Amendment 1
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 JUNE 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 July 31, 1998
Illinois Power Company Common stock, no par value, 65,150,562
shares outstanding held by Illinova
Corporation at July 31, 1998
1
<PAGE>
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 JUNE 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 - 16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for Illinova Corporation
and Illinois Power Company 17 - 26
Part II. OTHER INFORMATION
Item 1: Legal Proceedings 27
Item 4: Submission of Matters to a Vote of
Security Holders 28
Item 6: Exhibits and Reports on Form 8-K 28
Signatures 29 - 30
Exhibit Index 31
2
<PAGE>
PART I. FINANCIAL INFORMATION
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 30, DECEMBER 31,
1998 1997
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant, at original cost
Electric (includes construction work
in progress of $186.9 million and
$214.3 million, respectively) $ 6,780.5 $ 6,690.4
Gas (includes construction work
in progress of $12.4 million and
$10.7 million, respectively) 675.3 663.0
---------- ----------
7,455.8 7,353.4
Less-Accumulated depreciation 2,891.6 2,808.1
---------- ----------
4,564.2 4,545.3
Nuclear fuel in process 6.1 6.3
Nuclear fuel under capital lease 129.2 126.7
---------- ----------
Total utility plant 4,699.5 4,678.3
---------- ----------
Investments and Other Assets 230.3 198.8
---------- ----------
Current Assets
Cash and cash equivalents 17.4 33.0
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 162.1 115.6
Other 87.4 102.3
Accrued unbilled revenue 74.5 86.3
Materials and supplies, at average cost 120.3 118.6
Prepayments and other 30.2 64.4
---------- ----------
Total current assets 491.9 520.2
---------- ----------
Deferred Charges 216.2 185.7
---------- ----------
$ 5,637.9 $ 5,583.0
========== ==========
3
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ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 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 7.9 10.2
Retained earnings (16.5) 51.7
Less - Capital stock expense 7.3 7.3
Less - 3,968,550 and 4,000,000 of common stock in
treasury, respectively, at cost 89.7 90.4
-------- --------
Total common stock equity 1,304.3 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 140.0 100.0
Long-term debt of subsidiary 1,610.2 1,617.5
-------- --------
Total capitalization 3,308.6 3,341.1
-------- --------
Current Liabilities
Accounts payable 288.9 177.3
Notes payable 368.3 415.3
Long-term debt and lease obligations of
subsidiary maturing within one year 41.0 87.5
Other 200.4 181.6
-------- --------
Total current liabilities 898.6 861.7
-------- --------
Deferred Credits
Accumulated deferred income taxes 961.6 969.0
Accumulated deferred investment tax credits 204.8 208.3
Other 264.3 202.9
-------- --------
Total deferred credits 1,430.7 1,380.2
-------- --------
$ 5,637.9 $ 5,583.0
======== ========
4
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<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
(Unaudited)
(Millions of dollars except per share amounts)
Operating Revenues:
<S> <C> <C> <C> <C>
Electric $ 304.5 $ 301.7 $ 581.1 $ 583.9
Electric interchange 112.7 53.5 209.0 80.1
Gas 49.8 60.1 166.4 224.1
Diversified enterprises 80.3 127.6 166.2 225.2
------------ ------------ ------------ ------------
Total 547.3 542.9 1,122.7 1,113.3
------------ ------------ ------------ ------------
Operating Expenses:
Fuel for electric plants 53.9 52.2 109.6 97.5
Power purchased 229.4 45.6 326.5 81.4
Gas purchased for resale 22.4 22.8 88.4 122.5
Diversified enterprises 85.0 150.8 179.7 259.2
Other operating expenses 87.9 63.6 167.7 123.0
Maintenance 35.0 30.5 64.0 50.2
Depreciation & amortization 50.5 49.3 101.2 98.3
General taxes 34.3 33.0 73.0 71.7
------------ ------------ ------------ ------------
Total 598.4 447.8 1,110.1 903.8
------------ ------------ ------------ ------------
Operating Income (Loss) (51.1) 95.1 12.6 209.5
------------ ------------ ------------ ------------
Other Income and Deductions:
Miscellaneous-net 2.8 1.4 1.3 2.2
Equity earnings in affiliates 3.4 2.4 8.9 6.4
------------ ------------ ------------ ------------
Total 6.2 3.8 10.2 8.6
------------ ------------ ------------ ------------
Income (Loss) Before Interest
Charges and Income Taxes (44.9) 98.9 22.8 218.1
------------ ------------ ------------ ------------
