended PCA, Soyland was allowed to
prepay an Elected Capacity Reduction Fee associated with a unilateral reduction
in its base capacity charge under the PCA. In December 1997, Soyland signed a
letter of intent to pay in advance the remainder of its base capacity charges in
the PCA. Soyland obtained the necessary financing and regulatory approvals
during the second quarter of 1998. During the first quarter of 1998, IP received
$30 million from Soyland and the remaining $40 million was received during the
second quarter of 1998. The prepayment has been deferred and is being recognized
as interchange revenue evenly over the initial term of the PCA which is from
September 1, 1996 through August 31, 2006.
UNIFORM FUEL ADJUSTMENT CLAUSE (UFAC)
Previously, IP's rate schedules contained provisions for passing through to
its electric customers increases or decreases in the cost of energy provided to
its native load customers under the UFAC. Such costs included fuel and allowable
fuel transportation costs, emission allowance costs, DOE spent fuel disposal
fees and costs of power purchased to serve native load. On March 6, 1998, IP
filed with ICC the necessary documents required for elimination of the UFAC.
This established a new base fuel cost recoverable in IP's electric tariffs
effective on the date of the filing. As provided in P.A. 90-561, the new base
fuel cost is 1.287 cents per kwh, which is equal to 91 percent of IP's average
prudent and allowable fuel and purchased power supply costs in the two most
recent years for which the ICC has approved the level of recovery. Every year
UFAC cost recoveries are audited by the ICC in a reconciliation proceeding in
which they may be adjusted upward for actual costs not recovered, or downward
through a disallowance of costs incurred. By opting out of the UFAC, IP
eliminated exposure for potential disallowed fuel and purchased power costs for
periods after December 31, 1996, as those years will no longer be subject to the
ICC's annual reconciliation proceeding. This change will prevent IP from
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automatically passing through increases in cost and will expose IP to the risks
and opportunities of price volatility in the marketplace. Whether electric
energy costs will continue to be recovered in revenues from customers will
depend on a number of factors, including the number of customers served, demand
for electric service and changes in fuel cost components. These variables may be
influenced, in turn, by market conditions, availability of generating capacity,
future regulatory proceedings and environmental protection costs, among other
things.
DEREGULATION RULEMAKINGS AND TARIFFS
As a result of P.A. 90-561, ICC rulemakings are underway covering issues
such as affiliated interests and reliability. These regulatory proceedings,
alone or in combination, could significantly impact how IP operates and is
organized, but they are not likely to have a material impact on financial
results.
Under the new rules, Illinois utilities must keep records identifying
service interruptions experienced by each customer. Illinois utilities must also
file an annual report detailing the reliability of its service and explaining
its plans for reliability improvements. In addition, each utility must also
report the number and causes of service interruptions that were due to causes
within the utility's control. Outage targets were established for service to
individual customers and for system performance.
OPEN ACCESS AND COMPETITION
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with the FERC for all approvals necessary to create and
implement the Midwest Independent Transmission System Operator, Inc. (MISO). On
September 16, 1998, the FERC issued an order authorizing the creation of a MISO.
The MISO must now elect a seven-person independent board of directors within
seventy five days of approval. The goals of this joint undertaking are to: 1)
put in place a tariff allowing easy and nondiscriminatory access to transmission
facilities in a multi-state region, 2) enhance regional reliability and 3)
establish an entity that operates independently of any transmission owner(s) or
other market participants, thus furthering competition in the wholesale
generation market consistent with the objectives of the FERC's Order No. 888.
Since January 1998, four other transmission-owning entities joined the MISO.
Participation in an ISO by utilities was one of the requirements included in
P.A. 90-561 enacted in 1997. The MISO has a stated goal to begin limited
operation in 1999, and to be fully operational in the year 2000.
See "Open Access and Competition" under "Regulatory and Legal Matters" of
the "Notes to Consolidated Financial Statements" on page 12 of this report for
additional information.
YEAR 2000 DATA PROCESSING
In November 1996, Illinova deployed a project team to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no effect on
customers or disruption to business operations.
These actions are necessary to ensure that systems and applications will
recognize and process coding for the year 2000 and beyond. Major areas of
potential business impact have been identified. Illinova has inventoried 99% of
its systems. Assessment of systems and processes was completed in October 1998.
Implementation efforts are approximately 34% complete. Illinova also is
communicating with third parties with whom it does business to facilitate
continued business operations.
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The cost of achieving year 2000 compliance is estimated to be approximately
$20.4 million through 1999. The amount expended as of October 31, 1998 is $6.4
million which has been charged to expense. Contingency plans for operating
without year 2000 compliance have not been developed. Such activity is expected
to begin in the fourth quarter of 1998, but exact timing will depend on
assessment of progress. Project completion for Illinova is planned for the
fourth quarter of 1999 for Illinova overall. For IP alone, the project is
scheduled to be virtually complete by mid year 1999.
If Illinova, IP or critical interfacing third parties' year 2000 efforts
are unsuccessful, some or all of Illinova's and IP's commercial and operational
activities could be interrupted for an indefinite time. In addition to monetary
loss, equipment could be damaged and public safety impaired. It is uncertain
whether such damage would be catastrophic or minimal. It is impossible to assess
third party performance beyond Illinova's and IP's control.
DIVERSIFIED BUSINESS ACTIVITIES
IGC, a wholly-owned subsidiary of Illinova, invests in energy-related
projects throughout the world. Prior to the fourth quarter 1998, IGC owned 50
percent of the North American Energy Services Company (NAES) and in October
1998, IGC purchased the remaining 50 percent. NAES supplies a broad range of
operations, maintenance and support services to the world-wide independent power
generation industry and operates the Tenaska generation plants in which IGC has
an equity interest.
ENVIRONMENTAL MATTERS
GAS MANUFACTURING SITES
See "Manufactured Gas Plant Sites" under "Regulatory and Legal Matters" of
the "Notes to Consolidated Financial Statements" on page 16 of this report.
NITROGEN OXIDE
On September 24,1998, the Administrator of the US Environmental Protection
Agency signed a final rule (commonly known as the NOx SIP Call) requiring 22
States and the District of Columbia to submit State implementation plans that
address the regional transport of ground-level ozone through reductions in
nitrogen oxides (NOx). The rule imposes an ozone-season NOx tonnage cap on each
state. States have the ability to choose their NOx emission reduction strategy;
however, utility and large industrial sources are the most likely targets for
reductions. The State reduction plans are required by September, 1999 and NOx
emission reduction measures must be in place by May 1, 2003. Utility NOx
emissions are expected to be capped based on a NOx limit of 0.15 pounds per
million Btu of heat input; this is equivalent to an 85% reduction in utility
sector NOx emissions. IP's preliminary estimate to comply with the anticipated
utility NOx limit is $129 to $140 million beyond the $97.5 million cost of the
Phase II Acid Rain NOx reduction requirements. The NOx SIP Call is expected to
be challenged by utility and industrial organizations as well as several states.
EMISSION ALLOWANCE EXCHANGES
The value of emission allowances expected to be given up in future periods
as the result of exchange agreements was recorded in the third quarter 1998 at
the current market price and a liability of $9.8 million was recognized. This
obligation will be adjusted as price fluctuates until the allowances are
surrendered.
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GLOBAL WARMING
On December 11, 1997, international negotiations to reduce greenhouse gas
emissions concluded with the adoption of the Kyoto Protocol. This Protocol
requires the United States to reduce greenhouse gas emissions to 7% below 1990
levels during the years 2008 through 2012 and to make further reductions
thereafter. This Protocol must be ratified by the United States Senate. United
States Senate Resolution 98 (passed 95-0) indicates the Senate would not ratify
an agreement that fails to involve all countries or would damage the United
States economy. Ratification will be a major political issue since the Protocol
does not contain key elements that Senate Resolution 98 said would be necessary
for ratification. It is anticipated that ratification will not occur in 1998.
IP will face major changes in how it generates electricity if the Kyoto
Protocol is ratified, or if the Protocol's reduction goals are incorporated into
other environmental regulations. IP would have to repower some generating units
and change from coal to natural gas in other units to reduce greenhouse gas
emissions. IP estimates that compliance with these proposed regulations may
require significant capital outlays and an increase in annual operating expenses
which could have a material adverse impact on Illinova and IP.
POWER SUPPLY AND RELIABILITY
Electricity was in short supply throughout Illinois and Wisconsin this
summer because of an unusually high number of plant outages in this region. IP
was able to secure generation and transmission capacity in order to guard
against disruptions in service. IP took additional steps to avoid potential
shortages, including inspecting and upgrading transmission lines and equipment,
readying emergency procedures and restarting two plants that were in
cold-shutdown. Expenses incurred as a result of the shortage of electricity this
summer have had a material adverse impact on Illinova and IP.
