UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Registrant, State of
Incorporation, Address
Commission of Principal Executive I.R.S. Employer
File Number Offices and Telephone Number Identification No.
1-11327 ILLINOVA CORPORATION 37-1319890
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521-2200
(217) 424-6600
1-3004 ILLINOIS POWER COMPANY 37-0344645
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521-2200
(217) 424-6600
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Securities registered pursuant to Section 12(b) of the Act:
Each of the following securities registered pursuant to Section 12(b) of the Act
are listed on the New York Stock Exchange.
Title of each class Registrant
- ------------------- ----------
Common Stock (a) Illinova Corporation
Preferred stock, cumulative, Illinois Power Company
$50 par value
4.08% Series 4.26% Series 4.70% Series
4.20% Series 4.42% Series
Mandatorily redeemable preferred securities of subsidiary
(Illinois Power Capital, L.P.)
9.45% Series
Trust originated preferred securities of subsidiary
(Illinois Power Financing 1)
8.00% Series
First mortgage bonds
7.95% Series due 2004
New mortgage bonds
6 1/8% Series due 2000 6 3/4% Series due 2005
5.625% Series due 2000 8% Series due 2023
6 1/2% Series due 2003 7 1/2% Series due 2025
6.25% Series due 2002 6.0% Series due 2003
(a) Illinova Common Stock is also listed on the Chicago Stock Exchange.
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Illinova Corporation Yes [X] No
Illinois Power Company Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Illinova Corporation [X]
Illinois Power Company [X]
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The aggregate market value of the common stock held by non-affiliates of
Illinova Corporation at February 28, 1999, was approximately $1.7 billion.
Illinova Corporation is the sole holder of the common stock of Illinois Power
Company. The aggregate market value of the voting preferred stock held by
non-affiliates of Illinois Power Company at February 28, 1999, was approximately
$46.6 million. The determination of stock ownership by non-affiliates was made
solely for the purpose of responding to this requirement and the registrants are
not bound by this determination for any other purpose.
The number of shares of Illinova Corporation Common Stock, without par
value, outstanding on February 28, 1999, was 69,919,287.
The number of shares of Illinois Power Company Common Stock, without par
value, outstanding on February 28, 1999, was 62,892,213, all of which is owned
by Illinova Corporation.
Documents Incorporated by Reference
1. Portions of the 1998 Annual Report to Shareholders of Illinova Corporation
in the appendix to the Illinova Corporation Proxy Statement.
(Parts I, II, III and IV of Form 10-K)
2. Portions of the 1998 Annual Report to Shareholders of Illinois Power
Company in the appendix to the Illinois Power Company Information
Statement.
(Parts I, II, III and IV of Form 10-K)
3. Portions of the Illinova 1998 Proxy Statement.
(Part III of Form 10-K)
4. Portions of the Illinois Power 1998 Information Statement.
(Part III of Form 10-K)
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ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
FORM 10-K
For the Fiscal Year Ended December 31, 1998
This combined Form 10-K is separately filed by Illinova Corporation and
Illinois Power Company. Information contained herein relating to Illinois Power
Company is filed by Illinova Corporation and separately by Illinois Power
Company on its own behalf. Illinois Power Company makes no representation as to
information relating to Illinova Corporation or its subsidiaries, except as it
may relate to Illinois Power Company.
TABLE OF CONTENTS
Part I Page
Item 1. Business 6
General 6
Dividends 7
Open Access and Competition 8
Customer and Revenue Data 10
IP Electric Business 10
Overview 10
Soyland Power Cooperative, Inc. 11
Clinton Power Station 12
General 12
Decommissioning Costs 12
Fuel Supply 13
Construction Program 16
Accounting Matters 16
IP Gas Business 17
Gas Supply 18
Diversified Business Activities 18
Environmental Matters 19
Air Quality 19
Clean Air Act 19
Global Warming 20
Manufactured-Gas Plant Sites 20
Water Quality 20
Other Issues 21
Electric and Magnetic Fields 21
Environmental Expenditures 21
Year 2000 Data Processing 21
Research and Development 21
Regulation 22
Important Information 22
Executive Officers of Illinova Corporation 25
Executive Officers of Illinois Power Company 26
Operating Statistics 27
Item 2. Properties 27
Item 3. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of
Security Holders 28
4
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TABLE OF CONTENTS (Continued)
Part II
Item 5. Market for Registrants' Common Equity
and Related Stockholder Matters 29
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 29
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 29
Item 8. Financial Statements and Supplementary
Data 29
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 30
Part III
Item 10. Directors and Executive Officers of
the Registrants 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain
Beneficial Owners and Management 31
Item 13. Certain Relationships and Related
Transactions 31
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 32
Signatures 35
Exhibit Index 37
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PART I
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ITEM 1. Business
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General
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Illinois Power Company (IP) was incorporated under the laws of the
State of Illinois on May 25, 1923.
Illinova Corporation (Illinova) was incorporated under the laws of the
State of Illinois on May 27, 1994 and serves as the parent holding company of
five principal operating subsidiaries: IP, Illinova Generating Company (IGC),
Illinova Energy Partners, Inc. (IEP), Illinova Insurance Company (IIC), and
Illinova Business Enterprises, Inc. (IBE). IBE was incorporated in 1998. In May
1996, another Illinova subsidiary, Illinova Power Marketing, Inc. (IPMI),
consolidated its business activities with those of Illinova Energy Services and
with the non-regulated marketing activities of Illinova, in a new company named
IEP. On April 1, 1997, IEP and IPMI merged. In the merger, IPMI was the
surviving corporation and subsequently changed its name to IEP.