Interest Charges:
Interest expense 35.9 36.0 72.5 74.2
Allowance for borrowed funds
used during construction (1.2) (1.3) (2.3) (2.7)
Preferred dividend
requirements of subsidiary 5.0 5.4 9.9 10.9
------------ ------------ ------------ ------------
Total 39.7 40.1 80.1 82.4
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes (84.6) 58.8 (57.3) 135.7
------------ ------------ ------------ ------------
Income Taxes (37.6) 27.4 (33.3) 60.3
------------ ------------ ------------ ------------
Net Income (Loss) Applicable to
Common Stock $ (47.0) $ 31.4 $ (24.0) $ 75.4
============ ============ ============ ============
Earnings per common share (basic $(0.66) $0.42 $(0.34) $1.00
and diluted)
Cash dividends declared per
common share $0.31 $0.31 $0.62 $0.62
Cash dividends paid per
common share $0.31 $0.31 $0.62 $0.62
Weighted average number of
common shares outstanding
during period 71,712,791 75,648,456 71,707,054 75,665,104
</TABLE>
5
<PAGE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
SIX MONTHS ENDED
JUNE 30,
1998 1997
(Unaudited)
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (24.0) $ 75.4
Items not requiring cash, net 29.4 132.2
Changes in assets and liabilities 229.3 (18.0)
-------- --------
Net cash provided by operating
activities 234.7 189.6
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (115.0) (67.6)
Other investing activities (28.3) (23.2)
-------- --------
Net cash used in investing
activities (143.3) (90.8)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on common stock (44.4) (46.8)
Repurchase of common stock -- (11.2)
Reissuance of common stock 0.7 --
Redemptions -
Short-term debt (154.8) (188.5)
Long-term debt of subsidiary (109.2) (150.2)
Issuances -
Short-term debt 107.8 52.4
Long-term debt 92.4 250.0
Other financing activities 0.5 (5.3)
--------- ---------
Net cash used in financing
activities (107.0) (99.6)
--------- ---------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (15.6) (0.8)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 33.0 24.6
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 17.4 $ 23.8
========= =========
6
<PAGE>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 30, DECEMBER 31,
1998 1997
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant, at original cost
Electric (includes construction work
in progress of $186.9 million and
$214.3 million, respectively) $ 6,780.5 $ 6,690.4
Gas (includes construction work
in progress of $12.4 million and
$10.7 million, respectively) 675.3 663.0
------------ ------------
7,455.8 7,353.4
Less-Accumulated depreciation 2,891.5 2,808.1
------------ ------------
4,564.3 4,545.3
Nuclear fuel in process 6.1 6.3
Nuclear fuel under capital lease 129.2 126.7
------------ ------------
Total utility plant 4,699.6 4,678.3
------------ ------------
Investments and Other Assets 5.1 5.9
------------ ------------
Current Assets
Cash and cash equivalents 6.3 17.8
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 162.1 115.6
Other 29.4 16.6
Accrued unbilled revenue 74.5 86.3
Materials and supplies,
at average cost 119.5 117.3
Prepayments and other 31.6 61.2
------------ ------------
Total current assets 423.4 414.8
------------ ------------
Deferred Charges 220.9 192.5
------------ ------------
$ 5,349.0 $ 5,291.5
============ ============
7
<PAGE>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 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 26.6 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 1,206.8 1,299.1
Preferred stock 57.1 57.1
Company obligated mandatorily
redeemable preferred stock 197.0 197.0
Long-term debt 1,610.2 1,617.5
------------ ------------
Total capitalization 3,071.1 3,170.7
------------ ------------
Current Liabilities
Accounts payable 240.0 102.7
Notes payable 368.3 376.8
Long-term debt and lease
obligations maturing
within one year 41.0 87.5
Other 181.8 162.1
------------ ------------
Total current liabilities 831.1 729.1
------------ ------------
Deferred Credits
Accumulated deferred income taxes 977.8 980.6
Accumulated deferred investment
tax credits 204.8 208.3
Other 264.2 202.8
------------ ------------
Total deferred credits 1,446.8 1,391.7
------------ ------------
$ 5,349.0 $ 5,291.5
============ ============
8
<PAGE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
(Unaudited)
(Millions of Dollars)
Operating Revenues:
<S> <C> <C> <C> <C>
Electric $ 304.5 $ 301.7 $ 581.1 $ 583.9