IP experienced unprecedented and unexpected prices for power purchases
during the last week of June 1998. Replacement power costs for the second
quarter of 1998 were $49 million higher than the second quarter of 1997 and $55
million higher through June 1998 as compared to 1997. In addition, during June
1998 IP recorded an accrual of $58.3 million for probable and reasonably
estimable losses on power sales commitments with scheduled third quarter 1998
delivery dates. The earnings impact of replacement power costs for the third
quarter of 1998 was in line with July 1998 projections. The ultimate amount of
1998 losses associated with power sales commitments and lost margin on sales to
native load customers was largely the result of factors influencing the price of
purchased power such as regional weather, regional generation capacity, market
conditions including prices and liquidity, generation and transmission
availability as well as factors affecting IP's generating and transmission
capacity. In addition, IP is subject to future price and capacity risk related
to electric power supply contracts for the years 1999 and 2000. In the fourth
quarter of 1998, IP expects to accrue an additional amount of approximately $20
million to provide for other 1999 and 2000 sales agreements that it previously
expected to fulfill through IP generation.
The ultimate financial impact of these contracts will depend on market
conditions and IP's system availability. IP will continue to review its
accounting treatment of these commitments as further guidance is issued by the
EITF regarding issue 98-10, "Accounting for Energy Trading and Risk Management
Activities." See discussion of EITF 98-10 under "Accounting Matters" in the
"Notes To Consolidated Financial Statements" on page 15.
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On July 7, 1998, IP testified before the ICC and July 8, 1998 before the
Environment and Energy Committee of the Illinois House of Representatives with
regard to the electric supply problems of late June and IP's supply plans for
the rest of the summer. IP stated it was monitoring power plant maintenance and
transmission system preparation. In the third quarter, in response to the summer
supply situation, IP increased MWH generation 16.4 percent compared to the same
quarter of 1997 by running selected plants at peak and re-activating oil-fired
generating plants previously placed in cold shutdown.
In addition to having Clinton back in service, IP expects to have more than
400 megawatts of additional generation on line for the summer of 1999. That
includes approximately 235 megawatts from five oil-fired units being brought up
from cold shutdown and 176 megawatts from four natural gas turbines that IP
plans to install before next summer. Total cost for the two projects is
estimated at $87 million. IP also plans to refurbish nine gas turbines already
in service at a cost of $13 million. At a public ICC proceeding on reliability
on October 4, 1998, IP said that, even though it expects Clinton to be available
by summer 1999, for purposes of advance coverage of anticipated summer demand it
is using the assumption that Clinton will not be operating. Options being
considered include various demand side management initiatives, power purchases
and selected financial and insurance products.
At an ICC proceeding on reliability October 4, 1998, IP said that, even though
it expects Clinton to be available by summer 1999, for purposes of covering
anticipated summer demand, it is assuming that Clinton will not be operational.
Various demand side management initiatives, power purchases, and financial and
insurance products are being used or reviewed as approaches to reduce the risk
of supply shortage.
26
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RESULTS OF OPERATIONS
THREE MONTHS ENDED September 30, 1998 AND 1997
Electric Operations - Electric revenues for the third quarter of 1998
decreased $2.0 million compared to the third quarter of 1997 primarily due to
the 15% residential rate decrease mandated by deregulation legislation and
effective August 1, 1998. Also contributing to the decrease in revenue was the
one-time August billing rate reduction of 7.5% for residential and small
commercial customers. Electric interchange revenues increased $223.8 primarily
due to increased activity on the interchange market. Power purchased increased
$243.5 million also due to increased activity on the interchange market and
expected losses on future contract obligations. During the quarter, fuel for
electric plants increased $7.0 million due a to 7.3% increase in equivalent
availability for fossil plants, higher fuel prices and the elimination of the
Uniform Fuel Adjustment Clause. For more information, see "Uniform Fuel
Adjustment Clause" under "Regulatory Matters" of the "Management's Discussion
and Analysis" on page 22 of this report. These factors combined to decrease
electric margin $28.7 million for the quarter.
Kilowatt hour (kwh) sales to ultimate consumers increased 8.8% for the
quarter due to increases of 13.0% and 7.6% in the residential and the commercial
markets, respectively. Cooling degree days increased approximately 27.9% from
1997 which contributed to the increase in sales to the temperature-sensitive
markets.
For the third quarters of 1998 and 1997, Clinton was unavailable due to the
continued outage which began September 6, 1996. The equivalent availability for
IP's coal-fired plants was 87.3% and 80.0% for the three months ended September
30, 1998 and 1997, respectively. The higher equivalent availability for the
fossil plants in 1998 was primarily due to running selected plants at peak in
response to power supply shortages.
Gas Operations - For the quarter, gas margin decreased $0.8 million. Gas
revenues decreased $3.6 million despite a 18.4% increase in therm sales
(excluding transport) due to lower gas prices. Gas purchased costs decreased
$2.8 million also due to low gas prices.
Operation and Maintenance Expenses - Of the 1998 third quarter increase of
$31.7 million, approximately $24 is due to higher operating and maintenance
expenses associated with the Clinton outage. For more information, see "Clinton
Power Station" of the "Management's Discussion and Analysis" on pages 20-21 of
this report. The remaining $8 million increase is largely due to reactivating
oil-fired plants from cold shutdown and increased maintenance to the
transmission and distribution system related to reliability.
Diversified enterprises - Due primarily to decreased power trading activity
at IEP and for all market participants, diversified enterprise revenues
decreased $236.7 million for the third quarter of 1998, which was offset by a
decrease in diversified enterprise expenses of $237.9 million.
Earnings per Common Share - The earnings per common share for Illinova
during the third quarter of 1998 and 1997 resulted from the interaction of all
of the factors discussed herein.
27
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RESULTS OF OPERATIONS
NINE MONTHS ENDED September 30, 1998 AND 1997
Electric Operations - Electric revenues for the first nine months of 1998
decreased $4.8 million compared to the first nine months of 1997 due to
decreased sales to residential and commercial customers during the first quarter
of the year and the 15% residential rate decrease mandated by deregulation
legislation and effective August 1, 1998. Also contributing to the decrease in
revenue was the one-time August billing rate reduction of 7.5% for residential
and small commercial customers. Electric interchange revenues increased $352.7
million primarily due to increased activity on the interchange market. Power
purchased increased $488.6 million due to unprecedented and unexpected power
prices and regional power supply shortages which resulted in higher than
expected power supply costs. Year-to-date figures include a loss of
approximately $58.3 million on power sales commitments delivered during the
third quarter and expected losses on future contract obligations. During the
first nine months of 1998, Fuel for Electric Plants increased $19.1 million as a
result of running peaking units and reactivation of oil-fired plants from cold
shutdown. For more information, see "Uniform Fuel Adjustment Clause" under
"Regulatory Matters" of the "Management's Discussion and Analysis" on page 22 of
this report and "Power Supply and Reliability" under the "Management's
Discussion and Analysis" on pages 25-26. These factors combined to decrease
electric margin $159.8 million for the nine months ended September 30, 1998.
Kilowatt hour (kwh) sales to ultimate consumers increased 3.2% for the nine
months ended September 30, 1998 due to increases of 6.3% and 3.3% in the
residential and the commercial markets, respectively.
For the nine months ended September 30, 1998 and 1997, Clinton was
unavailable due to the continued outage which began September 6, 1996. The
equivalent availability for IP's coal-fired plants was 84.1% and 73.4% for the
nine months ended September 30, 1998 and 1997, respectively. The lower
equivalent availability for the fossil plants in 1997 was primarily due to the
fire and subsequent shut-down of the Wood River fossil station in December 1996.
Gas Operations - For the nine months ended September 30,1998, gas margin
decreased $24.4 million. Gas revenues decreased $61.3 million due to low gas
prices and a 12.7% decrease in therm sales (excluding transport) caused by mild
weather. Gas purchased costs decreased $36.9 million due to the lower
consumption and lower gas prices.
Operation and Maintenance Expenses - The increase for the first nine months
of 1998 of $90.2 million is primarily due to higher operating and maintenance
expenses associated with the Clinton outage. For more information, see "Clinton
Power Station" of the "Management's Discussion and Analysis" on pages 20-21 of
this report.
Diversified enterprises - Due primarily to decreased power trading activity
at IEP, diversified enterprise revenues decreased $295.7 million for the first
nine months of 1998, which was offset by a decrease in diversified enterprise
expenses of $317.4 million.
Earnings per Common Share - The earnings per common share for Illinova
during the third quarter of 1998 and 1997 resulted from the interaction of all
the factors discussed herein.
28
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PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
See "Notes to Consolidated Financial Statements" in Part I for a discussion
of certain legal proceedings related to manufactured gas plant sites.
See "Management's Discussion and Analysis" in Part I for a discussion of
certain legal proceedings related to regulatory matters.