IP is engaged in the generation, transmission, distribution and sale of
electric energy and the distribution, transportation and sale of natural gas in
the state of Illinois. IP is affected by changes in the electric utility
industry driven by regulatory and legislative initiatives to introduce
competition and end monopoly franchises. One aspect of this change is "direct
access," meaning giving customers the freedom to purchase electricity from
suppliers they choose. In December 1997, electric regulatory restructuring
legislation was enacted by the Illinois General Assembly and was signed by the
Governor. For a more detailed discussion of these developments, refer to the
"Open Access and Competition" section of this item.
IP provides funds to Illinova for operations and investments. Illinova
accrues interest due to IP on any borrowed funds at a rate equal to the higher
of the rate that Illinova would have to pay if it used a currently outstanding
line of credit, or IP's actual cost of the funds provided. Quarterly during
1998, when needed, IP effected a common stock repurchase from Illinova by
accepting shares having a market value equivalent to the amount of funds
provided to Illinova during the quarter plus the accrued interest for the
quarter. During 1998, IP provided approximately $79 million in funds to Illinova
through these stock repurchases. IP also provided funds to Illinova in the form
of cash dividends payable on the common stock of IP. In 1998, approximately $105
million in such dividends were declared and paid. For further information on IP
common stock repurchases, see Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this report. For more
information regarding cash dividend restrictions and stock repurchase
restrictions, see the "Dividends" section later in this item.
IGC is Illinova's wholly-owned independent power subsidiary. IGC
invests in energy supply projects throughout the world and competes in the
independent power market. For further discussion of IGC, see the "Diversified
Business Activities" section later in this item.
IEP is Illinova's wholly-owned subsidiary that engages in the brokering
and marketing of electric power and gas and the development and sale of
energy-related services to the unregulated energy market throughout the United
States and Canada. For further discussion of IEP, see the "Diversified Business
Activities" section later in this item.
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IIC was licensed in August 1996 by the State of Vermont as a captive
insurance company. The primary business of IIC is to insure the risks of the
subsidiaries of Illinova and risks related to or associated with their business
enterprises.
IBE is Illinova's wholly-owned subsidiary which was incorporated in
1998. The primary business of IBE is to account for miscellaneous business
activities not regulated by the Illinois Commerce Commission (ICC) or the
Federal Energy Regulatory Commission (FERC) and not falling within the business
scope of other Illinova subsidiaries.
The Illinova consolidated financial statements include the accounts of
Illinova Corporation, a holding company; IP, a combination electric and gas
utility; IGC, a wholly-owned subsidiary that invests in energy supply projects
and competes in the independent power market; IEP, a wholly-owned subsidiary
that develops and markets energy-related services to the unregulated energy
market; IIC, a wholly-owned subsidiary whose primary business is to insure
certain risks of Illinova and its subsidiaries; and IBE, a wholly owned
subsidiary which was incorporated in 1998 to account for miscellaneous business
activities not regulated by the ICC or FERC and not falling within the business
scope of other subsidiaries.
All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements. All transactions for
Illinova's unregulated subsidiaries are included in the sections titled
"Diversified Enterprises," "Interest Charges," "Income Taxes," and "Other Income
and Deductions," in Illinova's Consolidated Statements of Income.
The IP consolidated financial statements include the accounts of
Illinois Power Capital, L.P., a limited partnership in which IP serves as the
general partner; Illinois Power Financing I, a statutory business trust in which
IP serves as sponsor; Illinois Power Securitization Limited Liability Company
(LLC), a special purpose Delaware LLC whose sole member is IP; and Illinois
Power Special Purpose Trust, a special purpose Delaware business trust whose
sole owner is Illinois Power Securitization Limited Liability Company.
To the extent that information incorporated by reference herein appears
identically in both the 1998 Annual Report to Shareholders of Illinova
Corporation and the 1998 Annual Report to Shareholders of Illinois Power
Company, reference will be made herein only to the 1998 Annual Report to
Shareholders of Illinova Corporation, and such reference will be deemed to
include a reference to the 1998 Annual Report of Illinois Power Company.
Dividends
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On December 9, 1998, Illinova declared a quarterly common stock
dividend at $.31 per share payable February 1, 1999. On February 10, 1999,
Illinova declared a quarterly common stock dividend at $.31 per share payable
May 1, 1999.
The provisions of Supplemental Indentures to IP's General Mortgage
Indenture and Deed of Trust contain certain restrictions with respect to the
declaration and payment of dividends. IP was not limited by any of these
restrictions at December 31, 1998. Under the Restated Articles of Incorporation,
common stock dividends are subject to the preferential rights of the holders of
preferred and preference stock.
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IP is also limited in its payment of dividends by the Illinois Public
Utilities Act, which requires retained earnings equal to or greater than the
amount of any proposed dividend declaration or payment. The Federal Power Act
precludes declaration or payment of dividends by electric utilities "out of
money stated in a capital account." At December 31, 1998, IP had a zero balance
in retained earnings and was thus unable to declare a dividend on its common or
preferred stock. Payment of preferred dividends on February 1, 1999, was made
out of a trust created in November 1998 for this purpose. IP's retained earnings
balance is expected to grow sufficiently during 1999 to support payment of IP
common stock and scheduled preferred dividends. Illinova will secure payment of
IP preferred dividends through 1999.