Electric interchange 112.7 53.5 209.0 80.1
Gas 49.8 60.1 166.4 224.1
------------ ------------ ------------ ------------
Total 467.0 415.3 956.5 888.1
------------ ------------ ------------ ------------
Operating Expenses and Taxes:
Fuel for electric plants 53.9 52.2 109.6 97.5
Power purchased 229.4 45.6 326.5 81.4
Gas purchased for resale 22.4 22.8 88.4 122.5
Other operating expenses 87.9 63.6 167.7 123.0
Maintenance 35.0 30.5 64.0 50.2
Depreciation & amortization 50.5 49.3 101.2 98.3
General taxes 34.3 33.0 73.0 71.7
Income taxes (36.6) 35.7 (25.9) 72.0
------------ ------------ ------------ ------------
Total 476.8 332.7 904.5 716.6
------------ ------------ ------------ ------------
Operating Income (Loss) (9.8) 82.6 52.0 171.5
------------ ------------ ------------ ------------
Other Income and Deductions, Net 1.3 1.7 2.9 2.3
------------ ------------ ------------ ------------
Income (Loss) Before Interest
Charges (8.5) 84.3 54.9 173.8
------------ ------------ ------------ ------------
Interest Charges and Other:
Interest Expense 33.3 34.2 67.4 70.1
Allowance for borrowed funds
used during construction (1.2) (1.3) (2.3) (2.7)
------------ ------------ ------------ ------------
Total 32.1 32.9 65.1 67.4
------------ ------------ ------------ ------------
Net Income (Loss) (40.6) 51.4 (10.2) 106.4
Less-Preferred dividend
requirements 5.0 5.4 9.9 10.9
------------ ------------- ------------ -------------
Net Income (Loss) Applicable to
Common Stock $ (45.6) $ 46.0 $ (20.1) $ 95.5
============ ============ ============ ============
</TABLE>
9
<PAGE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
SIX MONTHS ENDED
JUNE 30,
1998 1997
(Unaudited)
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (10.2) $ 106.4
Items not requiring cash, net 34.0 133.7
Changes in assets and liabilities 222.9 (14.5)
---------------- ---------------
Net cash provided by operating 246.7 225.6
activities ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (115.0) (67.6)
Other investing activities 3.9 --
---------------- ---------------
Net cash used in investing (111.1) (67.6)
activities ---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on preferred and common
stock (52.7) (58.0)
Repurchase of common stock (29.4) (27.5)
Redemptions -
Short-term debt (107.4) (111.5)
Long-term debt (109.2) (150.2)
Issuances
Short-term debt 98.9 52.4
Long-term debt 52.4 150.0
Other financing activities 0.3 (5.3)
---------------- ---------------
Net cash used in financing activities (147.1) (150.1)
---------------- ---------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (11.5) 7.9
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 17.8 12.5
---------------- ---------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 6.3 $ 20.4
=============== ==============
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 quarter ended March 31, 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 June 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 June 30, 1998 and December 31, 1997, the Consolidated Statements of Income
for the three months and the six months ended June 30, 1998 and 1997, and the
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and
1997. In addition, it is Illinova's and IP's opinion that the accompanying
unaudited June 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 June 30, 1998 and December 31, 1997, the
Consolidated Statements of Income for the three months and the six months ended
June 30, 1998 and 1997, and the Consolidated Statements of Cash Flows for the
six months ended June 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 transmission 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>
On June 26, 1998, the Company filed an application with the Illinois
Commerce Commission (ICC) seeking approval for securitization bonds 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 bonds will be used to lower IP's cost of capital by
repurchasing stock and retiring debt. The ICC's staff issued its preliminary
comments on IP's application on July 22, and there were no major issues with the
filing. The Hearing Examiner's Proposed Order will be issued in late August
1998, and the ICC should issue its final order by September 22. A 30 day period
follows for any final rehearing requests. If none are received, the Company
intends to proceed with issuance of the bonds subject to receiving appropriate
IRS ruling.