Currently, commercial reprocessing of spent nuclear fuel is not allowed in
the U.S. The Nuclear Waste Policy Act of 1982 (NWPA) was enacted to establish a
government policy with respect to disposal of spent nuclear fuel and high-level
radioactive waste. On June 20, 1994, IP, along with other utilities and state
utility commissions, filed an action in the D.C. Circuit Court of Appeals asking
the Court to rule that the Department of Energy (DOE) is obligated to take
responsibility for spent nuclear fuel by January 31, 1998 under the NWPA. The
utilities asked the Court to confirm the DOE's commitment and to order the DOE
to develop a compliance program with appropriate deadlines. The utilities also
asked for relief from the ongoing funding requirements or to have an escrow
account established for future funds paid to DOE. Subsequently, the petition was
amended to seek, in addition, relief in the form of specific performance.
A three-judge panel ruled in July 1996 that the DOE's obligation to take
spent fuel, by the January 1998 date specified in the NWPA, is binding and
unconditional. The DOE notified utilities in December 1996 that it may not be
able to meet the 1998 deadline, and solicited utility suggestions on how to
accommodate the potential delay. In January 1997, petitions were filed in the
D.C. Circuit Court of Appeals by IP and other utilities and state utility
commissions, seeking further enforcement of DOE's obligation. In response, the
Court has reaffirmed its ruling that the DOE obligation is unconditional, but
has not granted injunctive relief. This means that the Court has found the DOE
in breach of DOE's obligation but has not literally ordered the DOE to perform.
On May 5, 1998, the court issued another order denying all motions before it on
the basis that the various requests for relief were either beyond the scope of
that court's jurisdiction or premature. This reaffirmed its earlier ruling that
the DOE has an unconditional statutory obligation to perform, and offering
relief if contract remedies imposed by a different court are inconsistent with
this statutory duty.
IP has on-site storage capacity that will accommodate its spent fuel
storage needs until the year 2007, based on operating levels with Clinton in
production. If by that date the DOE has not complied with its statutory
obligation to dispose of spent fuel, and IP has continued to operate the plant,
IP will have to use alternative means of disposal, such as dry storage in casks
on site or transportation of the fuel rods to private or collectively-owned
utility repositories. IP is currently an equity partner with seven other
utilities in an effort to develop a private temporary repository. Attempts to
reach agreement with the Mescalaro Apache Tribe of New Mexico ended in early
1996; however, the group signed a lease in December 1996 with the Goshute Tribe
to use land on its Utah reservation. A spent fuel storage license was filed with
the NRC in 1997, initiating a process which will take the NRC up to three years
to complete. Continued participation in the partnership will depend on the
technological and economic viability of the project. Safe, dry, on-site storage
is technologically feasible, but is subject to licensing and local permitting
requirements, for which there may be effective opposition.
29
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed with this 10-Q are listed on the Exhibit Index.
(b) Reports on Form 8-K since June 30, 1998:
Report filed on Form 8-K on July 6, 1998
Other Events: Illinova announces
significantly higher replacement power
costs and lower earnings projections.
Report filed on Form 8-K on July 15, 1998
Item 7, Exhibits: Press release
Illinova releases 1998 second
quarter earnings and provides
earnings outlook for 1998.
Report filed on Form 8-K on October 20, 1998
Item 7, Exhibits: Press Release
Illinova releases 1998 third
quarter earnings, announces
revision in Clinton re-start
date and announces Treasury
Stock buyback authorization.
30
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOVA CORPORATION
(Registrant)
By /s/ Larry F. Altembaumer
---------------------------
Larry F. Altenbaumer
Chief Financial Officer
Treasurer and Controller
on behalf of
Illinova Corporation
Date: November 16, 1998
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOIS POWER COMPANY
(Registrant)
By /s/ Larry F. Altembaumer
---------------------------
Larry F. Altenbaumer
Senior Vice President and
Chief Financial Officer
on behalf of
Illinois Power Company
Date: November 16, 1998
32
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EXHIBIT INDEX
PAGE NO. WITHIN
SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
10 Material Contracts 34 - 69
27 Financial Data Schedule UT
(filed herewith)
33
<PAGE>
Exhibit 10 - Material Contracts
10a - Employment Contract
Charles E. Bayless
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521
Dear Mr. Bayless:
This letter is to confirm the terms of your employment with Illinova
Corporation.
1. Salary. Your annual base salary will be $560,000, subject to periodic
review to determine whether an increase is appropriate.
2. Bonus. You will be entitled to participate in the Executive Incentive
Compensation Plan. For 1998, you are guaranteed a minimum bonus of
$232,000, with an opportunity for a payment of up to $302,000 for the year.
After 1998, your bonus under the Executive Incentive Compensation Plan will
be $280,000 (which is 50% of your salary) if the target level of
performance is achieved, and your bonus will be $420,000 (which is 75% of
your salary) at the maximum achievement level.
3. Long-Term Incentive Award. For 1998, your entire long-term incentive award
will be in the form of a stock option, the terms of which are reflected in
the enclosed stock option agreement. After 1998, 70% of your long-term
incentive award will be made as a stock option grant, and the remaining 30%
will be made as performance share grant. Although the size of your future
long-term incentive awards has not yet been determined, I anticipate that
the value of your annual award would approximate 90% of your base salary.
4. Supplemental Pension. In lieu of participation in the Company's
Supplemental Executive Retirement Plan, you will be covered by the enclosed
Supplemental Pension Plan.
5. Retention Agreement. You will be covered by the enclosed Employee Retention
Agreement, which provides benefits in the event of a Change in Control.
6. Loan. To compensate you for amounts you have foregone by leaving Tucson
Electric Power Company to join Illinova Corporation, you will be entitled
to a loan from the Company of $500,000. The terms of the loan are reflected
in the enclosed letter and promissory note.
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<PAGE>
7. Lump Sum Death Benefits. If your death should occur while you are employed
by the Company, your surviving spouse (or, if she does not survive you, the
beneficiary designated by you) will be entitled to a lump sum death benefit
of two times the amount of your salary plus your target bonus at the time
of your death. In lieu of receiving this lump sum death benefit, your
surviving spouse may elect to receive the surviving spouse benefit under
the Supplemental Pension Plan. (If your spouse does not survive you, only
the death benefit described in this paragraph is payable. The Supplemental
Pension Plan does not provide for other survivor benefits.)
8. Termination. You may resign from the Company at any time for any reason,
and the Board of Directors of the Company may terminate your employment at
any time for any reason. At the time of your termination of employment, you
(or your estate) will be entitled to the compensation and benefits
specified in this letter and the enclosed material, as well as to the other
benefits you earned while employed by the Company, to the extent such
compensation and benefits are payable on your termination of employment.
You agree that, upon termination of employment for any reason, you will
resign from the Board of Directors of the Company and the subsidiaries.
If the foregoing reflects your understanding of the terms of your agreement
with the Company, please so indicate by signing and returning a copy of this
letter to the undersigned, along with a signed copy of each of the enclosures.
Very truly yours,
Illinova Corporation
Accepted and agreed to this
13th day of August, 1998.
Charles E. Bayless
35
<PAGE>
Exhibit 10 - Material Contracts
10b - Agreement to Make a Loan
Charles E. Bayless
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521
Dear Mr. Bayless:
This letter is to confirm our verbal agreement that Illinova
Corporation (the "Company") will loan you $500,000.00. The Company is making the
loan to compensate you for amounts you have foregone by leaving Tucson Electric
Power Company to join the Company. As a condition of receiving the loan, you
must sign and return one copy of this letter and the enclosed promissory note.
As indicated in the promissory note, 20% of the principal amount of the
loan will be forgiven on each of the first through fifth anniversaries of July
6, 1998, if you are employed by the Company on such anniversary. Also, as of
each such anniversary, the entire amount of interest accrued on the outstanding
principal during the prior one-year period shall be forgiven.
As of each anniversary, the amount of the forgiveness of principal or
interest on that date will be taxable income to you. As of each date on which
the forgiveness occurs, you will become entitled to a tax gross-up payment from
the Company in an amount equal to the aggregate of the additional Federal, state
and local income taxes payable by you by reason of the forgiveness of the
interest amount (but not by reason of the forgiveness of the principal amount),
and by reason of your receipt of the gross-up payment.
If, prior to December 31, 1999, your employment is terminated by the
Company for reasons other than Cause, the amount of any outstanding balance of
principal and interest will be forgiven, and you will become entitled to a tax
gross-up payment in an amount equal to the aggregate of the additional Federal,
state and local income taxes payable by you by reason of the forgiveness of the
interest amount (but not by reason of the forgiveness of the principal amount),
and by reason of your receipt of the gross-up payment. However, if your
employment is terminated (i) prior to December 31, 1999 by the Company for
Cause, (ii) prior to December 31, 1999 by reason of your death, disability,
voluntary resignation or any other reason, except by the Company other than for
Cause, or (iii) for any reason on or after December 31, 1999, then the amount of
any outstanding balance of principal and interest will become immediately due
and payable. After termination of your employment, if amounts are due from you
to repay the loan, and such amounts are otherwise unpaid, the Company retains
36
<PAGE>
the right to offset such liability against amounts otherwise due to you from the
Company.