IP typically pays dividends on its common stock to provide Illinova
cash for operations. Contingent on IP meeting a free cash flow test, the ICC has
authorized IP to periodically repurchase its common stock from Illinova. IP did
not satisfy the test at year-end 1998 and does not anticipate satisfying the
test in 1999.
Illinova and IP periodically review their dividend policies based on
several factors, including their present and anticipated future use of cash,
level of retained earnings, and business strategy.
Open Access and Competition
- ---------------------------
Competition has become a dominant issue for the electric utility
industry. It has been promoted by federal legislation, starting with the Public
Utility Regulatory Policies Act of 1978, which facilitated the development of
co-generators and independent power producers. Federal promotion of competition
continued with enactment of the Energy Policy Act of 1992, which authorized the
FERC to mandate wholesale wheeling of electricity by utilities at the request of
certain authorized generating entities and electric service providers. Wheeling
is the transport of electricity generated by one entity over transmission and
distribution lines belonging to another entity.
Competition arises not only from co-generation or independent power
production, but also from municipalities seeking to extend their service
boundaries to include customers being served by utilities. The right of
municipalities to have power wheeled to them by utilities was established in
1973. IP has been obligated to wheel power for municipalities and cooperatives
in its territory since 1976.
Further competition may be introduced by state action, as has occurred
in Illinois, or by federal regulatory action, although the Energy Policy Act
currently precludes the FERC from mandating retail wheeling. Retail wheeling
involves the transport of electricity to end-use customers. It is a significant
departure from traditional regulation in which public utilities have a universal
obligation to serve the public in return for protected service territories and
regulated pricing designed to allow a reasonable return on prudent investment
and recovery of operating costs.
P.A. 90-561, Illinois electric utility restructuring legislation, was
enacted in December 1997. P.A. 90-561 gives IP's residential customers a 15
percent decrease in base electric rates beginning August 1, 1998, and an
additional 5 percent decrease effective on May 1, 2002. The rate decreases
resulted in revenue reductions of approximately $35 million in 1998, and
expected revenue reductions of approximately $70 million in each of the years
1999 through 2001, approximately $90 million in 2002, and approximately $100
million in 2003, based on current consumption.
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Under P.A. 90-561, customers with demand greater than 4 MW at a single
site and customers with at least 10 sites which aggregate at least 9.5 MW in
total demand will be free to choose their electric generation suppliers ("direct
access") starting October 1999. Direct access for the remaining non-residential
customers will occur in two phases: customers representing one-third of the
remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002. IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates and remains obligated to provide delivery service to all at
regulated rates. In 1999, rates for delivery services for non-residential
customers will be established in proceedings mandated by P.A. 90-561. The
transition charges departing customers must pay to IP are not designed to hold
IP completely harmless from resulting revenue loss because of the mitigation
factor described below. IP will be able to estimate the revenue impact of
customer choice more accurately when its delivery service charges are
established.
Although the specified residential rate reductions and the introduction
of direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
ICC. The transition charges are calculated by subtracting from a customer's
fully bundled rate an amount equal to: a) delivery charges the utility will
continue to receive from the customer, b) the market value of the freed-up
energy, and c) a mitigation factor, which is the higher of a fixed rate per
kwh or a percentage of the customer's bundled base rate. The mitigation
factor increases during the transition period and is designed to provide
incentive for management to continue cost reduction efforts and generate
new sources of revenue;
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. See "Note 5 - Commitments and Contingencies" on pages
a-32 to a-37 of the 1998 Annual Report to Shareholders in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference.
The extent to which revenues are affected by P.A. 90-561 will depend on
a number of factors including future market prices for wholesale and retail
energy, and load growth and demand levels in the current IP service territory,
and success in marketing to customers outside IP's service territory. The impact
on net income will depend on, among other things, the amount of revenues earned
and the cost of doing business.
Competition creates both risks and opportunities. At this time, the
ultimate effect of competition on Illinova's consolidated financial position and
results of operations is uncertain.
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Customer and Revenue Data
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In 1998, approximately 73 percent and 12 percent of Illinova's
operating revenues were derived from IP's sale of electricity and IP's sale and
transportation of natural gas, respectively. Approximately 15 percent of
Illinova's operating revenues came from its diversified enterprises in 1998. The
territory served by IP comprises substantial areas in northern, central and
southern Illinois, including nine cities with populations greater than 30,000
and twenty cities with a population of over 10,000 (1996 U.S. Census Bureau's
Estimated Populations). IP supplies electric service at retail to an estimated
aggregate population of 1,278,000 in 311 incorporated municipalities, adjacent
suburban and rural areas, and numerous unincorporated communities and retail
natural gas service to an estimated population of 962,000 in 266 incorporated
municipalities and adjacent areas. IP holds franchises in all of the 311
incorporated municipalities in which it furnishes retail electric service and in
all of the 266 incorporated municipalities in which it furnishes retail gas
service. At March 1, 1999, IP served 580,628 active electric customers (billable
meters) and 408,632 active gas customers (billable meters). These numbers do not
include non-metered customers such as street lights. Sales of electricity and
gas sales and transportation are affected by seasonal weather patterns, and,
therefore, operating revenues and associated operating expenses are not
distributed evenly during the year.
For more information, see "Note 14 - Segments of Business" on pages
a-45 through a-47 of the 1998 Annual Report to Shareholders in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference.
IP Electric Business
--------------------
Overview
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IP supplies electric service at retail to residential, commercial and
industrial consumers in substantial portions of northern, central and southern
Illinois. Electric service at wholesale is supplied to numerous utilities and
power marketing entities, as well as to the Illinois Municipal Electric Agency
(IMEA) as agent for 11 municipalities and to Soyland Power Cooperative, Inc.