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with the Federal Energy Regulatory Commission (FERC) for all
approvals necessary to create and implement the Midwest Independent Transmission
System Operator, Inc. (MISO). 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. The
parties are seeking to make the MISO operational by January 1, 2000.
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)
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 June 30, 1998, IP's net
investment in generation facilities was $3.2 billion and was reflected in
"Utility Plant, at Original Cost" on IP's balance sheet.
13
<PAGE>
In May 1998, the Staff of the Securities and Exchange Commission (SEC)
issued interpretive guidance regarding the application of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of (SFAS 121)," when a regulated enterprise such as an
electric utility discontinues regulatory accounting practices for separable
portions of its operations and assets. Under SFAS 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 an SFAS 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's recent interpretive
guidance, IP reviewed its impairment evaluation and 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 the Company'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.
The provisions of P.A. 90-561 allow an 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 $1.5 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.
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 earnings per share are equivalent for Illinova and IP at June 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 Illinois Power do not currently have
any components of comprehensive income in any period presented herein. Illinova
and Illinois Power will continue to analyze the disclosure requirements of FAS
130.
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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 Illinois Power are evaluating the provisions
of FAS 131 to determine the impact of the revised disclosure requirements on
their 1998 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. 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 2000. The Company's 1998 financial statements will contain the
disclosures required by this standard.
On July 23, 1998 the EITF of the Financial Accounting Standards Board
(FASB) met to discuss 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), and (2) how the results
of such activities should be displayed in the financial statements. In the
discussion, 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." Both IP and IEP
enter 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 ultimately meet the EITF's definition of trading activities it appears
likely that a change in those entities' accounting practices will be required.
The ultimate impact of this change in accounting on the Financial Position and
Results of Operations of Illinova and IP can not immediately be determined,
however such impact may be significant. The EITF is scheduled to resume
discussion of the issue in September 1998.
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MANUFACTURED GAS PLANT SITES
IP's estimated liability for Manufactured Gas Plant (MGP) site remediation
is $61.1 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 remediation costs and will be credited to customers
through the tariff rider mechanism which the 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.
PREFERRED STOCK VOTE
Illinois Power sought approval from preferred stockholders for an amendment
of the IP Articles of Incorporation to remove a restriction limiting the amount
of unsecured debt to not more than 20% of total capitalization excluding
unsecured debt. Preferred shareholders of record as of April 6, 1998 were
entitled and solicited to vote on this matter at a special meeting of IP common
and preferred shareholders scheduled May 29, 1998. At the May 29 meeting, the
proxy tabulator determined that an insufficient number of shareholders had voted
to remove the limit. A majority of the votes cast were in favor of the proposal,
but not the 66 2/3 percent required for adoption. See Item 4 "Submission of
Matters to a Vote of Security Holders" for tabulated results of the Proxy Vote.
TREASURY STOCK
Through June 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 six months of 1998.
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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 assumes 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 quarter
ended March 31, 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 preferred shares
outstanding to the public 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 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 six months of 1998 provided
sufficient working capital to meet ongoing operating requirements, to service
existing common and IP preferred stock dividends and debt requirements and the
majority of IP's construction requirements. IP used short term borrowings to
meet interim cash requirements. Additionally, Illinova expects to use 1998 cash
flows supplemented by external financing to meet operating requirements and
continue to service IP's and Illinova's existing debt, IP's preferred and
Illinova's common stock dividends, IP's sinking fund requirements and IP's and
Illinova's anticipated construction requirements. IP periodically repurchases
shares of its common stock from Illinova to provide Illinova cash for
operations, in accordance with authority granted by the ICC. For more
information, see "Treasury Stock" of the "Notes to Consolidated Financial
Statements" on page 16 of this report.
IP's capital requirements for construction were approximately $115 million
and $68 million during the six months ended June 30, 1998 and 1997,
respectively.
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.