If the foregoing reflects your understanding of the terms of your
agreement with the Company, please so indicate by signing and returning a copy
of this letter to the undersigned, along with a signed copy of each of the
enclosures.
Very truly yours,
Illinova Corporation
By:
Accepted and agreed to this
13th day of August, 1998.
Charles E. Bayless
37
<PAGE>
Exhibit 10 - Material Contracts
10c - Promissory Note
PROMISSORY NOTE
$500,000.00 August 13, 1998
Decatur, Illinois
FOR VALUE RECEIVED, the undersigned, Charles E. Bayless, an individual
(the "Employee"), promises to pay to the order of Illinova Corporation, an
Illinois corporation (the "Company"), on the date on which the Employee's
employment with the Company terminates (the "Maturity Date"), the principal sum
of $500,000.00 and any accrued interest on this Note, subject to the provisions
of this Note relating to forgiveness of such obligations.
This Note evidences obligations in connection with a loan made by the
Company to the Employee as part of the inducement to the Employee to become
employed by the Company.
The unpaid principal amount of this Note from time to time outstanding
shall bear interest at a rate per annum (based upon a 365/366 day year) equal to
the applicable Federal rate as of the August 13, 1998, as determined for
purposes of section 1274(d) of the Internal Revenue Code of 1986, as amended,
compounded annually. After the Maturity Date, any unpaid and unforgiven
principal amount and accrued unforgiven interest on the unpaid principal amount
of this Note shall be payable on demand.
As of each of the first five one-year anniversaries of July 6, 1998, if
the Employee is employed by the Company on such anniversary, an amount equal to
$100,000.00 of the principal amount due under this Note, together with the
amount of interest that has accrued with respect to the entire unpaid principal
and interest amount since the preceding July 6, shall be forgiven. If the
Employee's employment with the Company terminates prior to December 31, 1999,
and such termination is the result of being discharged by the Company for
reasons other than Cause, any remaining principal and interest shall be
forgiven. If the Employee's employment with the Company terminates (i) prior to
December 31, 1999 by the Company for Cause, (ii) prior to December 31, 1999 by
reason of the Employee's death, disability, voluntary resignation or any other
reason, except by the Company other than for Cause, or (iii) for any reason on
or after December 31, 1999, then any remaining principal and interest shall
become due and payable on the date of such termination of employment. For
purposes of this Note, the term "Cause" shall mean:
(a) the Employee's conviction of any criminal violation involving
dishonesty, fraud, or breach of trust,
38
<PAGE>
(b) the Employee's willful engagement in any misconduct in the
performance of the Employee's duty that materially injures the
Company,
(c) the Employee's performance of any act which, if known to the
shareholders or regulators of the Company or any of its
subsidiaries, would materially and adversely affect the business
of the Company or any of its subsidiaries, or
(d) the Employee's willful and substantial nonperformance of assigned
duties; provided that such nonperformance has continued more than
ten days after the Company has given written notice of such
nonperformance and of its intention to terminate the Employee's
employment because of such nonperformance.
Subject to the other terms and conditions hereof, the Employee may
voluntarily prepay all or any portion of the unpaid and unforgiven principal
amount of this Note from time to time outstanding and any accrued and unforgiven
interest thereon, without premium or penalty.
All payments of principal of and interest on this Note shall be payable
in lawful currency of the United States of America at Decatur, Illinois or such
other place as the Company shall designate to the Employee in writing, in cash
or by check. If payment hereunder falls due on a day which is either a Saturday,
Sunday or any other day on which banks in Decatur, Illinois are not generally
open for business to the public (i.e., not a "Business Day"), then such due date
shall be extended to the immediately succeeding Business Day, and additional
interest shall accrue and be payable for the period of any such extension.
The Employee agrees that if any of the following events of default
(each an "Event of Default") shall occur and be continuing:
(i) default in the performance or observance of any other agreements
of the Employee contained herein, or
(ii) the institution of any bankruptcy, insolvency, receivership or
similar proceeding relating to the Employee or his assets, and if
such case or proceeding is not commenced by the Employee, it is
consented to or acquiesced in by the Employee or remains for 60
days undismissed;
then the Company may declare this Note and all unpaid and unforgiven principal
of and interest on this Note and all accrued costs, expenses and other amounts
39
<PAGE>
under this Note to be due and payable, whereupon all unpaid and unforgiven
principal of and interest on this Note and all such costs, expenses and other
amounts shall immediately become due and payable following such declaration.
The Employee hereby represents and warrants to the Company as of the
date hereof (i) that this Note is the legally valid and binding obligation of
the Employee, enforceable against the Employee in accordance with its terms, and
(ii) that the execution, delivery and performance by the Employee of this Note
does not conflict with or contravene (a) any law, rule or regulation binding
upon the Employee or affecting any of the Employee's assets, (b) any provision
of any contract, instrument or agreement binding upon the Employee or affecting
any of the Employee's assets, or (c) any writ, order, judgment, decree or
decision of any court or governmental instrumentality binding upon the Employee
or affecting any of the Employee's assets.
All notices, certificates and other communications ("Notices")
hereunder shall be in writing and may be either delivered personally, by
nationally recognized express courier for overnight delivery, or by facsimile
(with request for assurance of receipt in a manner appropriate with respect to
communications of that type, provided that a confirmation copy is concurrently
sent by a nationally recognized express courier for overnight delivery) or
mailed, postage prepaid, by certified or registered mail, return receipt
requested, addressed as follows:
If to the Company: Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521
Attention: General Counsel
If to the Employee: Charles E. Bayless
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521
All notices hereunder shall be in writing (including, without
limitation, facsimile transmission) and shall be sent to the Employee or the
Company, as appropriate, at such party's address shown above, or at such other
address as such party may, by written notice received by the other party hereto,
have designated as its or his address for such purpose. Notices sent by
facsimile transmission shall be deemed to have been given when sent; notices
sent by mail shall be deemed to have been given five days after the date mailed
by registered or certified mail, postage prepaid; and notices sent by hand
delivery shall be deemed to have been given when received.
40
<PAGE>
This Note has been made and delivered at Decatur, Illinois and shall be
construed in accordance with and governed by the internal laws of the State of
Illinois. Wherever possible, each provision of this Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited by or invalid under applicable law,
such provision shall be ineffective to the least extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Note.
IN WITNESS WHEREOF, the Employee has caused this Note to be executed as
of the day and year first above written.
Charles E. Bayless
41
<PAGE>
Exhibit 10 - Material Contracts
10d - Agreement Concerning Supplemental Pension Plan
ILLINOVA CORPORATION
SUPPLEMENTAL PENSION PLAN
The Supplemental Pension Plan (the "Plan") is adopted effective July 6,
1998. The Plan is established and maintained by Illinova Corporation for the
purpose of providing benefits for the Participant, Charles E. Bayless.
Accordingly, Illinova Corporation hereby adopts the Plan pursuant to the terms
and provisions set forth below:
ARTICLE I
Definitions
Wherever used herein the following terms shall have the meanings
hereinafter set forth:
1.1 "Accrued Vested Benefit" of the Participant shall have the meaning
determined in accordance with Section 3.1.
1.2 "Board" means the Board of Directors of the Company.
1.3 "Cause" means:
(a) the Participant's conviction of any criminal violation involving
dishonesty, fraud, or breach of trust,
(b) the Participant's will engagement in any misconduct in the performance
of the Participant's duty that materially injures the Company,
(c) the Participant's performance of any act which, if known to the
shareholders or regulators of the Company or any of its subsidiaries,
would materially and adversely affect the business of the Company or
any of its subsidiaries, or
(d) the Participant's willful and substantial nonperformance of assigned
duties; provided that such nonperformance has continued more than ten
days after the Company has given written notice of such nonperformance
and of its intention to terminate the Participant's employment because
of such nonperformance.
1.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any regulations relating thereto.
42
<PAGE>
1.5 "Company" means Illinova Corporation, an Illinois corporation, or, to
the extent provided in Section 7.8 any successor corporation or other entity
resulting from a merger or consolidation into or with the Company or a transfer
or sale of substantially all of the assets of the Company.
1.6 "Earnings" of the Participant for any calendar month means the
Participant's accrued salary and bonus for that month and, for this purpose,
shall include any portion of such salary or bonus that would otherwise have been
includible for the month but is contributed by the Company on behalf of the
Participant pursuant to the Participant's election under a "qualified cash or
deferred arrangement" (as defined in section 401(k) of the Code) that is part of
any qualified profit sharing plan maintained by the Company. For purposes of
this definition, the Participant's bonus for any month is the bonus amount
earned under the Executive Incentive Compensation Plan (or any other successor
plan providing for an annual bonus) for that month. For each calendar year after
1998, the annual bonus shall be deemed to be earned evenly during each of the
months in which the Participant was employed by the Company during that year.