(Soyland) for resale to its member cooperatives. For additional information
related to Soyland, see "Note 7 - Facilities Agreements" on page a-38 of the
1998 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement which is incorporated herein by reference. In 1998, IP provided
interchange power to 81 entities, including 69 power marketers.
IP's highest system peak hourly demand (native load) in 1998 was
3,694,000 kilowatts on July 21, 1998. This establishes a new IP record for peak
load.
IP owns and operates generating facilities with a total net summer
capability of 4,571,250 kilowatts. The generating capability comes from six
major steam generating plants and three peaking service combustion turbine
plants. See Item 2, "Properties" for further information.
IP is a participant, together with Ameren - Union Electric Company
(AmerenUE) and Ameren - Central Illinois Public Service Company (AmerenCIPS), in
the Illinois-Missouri Power Pool which was formed in 1952. The Pool operates
under an interconnection agreement which provides for the interconnection of
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transmission lines. This agreement has no expiration date, but any party may
withdraw from the agreement by giving 36 months notice to the other parties.
IP has agreements with all major wholesale marketing and trading
entities operating in the Midwest. These agreements are used for the purchase
and sale of energy in the wholesale market.
IP, AmerenCIPS and AmerenUE have a contract with the Tennessee Valley
Authority (TVA) providing for the interconnection of the TVA system with those
of the three companies to exchange economy and emergency power and for other
working arrangements. This contract has no expiration date, but any party may
withdraw from the agreement by giving five years written notice to the other
parties.
IP also has interconnections with Indiana-Michigan Power Company,
Commonwealth Edison Company, Central Illinois Light Company, Mid-American Energy
Corporation, Louisville Gas & Electric, Southern Illinois Power Cooperative,
Electric Energy Inc. (EEI), Soyland, the City of Springfield, Illinois and the
TVA.
IP is a member of the Mid-America Interconnected Network, one of ten
regional reliability councils established to coordinate plans and operations of
member companies regionally and nationally.
In January 1998, IP, in conjunction with eight other
transmission-owning entities, filed with FERC for all approvals necessary to
create and implement the Midwest Independent Transmission System Operator, Inc.
(MISO). On September 16, 1998, FERC issued an order authorizing the creation of
a MISO. The MISO is governed by a seven-person independent board of directors.
The goals of the MISO 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
independent 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 Transmission Open Access Notice of Proposed Rulemaking,
Order No. 888. Since January 1998, four other transmission-owning entities
joined the MISO. Participation in an ISO is a requirement of P.A. 90-561. The
MISO has stated a goal to begin limited operation in 1999 and to be fully
operational in 2000.
In 1996, IP transferred, through a dividend, its 20% ownership of the
capital stock of EEI to Illinova. Illinova's interest was transferred to IGC in
1996. EEI was organized to own and operate a steam electric generating station
and related transmission facilities near Joppa, Illinois to supply electric
energy to the U.S.
Department of Energy (DOE) for its project near Paducah, Kentucky.
Soyland Power Cooperative, Inc.
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For discussion of the transfer to IP of Soyland's share of Clinton
Power Station (Clinton) and the amended Power Coordination Agreement between
Soyland and IP, see "Note 7 - Facilities Agreements" on page a-38 of the 1998
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
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Clinton Power Station
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General
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In March 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership interest in
Clinton in connection with the transfer from Soyland to IP of all of Soyland's
interest in Clinton. Soyland's title to the plant and directly related assets
such as nuclear fuel were transferred to IP in May 1997. Soyland's nuclear
decommissioning trust assets were transferred to IP in May 1997, consistent with
IP's assumption of all of Soyland's ownership obligations including those
related to decommissioning.
Clinton was placed in service in 1987 and represents approximately 20%
of IP's installed generation capacity. For more information on the Clinton Power
Station, see "Note 4 - Clinton Power Station" on page a-31 of the 1998 Annual
Report to Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference.
Due to uncertainties of deregulated generation pricing in Illinois and
due to various operation and management factors, Illinova's and IP's Boards of
Directors voted in December 1998 to sell or close Clinton. The decision resulted
in an impairment of Clinton-related assets and accrual of exit-related costs.
The impairment and accrual of related charges resulted in a $1,327.2 million,
net of income taxes, charge against earnings.
IP has entered into discussions with parties interested in purchasing
Clinton. Principal concerns of interested parties are plant restart, funding of
the decommissioning liability, terms of any purchase agreement for power
generated by Clinton, including the length of any agreement and the price of
electricity in any agreement, market price projections for electricity in the
region, property tax obligations of the purchaser, and income tax issues. These
concerns create substantial uncertainty with regard to the ability to convert
any tentative agreement into an executable transaction. Therefore, IP has
accounted for the Clinton exit based on the expectation of plant closure as of
August 31, 1999. An August 31, 1999, closure allows IP to pursue opportunities
to sell Clinton, which has the potential economic benefit of reducing IP's
financial exposure to decommissioning. An August 31, 1999, closure also allows
IP to refine its plans to close and decommission Clinton if a tentative
agreement cannot be converted into an executable transaction. In addition,
Clinton would be available for the summer cooling season. The estimated Clinton
other operating and maintenance expense, including expensed capital
expenditures, is $151 million for January through August 1999.
See "Note 2 - Clinton Impairment and Quasi-Reorganization" on pages
a-27 through a-29 of the 1998 Annual Report to Shareholders in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference.