Illinova currently has authority to issue an additional $160 million in debt
securities under this shelf registration statement to meet its operating and
investment needs. This capacity is expected to meet Illinova's anticipated
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 the debt shelf registration. IP also plans to
issue $100 million of bonds in the third quarter 1998. IP currently has
authority to issue an additional $100 million in new debt securities under its
existing shelf registration statement. In addition, IP currently has total lines
of credit represented by bank commitments of $354 million.
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.
ACCOUNTING MATTERS
For further information on accounting issues, see "Accounting Matters"
under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial
Statements" on pages 13-15 of this report.
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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
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 will continue 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
plans to meet with IP's management to discuss the plant's readiness for restart.
Clinton is expected to return to operation by the end of 1998. IP currently
expects Clinton's 1998 operating and maintenance expenses to be at least $73
million more than Clinton's 1997 expenses, totaling approximately $195 million
for 1998.
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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. Previously disclosed earnings
expectations are subject to the effects of these uncertainties and changes.
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 will be in addition to the 15
percent residential rate reduction that will be effective August 1, 1998 and
will have the effect of beginning the 15 percent residential electric rate
reduction two weeks earlier than the scheduled August 1, 1998 start date.
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 Illinois Power
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 23-24). 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 is 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 over the initial term of the PCA which is from September
1, 1996 through August 31, 2006.
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UNIFORM FUEL ADJUSTMENT CLAUSE
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. However, on
March 6, 1998, IP made the ICC filing 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 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 the Company 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
See "Open Access and Competition" under "Regulatory and Legal Matters" of
the "Notes to Consolidated Financial Statements" on pages 12-13 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.
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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 95% of
its systems. Assessment of systems and processes is 87% complete and expected to
be fully completed by October 1998. Implementation efforts are approximately 20%
complete. Illinova also is communicating with third parties with whom it does
business to facilitate continued business operations.
The cost of achieving year 2000 compliance is estimated to be at least $19
million through 1999. The cost expended as of July 31, 1998 is $4.3 million.
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 is
planned for the fourth quarter of 1999.
If Illinova or critical interfacing third parties' year 2000 efforts are
unsuccessful, some or all of Illinova'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 control.
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
Regulators are continuing to examine potential approaches for compliance
with current federal ozone air quality standards. On November 7, 1997, the U.S.
EPA proposed air pollution rules which would require substantial reductions of
NOx emissions in Illinois and 21 other states. The proposal would require the
installation of NOx controls by September 2002. This proposal is expected to be
finalized by November 1998 with Illinois utility reduction requirements
specified in 1999. Preliminary cost estimates to comply with the proposed NOx
limitations are $130 to $150 million beyond what is already needed to comply
with the NOx requirements of Phase II of the Acid Rain Program. The legality of
this proposal along with its technical feasibility is expected to be challenged
by a number of utilities and utility groups, including IP.
In June, 1998, thirteen Southeast/Midwest states submitted letters
advocating the need for a more reasonable approach to NOx reductions than those
proposed by USEPA. The state proposals would target specific causes of pollution
rather than broad regional emission reductions, mandate less severe emission
reductions and give sources more time to achieve those reductions. The overall
objective of these proposals is to provide cleaner air without the adverse
economic consequences of USEPA's proposal. USEPA will consider these comments
prior to finalizing the State Implementation Plan (SIP) Call (the USEPA
regulatory process for state compliance)in late 1998.
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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 annual operating expenses which could
have a material adverse impact on Illinova and IP.
POWER SUPPLY AND RELIABILITY
Electricity has been in short supply throughout Illinois and Wisconsin
this summer because of an unusually high number of plant outages in this region.
IP is attempting to secure generation and transmission capacity in order to
guard against disruptions in service. If the weather continues to be abnormally
hot or if IP's major generating units were to require maintenance and/or
experience delay in returning to service, IP may be unable to meet demand
because of the limited availability of power in the region and limited ability
to import power. IP has taken additional steps to avoid potential shortages,
including inspecting and upgrading transmission lines and equipment and readying
emergency procedures. Expenses which have been incurred as a result of the
summer situation 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 ultimate amount of 1998 losses associated with power sales
commitments and lost margin on sales to native load customers will largely
depend on 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. 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 pages 13-15.