For each of the six months between July and December, 1998, the bonus amount
deemed to be earned in a month shall be 1/12th of $232,000 plus 1/6 of any
portion of the Participant's total annual bonus for 1998 that exceeds $232,000.
1.7 "Final Average Earnings" means the average of the Participant's monthly
Earnings during the 36 consecutive calendar months that produces the highest
average and that occurs during the last 60 calendar months ending with the
calendar month in which the Participant's employment with the Company
terminates. If the Participant total employment period with the Company is less
than 36 calendar months, his Final Average Earnings shall be determined by
averaging (on a calendar month basis) the Earnings received by him from the
Company during his entire period of employment.
1.8 "Normal Retirement Date" means the first day of the calendar month
coinciding with or next following the Participant's 65th birthday.
1.9 "Participant" means Charles E. Bayless.
1.10 "Plan" means the Illinova Corporation Supplemental Pension Plan.
1.11 "Qualified Plan" means the Illinois Power Company Retirement Income
Plan for Salaried Employees or any successor plan.
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1.12 "Qualified Plan Retirement Benefit" means the benefit payable to a
Participant pursuant to the Qualified Plan by reason of his termination of
employment with the Company for any reason other than death.
1.13 "Qualified Plan Surviving Spouse Benefit" means the benefit payable to
the Surviving Spouse of the Participant pursuant to the Qualified Plan in the
event of the death of the Participant at any time prior to commencement of
payment of his Qualified Plan Retirement Benefit.
1.14 "Supplemental Retirement Benefit" means the benefit payable to the
Participant pursuant to the Plan by reason of his termination of employment with
the Company for any reason other than death.
1.15 "Surviving Spouse" means a person who is married to the Participant at
the date of his death and for at least one year prior thereto.
1.16 "Supplemental Surviving Spouse Benefit" means the benefit payable to a
Surviving Spouse pursuant to the Plan.
1.17 The Participant's "termination" of employment with the Company shall
be deemed to occur on the day immediately following the date on which he is last
employed by the Company
1.18 Words in the masculine gender shall include the feminine and the
singular shall include the plural, and vice versa, unless qualified by the
context. Any headings used herein are included for ease of reference only, and
are not to be construed so as to alter the terms hereof.
ARTICLE II
Eligibility
The Participant shall be eligible to receive a Supplemental Retirement
Benefit to the extent provided in Article III of the Plan. If the Participant
dies prior to commencement of payment of his Qualified Plan Retirement Benefit,
the Surviving Spouse of the Participant shall be eligible to receive a
Supplemental Surviving Spouse Benefit to the extent provided in Article IV of
the Plan.
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ARTICLE III
Supplemental Retirement Benefit
3.1 Amount. The Supplemental Retirement Benefit payable to the Participant
in the form of a straight life annuity over the lifetime of the Participant
only, commencing on his Normal Retirement Date, shall be a monthly amount equal
to the excess of the amount described in paragraph (a) over the amount described
in paragraph (b) below:
(a) the Participant's Accrued Vested Benefit;
LESS
(b) the monthly amount of the Qualified Plan Retirement Benefit actually
payable to the Participant under the Qualified Plan.
The amounts described in (a) and (b) shall be computed as of the date of
termination of employment of the Participant with the Company in the form of a
straight life annuity payable over the lifetime of the Participant only
commencing on his Normal Retirement Date.
The Participant's "Accrued Vested Benefit" shall be determined in
accordance with the following:
(i) if the Participant's employment with the Company terminates for any
reason prior to January 1, 2000, his Accrued Vested Benefit shall be zero,
and he shall not be entitled to any benefits under the Plan;
(ii) if the Participant's employment with the Company terminates after
December 31, 1999 and prior to December 31, 2004, and the termination
occurs by reason of his being discharged by the Company for reasons other
than Cause, or if the Participant's employment with the Company terminates
on or after December 31, 2004 for any reason, the Participant's Accrued
Vested Benefit shall be equal to 40% of the Participant's Final Average
Earnings as of the date of his termination of employment; and
(iii) if the Participant's employment with the Company terminates after
December 31, 1999 and prior to December 31, 2004, and the termination
occurs for any reason other than his being discharged by the Company for
reasons other than Cause, the Participant's Accrued Vested Benefit shall be
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equal to 40% of the Participant's Final Average Earnings as of the date of
his termination of employment, multiplied by the vesting percentage
determined in accordance with the following schedule:
-------------------------------------- ----------------------------------
If the Participant's employment with The vesting percentage shall be:
the Company terminates during this
period:
-------------------------------------- ----------------------------------
On or after December 31, 2000, and 20%
before December 31, 2001
-------------------------------------- ----------------------------------
On or after December 31, 2001, and 40%
before December 31, 2002
-------------------------------------- ----------------------------------
On or after December 31, 2002, and 60%
before December 31, 2003
-------------------------------------- ----------------------------------
On or after December 31, 2003, and 80%
before December 31, 2004
-------------------------------------- ----------------------------------
After December 31, 2004 100%
-------------------------------------- ----------------------------------
Notwithstanding the foregoing provisions of this Section 3.2, the determination
of the Participant's benefits shall be subject to the provisions of paragraph 1
of the Employee Retention Agreement between the Company and the Participant
dated August 13, 1998, to the extent that such provisions are applicable by
their terms.
3.2 Form of Benefit. The Supplemental Retirement Benefit payable to the
Participant shall be paid in the same form under which the Qualified Plan
Retirement Benefit is payable to the Participant. The Participant's election
under the Qualified Plan of any optional form of payment of his Qualified Plan
Retirement Benefit shall also be applicable to the payment of his Supplemental
Retirement Benefit.
3.3 Commencement of Benefit. Payment of the Supplemental Retirement Benefit
to the Participant shall commence on the same date as payment of the Qualified
Plan Retirement Benefit to the Participant commences. Any election under the
Qualified Plan made by the Participant with respect to the commencement of
payment of his Qualified Plan Retirement Benefit shall also be applicable with
respect to the commencement of payment of his Supplemental Retirement Benefit.
3.4 Approval of Company. Notwithstanding the provisions of Sections 3.2 and
3.3 above, an election made by the Participant under the Qualified Plan with
respect to the form of payment of his Qualified Plan Retirement Benefit or the
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date for commencement of payment thereof shall not be effective with respect to
the form of payment or date for commencement of payment of his Supplemental
Retirement Benefit hereunder unless such election is expressly approved in
writing by the Company with respect to his Supplemental Retirement Benefit. If
the Company shall not approve such election in writing, then the form of payment
or date for commencement of payment of the Participant's Supplemental Retirement
Benefit shall be selected by the Company in its sole discretion. If benefits are
payable to the Participant under this Plan, but no benefits are payable to the
Participant under the Qualified Plan, the time and form of benefit shall be
selected by the Participant, subject to the consent of the Company, from among
the alternatives that would be available under the Qualified Plan (or such other
alternatives permitted by the Company).
3.5 Actuarial Equivalent. A Supplemental Retirement Benefit which is
payable in any form other than a straight life annuity over the lifetime of the
Participant, or which commences at any time prior to the Participant's Normal
Retirement Date, shall be the actuarial equivalent of the Supplemental
Retirement Benefit set forth in Section 3.1 above as determined by the same
actuarial adjustments as those specified in the Qualified Plan with respect to
determination of the amount of the Qualified Plan Retirement Benefit.
ARTICLE IV
Supplemental Surviving Spouse Benefit
4.1 Amount. If the Participant dies either:
(i) while employed by the Company; or
(ii) prior to commencement of payment of his Supplemental Retirement
Benefit under this Plan, but after his employment with the Company has
terminated with an Accrued Vested Benefit that is greater than zero;
then a Supplemental Surviving Spouse Benefit is payable to his Surviving Spouse
as hereinafter provided. The monthly amount of the Supplemental Surviving Spouse
Benefit payable to a Surviving Spouse shall be equal to the excess of the amount
described in paragraph (a) over the amount described in paragraph (b) below:
(a) the monthly amount of the Qualified Plan Surviving Spouse Benefit to
which the Surviving Spouse of the Participant would have been entitled
under the Qualified Plan, but determined by applying the Surviving
Spouse Benefit provisions of the Qualified Plan as though the amount
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<PAGE>
of the monthly benefit (payable in the form of a straight life annuity
commencing at the Participant's Normal Retirement Date) which the
Participant had earned on the date of his death had been equal to the
amount of his Accrued Vested Benefit (as defined in Section 3.1 of
this Plan);
LESS
(b) the monthly amount of the Qualified Plan Surviving Spouse Benefit
actually payable to the Surviving Spouse under the Qualified Plan.