Decommissioning Costs
---------------------
IP is responsible for the costs of decommissioning Clinton and for
spent nuclear fuel disposal costs. In May 1997, consistent with IP's assumption
of all of Soyland's ownership obligations of Clinton, Soyland's nuclear
decommissioning trust assets of approximately $6 million were transferred to IP.
P.A. 90-561 provides for the continued recovery of decommissioning costs through
rates charged to IP's delivery service customers. An ICC approved site-specific
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decommissioning study projected a cost of $538 million in 1996 dollars for
decommissioning based on the assumption of the DECON method (prompt removal and
dismantlement of Clinton), which results in material expenditures in the early
years of decommissioning Clinton. The projected cost estimate in 2026 dollars,
assuming a 2 percent annual inflation factor, is $988 million. This estimate
continues as the basis for assessing decommissioning costs to IP's customers.
On December 9, 1998, Illinova's and IP's Boards of Directors decided
that IP would exit the nuclear business. The ultimate disposition of Clinton, as
well as the decommissioning method chosen, could have a material impact on the
total decommissioning liability. For more information on the decommissioning
costs related to Clinton, see "Decommissioning and Nuclear Fuel Disposal" in
"Note 5 - Commitments and Contingencies" on page a-34 of the 1998 Annual Report
to Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference.
Fuel Supply
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Coal was used to generate approximately 97% of the electricity produced
by IP during 1998, with other fuels generating the remaining 3%. For 1999, after
Clinton returns to service, the percentages of generation attributable to
nuclear fuel is projected to increase while projected generation from coal will
decline. As explained in "Note 2 - Clinton Impairment and Quasi-Reorganization"
on pages a-27 through a-29 of the 1998 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement, which is incorporated herein by
reference, Illinova's and IP's Boards of Directors voted to exit nuclear
operations. See this note for further information.
On March 6, 1998, IP initiated an ICC proceeding for elimination of the
UFAC. This established a new base fuel cost recoverable under IP's electric
tariffs which includes a component for recovery of fuel costs, but not a direct
pass-through of such costs. Elimination of the UFAC exposes IP to the risks and
opportunities of market price volatility and operating efficiencies. By
eliminating the UFAC, IP eliminated exposure for potential disallowed fuel and
purchased power costs for the periods after December 31, 1996. Whether electric
energy production costs will continue to be recovered depends on a number of
factors, including the number of customers served, demand for electric service,
and changes in fuel cost components. Furthermore, IP's base electric rates to
residential customers were reduced beginning in August 1998 and certain
customers will be free to choose their electric generation suppliers beginning
in October 1999. These variables will be influenced, in turn, by market
conditions, availability of generating capacity, future regulatory proceedings,
and environmental protection costs, among other things. IP's electric customers
are receiving refunds totaling $15.1 million during the first quarter of 1999
related to fuel cost disallowances as the final phase of the elimination of the
UFAC. These refunds close the ICC review process related to the UFAC cost
pass-through for the years 1989, 1994, 1995, and 1996.
For additional information, see the information under the sub-captions
"Revenue and Energy Cost" of "Note 1 - Summary of Significant Accounting
Policies" on pages a-25 and a-26 and "Fuel Cost Recovery" of "Note 5 Commitments
and Contingencies" on page a-32 of the 1998 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement which is incorporated herein by
reference.
COAL - Coal is expected to be the primary source of fuel for future generation.
Through both long-term and short-term contracts, IP has obtained commitments for
a major portion of its future coal requirements. IP announced in November 1998
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that it will comply with Phase II of the Clean Air Act Amendments that become
effective January 1, 2000, by switching to low sulfur Powder River Basin coal at
its Baldwin and Hennepin Power Stations. IP will continue to comply during 1999,
the final year of Phase I of the Clean Air Act, with Illinois high sulfur coal
and emission allowances. IP renegotiated one contract in 1998 that will provide
Powder River Basin coal through 2010. IP also has short-term contracts with two
suppliers which last through 2000 and a third contract which lasts through 2002.
Spot purchases of coal in 1998 represented less than 5% of IP's total
coal purchases. Given the above-mentioned commitments, IP believes that it will
be able to obtain sufficient coal to meet its future generating requirements.
However, IP is unable to predict the extent to which coal availability and price
may fluctuate in the future. Coal inventories on hand at December 31, 1998,
represented a 43-day supply based on IP's average daily burn projections for
1999.
NUCLEAR - IP leases nuclear fuel from Illinois Power Fuel Company (Fuel
Company). The Fuel Company, which is 50% owned by IP, was formed in 1981 for the
purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to
the Fuel Company's cost of fuel as consumed (including related financing and
administrative costs). IP is obligated to make subordinated loans to the Fuel
Company at any time the obligations of the Fuel Company which are due and
payable exceed the funds available to the Fuel Company. At December 31, 1998, IP
had outstanding loans to the Fuel Company of approximately $1.96 million. This
amount was repaid in January 1999. Lease terms stipulate that, in the event
Clinton is out of service for 24 consecutive months, IP is obligated to purchase
Clinton's in-core nuclear fuel from the Fuel Company. In accordance with this
provision, IP purchased $62.1 million of fuel in the first quarter of 1999. IP
has an obligation for nuclear fuel disposal costs of leased nuclear fuel. For
additional information relating to the nuclear fuel lease, see "Note 9 - Capital
Leases" on page a-39 of the 1998 Annual Report to Shareholders in the appendix
to the Illinova Proxy Statement which is incorporated herein by reference. At
December 31, 1998, IP's net investment in nuclear fuel was $20.4 million.