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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. Additionally, IP talked about re-activating
five oil-fired generating units at Havana Station. Those units, placed into cold
shutdown in January 1994, could provide up to 250 megawatts of power if all
could be made operational. IP is working to restore and restart Units 3, 4 & 5
by August, 1998 which will supply 150 megawatts of power.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Electric Operations - Electric revenues for the second quarter of 1998
increased $2.8 million compared to the second quarter of 1997 due largely to
increased sales to residential and commercial customers. Electric interchange
revenues increased $59.2 million primarily due to increased activity on the
interchange market. Power purchased increased $183.8 million due largely to near
record temperatures and regional power supply shortages which resulted in higher
than expected power supply costs. Second quarter 1998 figures include an accrual
of approximately $58.3 million for known and probable loss on power sales
commitments with scheduled third quarter delivery dates. During the quarter,
fuel for electric plants increased $1.7 million due primarily to an increase in
generation. For more information, see "Uniform Fuel Cost Adjustment" under
"Regulatory Matters" of the "Management's Discussion and Analysis" on page 21 of
this report and "Power Supply and Reliability" under the "Management's
Discussion and Analysis" on pages 23-24. These factors combined to decrease
electric margin $123.5 million for the quarter.
Kilowatt hour (kwh) sales to ultimate consumers increased 4.0% for the
quarter due to increases of 17.4% and 8.2% in the residential and the commercial
markets, respectively. Cooling degree days increased approximately 91.1% from
1997 which contributed to the increase in sales to the temperature-sensitive
markets.
For the second 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 74.4% and 68.3% for the three months ended June
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 quarter, gas margin decreased $9.9 million. Gas
revenues decreased $10.3 million reflecting a 9.4% decrease in therm sales
(excluding transport) caused by the mild spring weather. Gas purchased costs
decreased $.4 million due to the lower consumption.
Operation and Maintenance Expenses - The 1998 second quarter increase of
$28.8 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 19-20 of this
report.
Diversified enterprises - Due primarily to decreased sales activity at
IEP, diversified enterprise revenues decreased $47.3 million for the second
quarter of 1998, which was offset by a decrease in diversified enterprise
expenses of $65.8 million.
Earnings(Loss) per Common Share - The earnings per common share for
Illinova during the second quarter of 1998 and 1997 resulted from the
interaction of all of the factors discussed herein as well as fewer shares of
common stock outstanding.
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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Electric Operations - Electric revenues for the first six months of 1998
decreased $2.8 million compared to the first six months of 1997 due largely to
decreased sales to residential and commercial customers during the first quarter
of the year. Electric interchange revenues increased $128.9 million primarily
due to increased activity on the interchange market. Power purchased increased
$245.1 million due largely to near record temperatures and regional power supply
shortages which resulted in higher than expected power supply costs.
Year-to-date figures include an accrual of approximately $58.3 million for known
and probable loss on power sales commitments with scheduled third quarter
delivery dates. During the first six months of 1998, Fuel for Electric Plants
increased $12.1 million due primarily to an increase in generation. For more
information, see "Uniform Fuel Cost Adjustment" under "Regulatory Matters" of
the "Management's Discussion and Analysis" on page 21 of this report and "Power
Supply and Reliability" under the "Management's Discussion and Analysis" on
pages 23-24. These factors combined to decrease electric margin $131.1 million
for the six months ended June 30, 1998.
Kilowatt hour (kwh) sales to ultimate consumers remained relatively flat
for the six months ending June 30, 1998.
For the six months ended June 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 76.9% and 69.0% for the six months
ended June 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 six months ended June 30,1998, gas margin
decreased $23.6 million. Gas revenues decreased $57.7 million reflecting a 15.9%
decrease in therm sales (excluding transport) caused by mild weather. Gas
purchased costs decreased $34.1 million due to the lower consumption.
Operation and Maintenance Expenses - The increase for the first six months
of 1998 of $58.5 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 19-20 of
this report.
Diversified enterprises - Due primarily to decreased sales activity at IEP
resulting from power supply shortages, diversified enterprise revenues decreased
$59.0 million for the first six months of 1998, which was offset by a decrease
in diversified enterprise expenses of $79.5 million.