Notwithstanding any other provision of the Plan, the Surviving Spouse shall
be entitled to benefits under this Section 4.1 only if she waives all rights to
receive the lump sum death benefits to which she would otherwise be entitled
under the provisions of the July 6, 1998 letter to the Participant from the
Company, with such waiver to be made within 90 days after the Participant's
death in accordance with the procedures established by the Company.
4.2 Form and Commencement of Benefit. A Supplemental Surviving Spouse
Benefit shall be payable over the lifetime of the Surviving Spouse only in
monthly installments commencing on the date for commencement of payment of the
Qualified Plan Surviving Spouse Benefit to the Surviving Spouse and terminating
on the date of the last payment of the Qualified Plan Surviving Spouse Benefit
made before the Surviving Spouse's death.
ARTICLE V
Administration of the Plan
5.1 Administration by the Company. The Company shall be responsible for the
general operation and administration of the Plan and for carrying out the
provisions thereof.
5.2 General Powers of Administration. All provisions set forth in the
Qualified Plan with respect to the administrative powers and duties of the
Company, expenses of administration and procedures for filing claims shall also
be applicable with respect to the Plan. The Company shall be entitled to rely
conclusively upon all tables, valuations, certificates, opinions and reports
furnished by any actuary, accountant, controller, counsel or other person
employed or engaged by the Company with respect to the Plan.
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ARTICLE VI
Amendment or Termination
The Plan may be amended or terminated at any time by the Board, provided
however that, notwithstanding any other provision of the Plan, no amendment or
termination that would adversely affect the rights of the Participant or his
Surviving Spouse (including, without limitation, his right to accrue future
benefits) may be made by the Company except with the written consent of the
Participant (or, in the event of his death, with the written consent of the
Surviving Spouse).
ARTICLE VII
General Provisions
7.1 Funding. The Plan at all times shall be entirely unfunded and no
provision shall at any time be made with respect to segregating any assets of
the Company for payment of any benefits hereunder. No Participant, Surviving
Spouse or any other person shall have any interest in any particular assets of
the Company by reason of the right to receive a benefit under the Plan and any
such Participant, Surviving Spouse or other person shall have only the rights of
a general unsecured creditor of the Company with respect to any rights under the
Plan.
7.2 General Conditions. Except as otherwise expressly provided herein, all
terms and conditions of the Qualified Plan applicable to a Qualified Plan
Retirement Benefit or a Qualified Plan Surviving Spouse Benefit shall also be
applicable to a Supplemental Retirement Benefit or a Supplemental Surviving
Spouse Benefit payable hereunder. Any Qualified Plan Retirement Benefit or
Qualified Plan Surviving Spouse Benefit, or any other benefit payable under the
Qualified Plan, shall be paid solely in accordance with the terms and conditions
of the Qualified Plan and nothing in this Plan shall operate or be construed in
any way to modify, amend or affect the terms and provisions of the Qualified
Plan.
7.3 No Guaranty of Benefits. Nothing contained in the Plan shall constitute
a guaranty by the Company or any other entity or person that the assets of the
Company will be sufficient to pay any benefit hereunder.
7.4 No Enlargement of Employee Rights. No Participant or Surviving Spouse
shall have any right to a benefit under the Plan except in accordance with the
terms of the Plan. Establishment of the Plan shall not be construed to give any
Participant the right to be retained in the service of the Company.
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<PAGE>
7.5 Spendthrift Provision. No interest of any person or entity in, or right
to receive a benefit under, the Plan shall be subject in any manner to sale,
transfer, assignment, pledge, attachment, garnishment, or other alienation or
encumbrance of any kind; nor may such interest or right to receive a benefit be
taken, either voluntarily or involuntarily, for the satisfaction of the debts
of, or other obligations or claims against, such person or entity, including
claims for alimony, support, separate maintenance and claims in bankruptcy
proceedings.
7.6 Applicable Law. The Plan shall be construed and administered under the
laws of the State of Illinois.
7.7 Incapacity of Recipient. If any person entitled to a benefit payment
under the Plan is deemed by the Company to be incapable of personally receiving
and giving a valid receipt for such payment, then, unless and until claim
therefor shall have been made by a duly appointed guardian or other legal
representative of such person, the Company may provide for such payment or any
part thereof to be made to any other person or institution then contributing
toward or providing for the care and maintenance of such person. Any such
payment shall be a payment for the account of such person and a complete
discharge of any liability of the Company and the Plan therefor.
7.8 Corporate Successors. The Plan shall be binding upon, and inure to the
benefit of, the Company and its successors and assigns and upon any person
acquiring, whether by merger, consolidation, purchase of assets or otherwise,
all or substantially all of the Company's assets and business, and the successor
shall be substituted for the Company under the Plan.
7.9 Unclaimed Benefit. Each Participate shall keep the Company informed of
his current address and the current address of his spouse. The Company shall not
be obligated to search for the whereabouts of any person. If the location of the
Participant is not made known to the Company within three (3) years after the
date on which payment of the Participant's Supplemental Retirement Benefit may
first be made, payment may be made as though the Participant had died at the end
of the three-year period. If, within one additional year after such three-year
period has elapsed, or, within three years after the actual death of the
Participant, the Company is unable to locate any Surviving Spouse of the
Participant, then the Company shall have no further obligation to pay any
benefit hereunder to such Participant or Surviving Spouse or any other person
and such benefit shall be irrevocably forfeited.
7.10 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Plan, neither the Company nor any individual acting as an
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<PAGE>
employee or agent of the Company shall be liable to any Participant, former
Participant, Surviving Spouse or any other person for any claim, loss, liability
or expense incurred in connection with the Plan.
IN WITNESS WHEREOF, the undersigned director of the Company, on behalf of
the Company, has executed this Plan to witness its adoption by the Company as of
July 6, 1998, and the Participant has executed this Plan to witness his
understanding that it reflects his agreement with the Company.
ILLINOVA CORPORATION
By:____________________________
Accepted and agreed to this
13th day of August, 1998.
Charles E. Bayless
51
<PAGE>
Exhibit 10 - Material Contracts
10e - Employee Retention Agreement
ILLINOVA CORPORATION
EMPLOYEE RETENTION AGREEMENT
THIS EMPLOYEE RETENTION AGREEMENT (the "Agreement") is entered into this
13th day of August, 1998 by and between ILLINOVA CORPORATION, an Illinois
corporation (the "Company") and Charles E. Bayless (the "Employee").
WHEREAS, the Company desires to retain the services of Employee in
connection with any change in control of the Company;
NOW, THEREFORE, in consideration of continued employment and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Employee agree as follows:
1. Change in Control Benefits. If within two (2) years after a Change in
Control (as defined below), (i) the Company shall terminate the Employee's
employment with the Company without Good Cause (as defined below), or (ii) the
Employee shall voluntarily terminate such employment with Good Reason (as
defined below), then the provisions of paragraphs (a), (b), (c), (d) and (e)
below shall apply:
(a) The Employee shall be entitled to receive from the Company for the period
continuing through the 36-month anniversary of the termination of the
Employee's employment with the Company, a monthly payment equal to 1/12th
of the sum of:
(I) the greater of the Employee's annual salary rate in effect on the date
of the Change in Control, or the Employee's annual salary rate in effect on
the date Employee's employment with the Company terminates; plus
52
<PAGE>
(II) the amount of the latest annual bonus earned by Employee, provided
that the amount described in this paragraph (II) shall be zero unless the
Employee has received an annual bonus in one or more of the three calendar
years last preceding the termination.
(b) Notwithstanding any provision in the promissory note or the tax letter to
the contrary, any obligation of the Employee for payment of principal and
interest otherwise due under the promissory note shall be forgiven, and the
Employee shall be entitled to the tax gross-up payment as described in the
tax letter with respect to such forgiven interest (but not with respect to
the forgiven principal) For purposes of this paragraph (b), the term
"promissory note" shall mean the promissory note dated August 13, 1998 with
respect to the borrowing of $500,000 by the Employee from the Company, and
the term "tax letter" shall mean the letter from the Company to the
Employee dated August 13, 1998 providing for the tax gross-up with respect
to the forgiveness of interest under the promissory note.
(c) Notwithstanding any provision in the Supplemental Pension Plan to the
contrary, the Employee's Accrued Vested Benefit under the Supplemental
Pension Plan shall be equal to 40% of the Employee's Final Average Earnings
(as defined under the Supplemental Pension Plan) as of the date of his
termination of employment with the Company.
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<PAGE>
(d) The Employee and his dependents, if any, shall, for thirty-six (36) months
following the Employee's termination of employment or until the Employee
reaches 65 years of age, or is employed by another employer, if sooner,
continue to participate in any benefit plans for the Company which provide
health (including medical and dental), life or disability insurance, or
similar coverage; provided, however, that the Employee and dependents, if
any, shall be eligible to participate in any benefit plans of the Company
which provide health and life insurance or similar coverage as are then
extended to employees of the Company electing early retirement at age 55 on
the same terms and subject to the same conditions as are applicable to such
employees; provided that such coverage shall not be furnished if the
Employee waives coverage by giving written notice of waiver to the Company.