IP has one long-term contract for the supply of uranium concentrates
with Cameco, a Canadian corporation. The Cameco contract was renegotiated in
1994 to lower the price and provide 55% to 65% of Clinton's estimated fuel
requirements approximately through 2000. The decision to utilize Cameco for the
additional 10% of Clinton's fuel requirements is made the year before each
delivery and depends on the estimated price and availability from the spot
market versus the estimated contract price. The contract with Cameco is stated
in terms of U.S. dollars. It is expected that this contract will be terminated
in 1999 as a result of the decision to exit Clinton operations.
Accordingly, termination fees were accrued at December 31, 1998.
Conversion services for the period 1991-2005 are contracted with
Sequoyah Fuels. Sequoyah Fuels closed its Oklahoma conversion plant in 1992 and
joined with Allied Chemical Company to form a marketing company named CoverDyn.
All conversion services will be performed at Allied's Metropolis, Illinois
facility, but Sequoyah Fuels retains the contract with IP. It is expected that
this contract will be terminated in 1999 as a result of the decision to exit
Clinton operations. Accordingly, termination fees were accrued at December 31,
1998.
IP has a utility services contract for uranium enrichment requirements
with the DOE which provides 70% of the enrichment requirements of Clinton
through 1999. The remaining 30% has been contracted with the DOE through an
amendment to its incentive pricing plan through 1999. This amendment allows IP
14
<PAGE>
to either purchase the enrichment services at the DOE's incentive price or
provide electricity at DOE's Paducah, Kentucky enrichment plant at an agreed
exchange rate.
A contract with General Electric Company provides fuel fabrication
requirements for the initial core and 11 reloads, or approximately through 2011.
The contract was renegotiated in 1998 to lower the price and reduce the duration
from approximately 19 reloads. It is expected that this contract will be
terminated in 1999 as a result of the decision to exit Clinton operations.
Accordingly, termination fees were accrued at December 31, 1998.
Under the Nuclear Waste Policy Act (NWPA), the DOE is responsible for
the permanent storage and disposal of spent nuclear fuel. The DOE currently
charges one mill ($0.001) per net kwh (one dollar per MWH) generated and sold
for future disposal of spent fuel. IP is recovering these charges through rates.
In 1996, at the request of nuclear-owning utilities and state regulatory
agencies, the District of Columbia (D.C.) Circuit Court of Appeals issued an
order confirming DOE's unconditional obligation to take responsibility for spent
nuclear fuel commencing in 1998. The DOE argued that it had no such obligation
because of its inability to site and license a permanent repository.
Notwithstanding this decision, which the DOE did not appeal, the DOE has
indicated to all nuclear utilities that it will experience delay in performance.
The impact of any such delay on IP will depend on many factors, including the
duration of such delay and the cost and feasibility of interim, on-site storage.
Nuclear plant owners and others are pursuing litigation against DOE at the D.C.
Circuit Court of Appeals, the Federal Court of Claims, federal district court,
and in administrative proceedings. These lawsuits are focused on establishing
DOE liability for damages caused by its failure to perform, the scope of those
damages, and other remedies. IP is participating in such litigation before the
D.C. Circuit Court of Appeals. To date, the unconditional nature of DOE's
obligation has been upheld but no court has yet quantified damages or ordered
specific performance. The outcome of these lawsuits is uncertain.
Currently, commercial reprocessing of spent nuclear fuel is not allowed
in the United States. The NWPA was enacted to establish a government policy on
disposal of spent nuclear fuel and/or high-level radioactive waste. Although the
DOE has failed to comply with its obligation under the NWPA to provide spent
nuclear fuel retrieval and storage by 1998, IP has on-site underwater storage
capacity that will accommodate its spent fuel storage needs for approximately 10
years. IP is currently an equity partner with seven other utilities in an effort
to develop a private temporary repository. 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. Safe, dry, on-site storage is technologically feasible,
but is subject to licensing and local permitting requirements, for which there
may be effective opposition.
Under the Energy Policy Act of 1992, IP is responsible for a portion of
the cost to decontaminate and decommission the DOE's uranium enrichment
facilities. Each utility is assessed an annual fee for a period of fifteen years
based on quantities purchased from the DOE facilities prior to passage of the
Act. At December 31, 1998, IP has a remaining liability of $5.9 million
representing future assessments. IP had been recovering these costs, as
amortized, through its UFAC subject to UFAC limitations discussed under the
heading "Fuel Supply" previously in this item.
OIL and GAS - IP used natural gas and oil to generate 1.8% of the electricity
produced in 1998. IP has not experienced difficulty in obtaining adequate
supplies of these resources. However, IP is unable to predict the extent to
which oil and gas availability and price may fluctuate in the future.
15
<PAGE>
Reference is made to the section "Environmental Matters" hereunder for
information regarding pollution control matters relating to IP's fuel supply.
Construction Program
- --------------------
To meet anticipated needs, Illinova and IP have used internally
generated funds and external financings. The timing and amount of external
financings depend primarily on economic and financial market conditions, cash
needs and capitalization ratio objectives.
For more information on Illinova's construction program and liquidity,
see "Note 5 - Commitments and Contingencies" on page a-32 of the 1998 Annual
Report to Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference; "Note 6 - Lines of Credit and Short-Term
Loans" on page a-37 of the 1998 Annual Report to Shareholders in the appendix to
the Illinova Proxy Statement which is incorporated herein by reference; and
"Liquidity and Capital Resources" in "Management's Discussion and Analysis" on
pages a-12 through a-15 of the 1998 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement which is incorporated herein by
reference.