Earnings(Loss) per Common Share - The earnings per common share for
Illinova during the second quarter of 1998 and 1997 resulted from the
interaction of all of the factors discussed herein as well as fewer shares of
common stock outstanding.
26
<PAGE>
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 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 Nuclear Regulatory Commission (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.
27
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
Illinois Power sought approval from preferred stockholders for an
amendment of the IP Articles of Incorporation to remove a restriction limiting
the amount of unsecured debt to not more than 20% of total capitalization
excluding unsecured debt. Preferred shareholders of record as of April 6, 1998
were entitled and solicited to vote on this matter at a special meeting of IP
preferred shareholders scheduled May 29, 1998. At the May 29 meeting, the proxy
tabulator determined that an insufficient number of shareholders had voted to
remove the limit.
A majority of the votes cast were in favor of the proposal. However, a
minimum of 66 2/3 percent of IP's 1,139,110 outstanding shares of preferred
stock was required for adoption. The tabulated results of the proxy vote were:
For Against Abstain No Reply
- --------------------------------------------------------------------------------
DTC 376,431 190,806 76,849 270,842
Registered 125,159 5,697 2,632 90,694
- --------------------------------------------------------------------------------
Total 501,590 196,503 79,481 361,536
Total(%) 44.0% 17.3% 7.0% 31.7%
- --------------------------------------------------------------------------------
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
Other Events: Illinova releases 1998 second quarter earnings
and provides earnings outlook for 1998.
28
<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.
ILLINOVA CORPORATION
(Registrant)
/s/ Larry F. Altenbaumer
By ---------------------------
Larry F. Altenbaumer
Chief Financial Officer
Treasurer and Controller
on behalf of
Illinova Corporation
Date: August 13,1998
29
<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)
/s/ Larry F. Altenbaumer
By ---------------------------
Larry F. Altenbaumer
Senior Vice President and
Chief Financial Officer
on behalf of
Illinois Power Company
Date: August 13, 1998
30
<PAGE>
EXHIBIT INDEX
PAGE NO. WITHIN
SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
12 Statement Re Computation of Ratios
A Computation of ratio of earnings 32
to fixed charges for Illinova
Corporation.
B Computation of ratio of earnings 33
to fixed charges for Illinois Power.
27 Financial Data Schedule UT
(filed herewith)
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(A)
ILLINOVA CORPORATION
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Thousands of Dollars)
Six Twelve Twelve
Months Ended Months Ended Months Ended
June June June**
--------------------------------------------------------------------------------
1998 1998 1998
---- ---- ----
Earnings Available for Fixed
Charges:
<S> <C> <C> <C>
Net Income (Loss) ($24,049) ($190,033) ($190,033)
Add:
Income Taxes:
Current 26,309 75,710 75,710
Deferred - (48,761) (65,616) (65,616)
Net
Allocated income taxes (7,373) (16,014) (16,014)
Investment tax credit - (3,447) (7,278) (7,278)
deferred
Income tax effect of FAS 71 write-off - (117,998) (117,998)
Interest on long-term debt 57,313 114,108 114,108
Amortization of debt
expense and
premium-net, and other interest 15,229 28,398 28,398
charges
One-third of all rentals (Estimated
to be
representative of the interest 2,154 4,067 4,067
component)
Interest on in-core fuel 1,767 3,807 3,807
FAS 71 Regulatory - - 313,030
Write-Offs
--------------- --------------- ----------------
Earnings (loss) available for fixed charges $19,142 ($170,849) $142,181
=============== =============== ================
Fixed charges:
Interest on long-term debt $57,313 $114,108 $114,108
Amortization of debt
expense and
premium-net, and other interest 18,867 35,805 35,805
charges
One-third of all rentals (Estimated to
be
representative of the interest 2,154 4,067 4,067
component)
--------------- --------------- ----------------
Total Fixed Charges $78,334 $153,980 $153,980
=============== =============== ================
Ratio of earnings to fixed 0.24 * (1.11) * 0.92 *
charges
=============== =============== ================
</TABLE>
* Earnings are inadequate to cover fixed charges. Additional earnings
(thousands) for Six Months Ended June 1998 of $59,192 and Twelve
Months Ended June 1998 of $324,829 and supplemental Twelve Months
Ended June 1998 of $11,799 are required to attain a one-to-one ratio
of Earnings to Fixed Charges.