(e) Notwithstanding any provision of the applicable stock option agreement to
the contrary, any stock option or portion thereof that is exercisable on
the date of the Employee's Termination (as that term is used in the
applicable stock option agreement) shall not be forfeited on the date of
Termination, but shall instead remain exercisable for the 30-day period
following the Termination (or, if greater, the period otherwise specified
by the applicable option agreement); provided that, in no event shall such
the option be exercisable after the date on which the option would
otherwise expire if the Employee had continued in the employ of the
Company.
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<PAGE>
The Employee shall not be required to mitigate damages by seeking other
employment or otherwise. Except as specifically provided above with the respect
to the Employee's becoming an employee of another employer, the Company's
obligations under this paragraph I shall not be reduced in any way by reason of
any compensation received by the Employee from sources other than the Company
after termination of the Employee's employment with the Company.
Notwithstanding any provision in this Agreement to the contrary, the
benefits under this paragraph I shall be in lieu of, and not in addition to, any
benefits to which the Employee might otherwise be entitled under any other
severance plan maintained by the Company.
If the Employee is employed by the Company on the date of a Change in
Control then, with respect to any stock option granted to the Employee by the
Company prior to the Change in Control that is outstanding on the date of the
Change in Control:
(A) If such option or any portion thereof is service-based (as defined below),
that option or portion thereof shall be exercisable on and after the date
of the Change in Control.
(B) If such option or any portion thereof is performance-based (as defined
below), that option or portion thereof shall become exercisable by reason
of a Change in Control only if the price paid for the Stock in the
transaction resulting in the Change in Control (excluding a transaction
described in paragraph 2(a)(iii)(C))
55
<PAGE>
>
is not less than the requisite Stock Price_ required for vesting under the
terms of the option (provided that, for purposes of determining the Stock
Price paid in connection with the Change in Control, the requirement that
the closing price be achieved for five consecutive trading days shall be
disregarded). (For purposes of the preceding sentence, the Stock Price paid
in connection with the Change in Control shall take into account the amount
of cash plus the value of any property paid.) If the performance-based
option or portion thereof does not become exercisable upon the Change in
Control, then the committee of the Board of Directors of the Company
responsible for administering the plan under which the option was granted
shall, to the extent it determines equitable to correspond to the
transaction resulting in the Change in Control, adjust the Stock Price to
be attained, and the identity of the company on which the Stock Price
determination is based.
Except as otherwise provided in the foregoing paragraphs (A) and (B) with
respect to exercisability of options, the options shall remain subject to the
expiration provisions and other terms of the option awards without regard such
paragraphs (A) and (B). The foregoing paragraphs (A) and (B) shall not apply to
any stock option to the extent that the terms governing such option expressly
reference this Agreement and expressly provide that the provisions of such
paragraphs are inapplicable. For purposes of this paragraph 1, an option or
portion thereof shall be treated as "service-based" if the vesting thereof is
not contingent on the achievement of a specified Stock Price; and an
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<PAGE>
option or portion thereof shall be treated as "performance-based" if the vesting
thereof is contingent on the achievement of a specified Stock Price.
2. Definitions.
(a) For purposes of this Agreement:
(i) "Good Cause" shall mean:
(A) the Employee's conviction of any criminal violation involving
dishonesty, fraud, or breach of trust.
(B) the Employee's willful engagement in any misconduct in the
performance of the Employee's duty that materially injures the
Company.
(C) the Employee's performance of any act which, if known to the
shareholders or regulators of the Company or any of its subsidiaries,
would materially and adversely affect the business of the Company or
any of its subsidiaries, or
(D) the Employee's willful and substantial nonperformance or assigned
duties; provided that such nonperformance has continued more than ten
days after the Company has given written notice of such nonperformance
and of its intention to terminate the Employee's employment because of
such nonperformance.
(ii) "Good Reason" shall exist if, without an Employees express written
consent, the Company shall:
(A) reduce the salary of the Employee; or
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<PAGE>
(B) materially reduce the amount of paid vacations to which the
Employee is entitled, or the Employee's fringe benefits and
perquisites; or
(C) cease to employ the Employee in the position he held immediately
before the Change in Control or a comparable position (provided that,
for this purpose, a "comparable position" shall include any of the
positions of chairman, vice-chairman, chief executive officer, or
president of the Company or of another company or business unit that
is comparable to the size of the Company immediately prior to the
Change in Control); or
(D) change by 50 miles or more the principal location in which the
Employee is required to perform services without providing reasonable
relocation assistance.
(iii) "Change in Control" shall be deemed to occur on the earliest of the
existence of one of the following and the receipt of all necessary regulatory
approvals therefore:
(A) The acquisition other than from the Company, by any entity, person
or group (including all Affiliates or Associates of such entity,
person or group) of beneficial ownership, as that term is defined in
Rule 13d-3 under the Securities Exchange Act of 1934, of more than 20%
of the outstanding shares of capital stock of the Company entitled to
vote generally in the election of directors, but excluding for this
purpose any such acquisition by the Company or any of its subsidiaries
or any
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<PAGE>
employee benefit plan (or related trust) or the Company or its
subsidiaries, or any corporation with respect to which, following such
acquisition, more than 50% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the common stock and voting securities of the Company
immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition,
of the then outstanding shares of common stock of the Company or the
combined voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of directors, as
the case may be;
(B) The effective time of a reorganization, merger or consolidation of
the Company, in each case, with respect to which all or substantially
all of the individuals and entities who were the respective beneficial
owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do
not, following such reorganization, merger, or consolidation
beneficially own, directly and indirectly more than 50% of
respectively, the then outstanding shares of
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<PAGE>
common stock or the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such
reorganization, merger or consolidation, or of a complete liquidation
or dissolution of the Company or of the sale or other disposition of a
Substantial Portion of the Property of the Company; or
(C) The election to the Board of Directors of the Company, of
directors constituting a majority of the number of the directors in
office unless such directors were recommended for election by the
existing Board of Directors.
(iv) A "Termination Event" means the date that the Employee's employment
with the Company terminates under one of the following circumstances:
(A) The Employee's employment is terminated by the Company without
Good Cause within two (2) years following a Change in Control.
(B) The Employee voluntarily terminates employment with Good Reason
within two (2) years following a Change in Control.
(C) The Employee's employment is terminated prior to a Change in
Control at the request of a acquiror.
(b) For purposes of the foregoing, (i) "Affiliate" or "Associate"
shall have the meaning set forth in Rule l2b-2 under the Securities
Exchange Act of 1934, and (ii) "Substantial Portion of the Property of
the
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Company" shall me-an 80% of the aggregate book value of the assets of
the Company and its Affiliates and Associates as set forth on the most
recent balance sheet of the Company, prepared on a consolidated basis,
but its regularly employed, independent, certified public accountant.
(c) Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur for the Employee by virtue of any transaction in which
such an Employee is a participant in a group effecting an acquisition
that constitutes a Change in Control if, after such acquisition, the
Employee holds an equity interest in the entity that has made the
acquisition.
3. Litigation Expenses. The Company shall pay to the Employee the
attorneys' fees incurred by the Employee in connection with any claim or legal
action or proceeding involving the Agreement, whether brought by the Employee or
by or on behalf of the Employee or by another party; provided, however, the
Company shall not be obligated to pay to the Employee out-of-pocket expenses,
including attorneys' fees, incurred by the Employee in any claim or legal action
or proceeding in which the Employee is a party adverse to the Company if the
Company prevails in such litigation. The Company shall pay prejudgment interest
on any money judgment obtained by the Employee, calculated at the published
prime interest rate charged by the Company's principal banking connection, as in
effect from time to time, from the date that payment(s) to the Employee should
have been made under the Agreement.
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4. Post-termination Payment Obligations Absolute. The Company's obligation
to pay the Employee the amounts and to make the other arrangements provided for
herein to be paid and made after termination of the Employee's employment with
the Company shall be absolute and unconditional and shall not be affected by any
circumstances, including, without limitation, any set-off, counterclaim,
recoupment, defense or other right that the Company may have against the
Employee or anyone else. The Company hereby waives any contract formation
defenses that it may have with respect to the Employee Retention program and
this Agreement.
5. Withholding. The Company may withhold from any payment that it is
required to make under the Agreement amounts sufficient to satisfy applicable
withholding requirements under any federal, state, or local law.
6. Successors. The obligations of the Company provided for in the Agreement
shall be the binding legal obligations of any successor to the Company by
purchase, merger, consolidation, or otherwise. Rights under the Agreement may
not be assigned by the Employee during the Employee's life, and upon the
Employee's death will inure to the benefit of the Employee's heirs, legatees and
the legal representatives of the Employee's estate.
7. Interpretation. The validity, interpretation, construction and
performance of the Agreement shall be governed by the laws of the State of
Illinois. The invalidity of unenforceability of any provision of the Agreement
shall not affect the validity or enforceability of any other provision.