For more information on IP's construction program and liquidity, see
"Note 4 - Commitments and Contingencies" on pages a-28 and a-33 of the 1998
Annual Report to Shareholders in the appendix to the Illinois Power Information
Statement which is incorporated herein by reference; "Note 5 - Lines of Credit
and Short-Term Loans" on page a-33 of the 1998 Annual Report to Shareholders in
the appendix to the Illinois Power Information Statement which is incorporated
herein by reference; and "Liquidity and Capital Resources" in "Management's
Discussion and Analysis" on pages a-10 through a-14 of the 1998 Annual Report to
Shareholders in the appendix to the Illinois Power Information Statement which
is incorporated herein by reference.
Accounting Matters
- ------------------
Prior to the enactment 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 assets on their balance sheets 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 of the Financial Accounting
Standards Board (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 market-based pricing of electric
generation services, IP discontinued application of FAS 71 for its generating
segment as of December 1997. 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.
In December 1997, IP wrote off generation-related regulatory assets and
liabilities of approximately $195 million (net of income taxes). These net
16
<PAGE>
assets related to previously incurred costs that had been expected to be
collected through future revenues, including deferred Clinton post construction
costs, unamortized gains and losses on reacquired debt, recoverable income taxes
and other generation-related regulatory assets. At December 31, 1998, IP's net
investment in non-nuclear generation facilities was $2.9 billion.
As discussed above, Illinova's and IP's Boards of Directors decided to
exit the nuclear portion of the business, by either sale or shutdown of Clinton.
FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," requires that all long-lived assets for which
management has committed to a plan of disposal be reported at the lower of
carrying amount or fair value less cost to sell. Consequently, IP wrote off the
value of Clinton and accrued Clinton-related exit costs, which resulted in an
accumulated deficit in Illinova's retained earnings of $1,419.5 million.
Illinova's and IP's Boards of Directors also approved in December 1998,
quasi-reorganization accounting for Illinova and IP. The SEC provided
concurrence with this accounting in November 1998. 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 liabilities to their fair values, with the net amount of these
adjustments added to or deducted from the deficit. Any balance in the retained
earnings account is then eliminated by a transfer from other paid-in capital,
giving the company a "fresh start" with a zero balance in retained earnings. For
additional information see "Note 2 - Clinton Impairment and
Quasi-Reorganization" on pages a-27 through a-29 of the 1998 Annual Report to
Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference.
IP Gas Business
---------------
IP supplies retail natural gas service to an estimated aggregate
population of 962,000 in 266 incorporated municipalities, adjacent suburban
areas and numerous unincorporated communities. IP does not sell gas for resale.
IP's rate schedules contain provisions for passing through to its gas
customers increases or decreases in the cost of purchased gas. For information
on revenue and energy costs, see the sub-caption "Revenue and Energy Cost" of
"Note 1 - Summary of Significant Accounting Policies" on pages a-25 and a-26 of
the 1998 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement that is incorporated herein by reference.
IP has eight underground gas storage fields having a total capacity of
approximately 15.2 million MMBtu and a total deliverability on a peak day of
about 347,000 MMBtu. In addition to the capacity of the eight underground
storage fields, IP has contracts with various natural gas suppliers and
producers for 9.9 million MMBtu of underground storage capacity and a total
deliverability on a peak day of 160,000 MMBtu. Operation of underground storage
permits IP to increase deliverability to its customers during peak load periods
by taking gas into storage during the off-peak months.
IP owns one active liquefied petroleum gas plant having an aggregate
peak-day deliverability of about 20,000 MMBtu for peak-shaving purposes. Gas
properties include approximately 8,000 miles of mains.
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IP experienced its 1998 peak-day send out of 572,067 MMBtu of natural
gas on December 30, 1998. This compares with IP's record peak-day send out of
857,324 MMBtu of natural gas on January 10, 1982.
Gas Supply
- ----------
IP has contracts with six interstate pipeline companies for firm
transportation and storage services. These contracts have varying expiration
dates ranging from 1999 to 2004. IP also enters into contracts for the
acquisition of natural gas supply. Those contracts range in duration from one to
five months.
Diversified Business Activities
-------------------------------
IGC, a wholly-owned subsidiary of Illinova, invests in energy supply
projects throughout the world. IGC is an equity partner with Tenaska, Inc. in
four natural gas-fired generation plants, of which three plants totaling
approximately 700 megawatts (MW) are in operation and one 830 MW plant is under
construction. Tenaska, Inc. is an Omaha, Nebraska-based developer of independent
power projects throughout the United States. IGC also owns 100 percent of the
North American Energy Services Company (NAES). NAES supplies a broad range of
operations, maintenance and support services to the world-wide independent power
generation industry and operates the Tenaska generation plants in which IGC has
an equity interest. IGC is an equity partner in the Indeck North American Power
Fund (Fund). The Fund has generation projects in Long Beach, California, and
Pepperell, Massachusetts. In addition to these ventures, IGC is involved in
generation projects in Teesside, England; Puerto Cortez, Honduras; Zhejiang
Province and Hunan Province, People's Republic of China; Aguaytia, Peru;
Tilaran, Costa Rica; Old Harbour, Jamaica; Barranquilla, Columbia; and
Balochistan, Pakistan. In August 1996, Illinois Power's interest in the 1000 MW
coal-fired plant in Joppa, Illinois was transferred to IGC.