** Supplemental ratio of earnings to fixed charges presented to exclude
write-off related to the discontinued application of provisions of
SFAS 71, "Accounting for the Effects of Certain Types of Regulation"
for the generation segment of the business.
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12(B)
ILLINOIS POWER COMPANY
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Thousands of Dollars)
Six Twelve Twelve
Months Months Ended Months Ended
Ended
June June June**
-------------------------------------------------------------------------
1998 1998 1998
---- ---- ----
Earnings Available for Fixed
Charges:
<S> <C> <C> <C>
Net Income (Loss) ($20,083) ($181,272) ($181,272)
Add:
Income Taxes:
Current 26,309 61,347 61,347
Deferred - (48,761) (49,551) (49,551)
Net
Allocated income taxes (1,852) (2,680) (2,680)
Investment tax credit - (3,447) (7,278) (7,278)
deferred
Income tax effect of FAS 71 write-off - (117,998) (117,998)
Interest on long-term debt 52,645 106,037 106,037
Amortization of debt
expense and
premium-net, and other interest 14,741 27,138 27,138
charges
One-third of all rentals (Estimated to
be
representative of the interest 2,154 4,067 4,067
component)
Interest on in-core fuel 1,767 3,807 3,807
FAS 71 Regulatory - - 313,030
Write-Offs
------------ --------------- --------------
Earnings (loss) available for fixed charges $23,473 ($156,383) $156,647
============ =============== ==============
Fixed charges:
Interest on long-term debt $52,645 $106,037 $106,037
Amortization of debt expense,premium-net,
other interest plus interest on IP Fuel 18,379 34,545 34,545
One-third of all rentals (Estimated to
be
representative of the interest 2,154 4,067 4,067
component)
------------ --------------- --------------
Total Fixed Charges $73,178 $144,649 $144,649
============ =============== ==============
Ratio of earnings to fixed 0.32 * (1.08) * 1.08
charges
============ =============== ==============
</TABLE>
* Earnings are inadequate to cover fixed charges. Additional earnings
(thousands) for Six Months Ended June 1998 of $49,705 and Twelve
Months Ended June 1998 of $301,032 are required to attain a one-to-one
ratio of Earnings to Fixed Charges.
** Supplemental ratio of earnings to fixed charges presented to exclude
write-off related to the discontinued application of provisions of
SFAS 71, "Accounting for the Effects of Certain Types of Regulation"
for the generation segment of the business.
33
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from
the balance sheet, income statement, and cash flow statement of
Illinois Power Company and is qualified in its entirety by reference
to the balance sheet, income statement, and cash flow statement of
Illinois Power Company.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4700
<OTHER-PROPERTY-AND-INVEST> 5
<TOTAL-CURRENT-ASSETS> 423
<TOTAL-DEFERRED-CHARGES> 221
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5349
<COMMON> 1180
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 27
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1207
197
57
<LONG-TERM-DEBT-NET> 1510
<SHORT-TERM-NOTES> 80
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 288
<LONG-TERM-DEBT-CURRENT-PORT> 12
0
<CAPITAL-LEASE-OBLIGATIONS> 100
<LEASES-CURRENT> 29
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1869
<TOT-CAPITALIZATION-AND-LIAB> 5349
<GROSS-OPERATING-REVENUE> 957
<INCOME-TAX-EXPENSE> (26)
<OTHER-OPERATING-EXPENSES> 931
<TOTAL-OPERATING-EXPENSES> 905
<OPERATING-INCOME-LOSS> 52
<OTHER-INCOME-NET> 3
<INCOME-BEFORE-INTEREST-EXPEN> 55
<TOTAL-INTEREST-EXPENSE> 65
<NET-INCOME> (10)
10
<EARNINGS-AVAILABLE-FOR-COMM> (20)
<COMMON-STOCK-DIVIDENDS> 43
<TOTAL-INTEREST-ON-BONDS> 53
<CASH-FLOW-OPERATIONS> 247
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