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8. Amendment. This Agreement may be amended or cancelled only by the mutual
agreement of the parties in writing without the consent of any other person. So
long as the Executive lives, no person, other than the parties hereto, shall
have any rights under or interest in this Agreement or the subject matter
hereof.
9. Tax Payments. This paragraph 9 shall apply if all or any portion of the
payments and benefits provided to an Employee under the Agreement, or any
benefit (including any plan adopted in the future), would otherwise constitute
"excess parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), that are subject to the tax
imposed by Section 4999 of the Code (or similar tax and/or assessment). If,
after the application of such tax and/or assessment, the amount of such payment
and benefits would be less than if the payment and benefits had been reduced to
an amount that would result in there being no excess parachute payments, then
such payments and benefits shall be so reduced (the minimum extent necessary so
that no excess parachute payments result). If reduction is necessary hereunder,
the Employee shall elect which of the payments and benefits shall be reduced.
Determination of whether payments and benefits would constitute excess parachute
payments, and the amount of reduction so that no excess parachute payments shall
exist, shall be made, at the Company's expense, by the Independent accounting
firm employed by the Company immediately prior to the occurrence of any change
of control of the Company which will result in the imposition of such tax.
63
<PAGE>
IN WITNESS WHEREOF, the Company and the Employee have executed the
Agreement on and as of the 13th day of August, 1998. This Agreement supersedes
and replaces any prior agreement between the Company and the undersigned,
regarding this subject.
ILLINOVA CORPORATION
By:____________________________
____________________________
CHARLES E. BAYLESS
64
<PAGE>
Exhibit 10 - Material Contracts
10f - Stock Option Agreement
NON-QUALIFIED STOCK OPTION AGREEMENT
ILLINOVA CORPORATION
1992 LONG-TERM INCENTIVE COMPENSATION PLAN
THIS AGREEMENT, entered into as of the 24th day of June, 1998 (the
"Grant Date"), by and between Illinova Corporation, an Illinois corporation (the
"Company") and Charles E. Bayless (the "Employee"),
WITNESSETH THAT:
WHEREAS, the Company maintains the Illinova Corporation 1992 Long-Term
Incentive Compensation Plan (the "Plan"), which is incorporated and forms a part
of this Agreement, for the benefit of key employees of the Company and its
Subsidiaries;
WHEREAS, to induce the Employee to accept employment by the Company,
the Company has agreed to grant to the Employee the option described in this
Agreement; and
WHEREAS, the Employee and the Company desire to enter into this
Agreement reflecting the award of such option;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the
Employee as follows:
SECTION ONE
GRANT
Subject to the terms and conditions of the Plan and this Agreement, the
Employee is hereby awarded an option to purchase 165,000 shares of Stock (the
"Option"). The Option is not intended, and shall not be treated, as an incentive
stock option (as that term is used in Section 422 of the Code).
SECTION TWO
OPTION PRICE
The option price of each share of stock subject to the Option is
$30.25.
SECTION THREE
EXERCISE, EXPIRATION AND
CANCELLATION OF OPTION
The option shall be exercisable by the Employee in accordance with the
following schedule:
65
<PAGE>
------------------------------------ ------------------------------------
If the Employee is employed The Option shall become exercisable
through the following date: with respect to the following number
of shares on and after that date:
------------------------------------ ----------------------------------
One-year anniversary of Grant Date 16,667 shares
------------------------------------ ----------------------------------
Two-year anniversary of Grant Date 16,667 shares
------------------------------------ ----------------------------------
Three-year anniversary of Grant Date 16,666 shares
------------------------------------ ----------------------------------
The first date on which the Stock 57,500 shares
Price attains $35.00
------------------------------------ ----------------------------------
The first date on which the Stock 57,500 shares
Price attains $40.00
------------------------------------ ----------------------------------
If the Employee's employment by the Company continues through the 9-1/2
year anniversary of the Grant Date, then any portion of the Option herein
granted and not previously exercisable shall become exercisable on such
9-1/2-year anniversary. For purposes of this Section Three, a "Stock Price"
amount shall be deemed to have been attained on the last day of any
five-consecutive-trading-day period for which quotations for Stock are included
in the New York Stock Exchange composite transactions published in The Wall
Street Journal, if the closing price as so reported for a share of Stock for
each of those five days is not less than such Stock Price amount.
The Option shall expire as to any unexercised portion on the earliest
of:
(a) the tenth anniversary of the date first above written;
(b) the first anniversary of the Employee's death;
(c) five years following the Employee's date of retirement; or
(d) the date of the Employee's Termination; provided that if the
Employee's employment ceases because of a Termination, any
exercise of the Option occurring on or after the Employee's
date of Termination shall be void and shall be ineffective.
For purposes of this Agreement, the Employee's "date of retirement"
shall be the date of Retirement, Early Retirement or Disability Retirement as
those terms are defined in the Plan.
66
<PAGE>
If the Employee exercises the Option with respect to a portion, but not
all, of the shares of Stock subject thereto, the Option shall thereafter cease
to be exercisable with respect to the shares of Stock for which it was exercised
but, subject to the terms and conditions of the Plan and this Agreement, shall
continue to be exercisable with respect to the shares of Stock with respect to
which it was not exercised.
If the Employee's Termination occurs prior to the date on which any
portion of the Option has become exercisable, that portion of the Option shall
be forfeited upon such Termination. Notwithstanding the foregoing provisions of
this Agreement, the Option shall not become exercisable and shall be forfeited
if the Participant does not become an employee of the Company, and the Option
shall be forfeited if the Participant becomes an employee of the Company but
voluntarily resigns within 30 days after his initial date of employment.
SECTION FOUR
METHOD OF EXERCISE
Subject to the terms and conditions of the Plan and this Agreement, the
Option may be exercised, in whole or in part, by filing a written notice with
the Secretary of the Company at its corporate headquarters prior to the date on
which the Option expires or is otherwise canceled. Such notice shall specify the
date as of which the exercise is to occur and the number of shares of Stock
which the Employee elects to purchase and shall be in such form and shall
contain such other information as the Secretary of the Company may reasonably
require. The election shall be accompanied by payment of the option price for
such shares of Stock indicated by the Employee's election, together with the
amount of any required state, federal or local withholding taxes arising in
connection with the purchase of such Stock. Subject to the provisions of the
preceding sentence and the terms of the Plan, payment shall be by cash or check
payable to the Company, by delivery of shares of Stock having an aggregate Fair
Market Value (determined as of the date of exercise) equal to the option price,
and if elected in accordance with this Section Four, the Employee's tax
withholding obligation for the shares of Stock, indicated by the Employee's
election, or a combination of both.
SECTION FIVE
TRANSFERABILITY
The Option shall not be transferable by the Employee other than by will
or the laws of descent and distribution and, during the life of the Employee, is
exercisable only by the Employee or Employee's guardian or legal representative.
67
<PAGE>
SECTION SIX
NOTICE OF DISPOSITION OF SHARES
The Employee agrees to notify the Company promptly in the event of
disposal of any shares of Stock acquired upon the exercise of the Option,
including a disposal by sale, exchange, gift or transfer of legal title.
SECTION SEVEN
ADMINISTRATION
The authority to manage and control the operation and administration of
this Agreement shall be vested in the Committee, and the Committee shall have
all powers with respect to this Agreement that it has with respect to the Plan.
Any interpretation of this Agreement by the Committee and any decision made by
it with respect to the Agreement is final and binding on all persons.
SECTION EIGHT
PLAN GOVERNS
Notwithstanding anything in this Agreement to the contrary, the terms
of this Agreement shall be subject to the terms of the Plan, a copy of which may
be obtained by the Employee from the office of the Secretary of the Company.
Unless the context clearly implies or indicates the contrary, a word, term or
phrase used or defined in the Plan is similarly used or defined for purposes of
this Agreement.
SECTION NINE
AMENDMENT
This Agreement may be amended by written agreement of the Employee and
the Company, acting pursuant to authority from the Committee, without the
consent of any other person.
SECTION TEN
CONTINUED EMPLOYMENT, RIGHTS AS SHAREHOLDER
This Agreement does not constitute a contract of employment, and does
not give the Employee the right to be employed by the Company or its
Subsidiaries. This Agreement does not confer on the Employee any rights as a
shareholder of the Company prior to the date on which the Employee fulfills all
conditions for receipt of Stock pursuant to this Agreement and the Plan.
68
<PAGE>
SECTION ELEVEN
GOVERNING LAW
This Agreement shall be construed and administered in accordance with
the laws of the State of Illinois, without regard to the principles of conflicts
of law.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day and year first above written.
---------------------------------
Charles E. Bayless
Illinova Corporation
By:______________________________
ATTEST:
- - ----------------------------
Leah Manning Stetzner
Corporate Secretary
69
<PAGE>
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This schedule contains summary financial information extracted from the
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