IEP is Illinova's wholly-owned subsidiary that engages in the brokering
and marketing of electric power and gas, and the development and sale of
energy-related products and services to the unregulated energy market throughout
the United States and Canada. In May 1995, IEP obtained approval from the FERC
to conduct business as a marketer of electric power and gas to various customers
outside of IP's present service territory. In September 1995, IEP began buying
and selling wholesale electricity in the Western United States. IEP owns 50
percent of Tenaska Marketing Ventures (TMV). TMV focuses on natural gas
marketing in the Midwestern United States. IEP and TMV have formed Tenaska
Marketing Canada to market natural gas in Canada. In July 1996, IP received FERC
approval to sell electricity to IEP without prior transaction approval from
FERC. In October 1998, IEP acquired a 51% ownership interest in EMC Gas
Transmission Company, a retail gas marketer in Michigan. IEP consolidates the
accounts of EMC Gas Transmission Company.
For more information on the activities of the Illinova's diversified
enterprises, see "Note 3 - Illinova Subsidiaries" on page a-30 of the 1998
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
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<PAGE>
Environmental Matters
---------------------
IP is subject to regulation by certain federal and Illinois authorities
with respect to environmental matters and may in the future become subject to
additional regulation by such authorities or by other federal, state and local
governmental bodies. Existing regulations affecting IP are principally related
to air and water quality, hazardous wastes and toxic substances.
Air Quality
- -----------
Pursuant to the Federal Clean Air Act (Act), the United States
Environmental Protection Agency (USEPA) has established ambient air quality
standards for air pollutants which, in its judgment, have an adverse effect on
public health or welfare. The Act requires each state to adopt laws and
regulations, subject to USEPA approval, designed to achieve such standards.
Pursuant to the Illinois Environmental Protection Act, the Illinois Pollution
Control Board (Board) adopted and, along with the Illinois Environmental
Protection Agency (IEPA), is enforcing a comprehensive set of air pollution
control regulations which include emission limitations, permit issuances,
monitoring and reporting requirements.
The air pollution regulations of the Board impose limitations on
emissions of particulate, sulfur dioxide, carbon monoxide, nitrogen oxides and
various other pollutants. Enforcement of emission limitations is accomplished in
part through the regulatory permitting process. IP's practice is to obtain an
operating permit for each source of regulated emissions. Presently, it has a
total of approximately 100 permits for emission sources at its power stations
and other facilities, expiring at various times. In addition to having the
requisite operating permits, each source of regulated emissions must be operated
within the regulatory limitations on emissions. Verification of such compliance
is usually accomplished by reports to regulatory authorities and inspections by
such authorities.
In accordance with the requirements of the Illinois Clean Air Act
Permit Program (CAAPP), IP submitted new air permit applications for each of its
generating facilities in 1995. The IEPA will review these applications and is
expected to issue CAAPP permits in 1999.
In addition to the sulfur dioxide emission limitations for existing
facilities, both the USEPA and the State of Illinois adopted New Source
Performance Standards (NSPS) applicable to coal-fired generating units limiting
emissions to 1.2 pounds of sulfur dioxide per million Btu of heat input. This
standard is applicable to IP's Unit 6 at the Havana Power Station. The federal
NSPS also limit nitrogen oxides, opacity and particulate emissions and imposes
certain monitoring requirements. In 1977 and 1990, the Act was amended and, as a
result, USEPA has adopted more stringent emission standards for new sources.
These standards would apply to any new plant constructed by IP.
Clean Air Act
- -------------
For information on the impacts of the Clean Air Act Amendments of 1990,
see "Environmental Matters" in "Note 5 - Commitments and Contingencies" on pages
a-35 and a-36 of the 1998 Annual Report to Shareholders in the appendix to the
Illinova Proxy Statement which is incorporated herein by reference.
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Global Warming
- --------------
For information on the impacts of the international negotiations to
reduce greenhouse gas emissions and the Kyoto Protocol, see "Environmental
Matters" in "Note 5 - Commitments and Contingencies" on page a-36 of the 1998
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
Manufactured-Gas Plant Sites
- ----------------------------
IP's estimated liability for MGP site remediation is $61 million. This
amount represents IP's current best estimate of the costs 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 claiming that
insurance coverage should apply to a portion of the cleanup costs. As of June
1998, settlements or settlements in principle have been negotiated with all 30
of the carriers. Settlement proceeds recovered from the carriers will offset a
significant portion of MGP remediation costs and will be credited to IP's
customers through the tariff rider mechanism which the ICC previously approved.
Cleanup costs in excess of insurance proceeds will be fully recovered from IP's
transmission and distribution customers.
Water Quality
- -------------
The Federal Water Pollution Control Act Amendments of 1972 require that
National Pollutant Discharge Elimination System (NPDES) permits be obtained from
USEPA (or, when delegated, from individual state pollution control agencies) for
any discharge into navigable waters. Such discharges are required to conform
with the standards, including thermal, established by USEPA and also with
applicable state standards.
Enforcement of discharge limitations is accomplished in part through
the regulatory permitting process similar to that described previously under
"Air Quality." Presently, IP has approximately two dozen permits for discharges
at its power stations and other facilities, which must be periodically renewed.
In addition to obtaining such permits, each source of regulated
discharges must be operated within the limitations prescribed by applicable
regulations. Verification of such compliance is usually accomplished by
monitoring results reported to regulatory authorities and inspections by such
authorities.
The Clinton permit was reissued in the third quarter of 1995. The
Havana Power Station permit was reissued in the first quarter of 1996. The
Hennepin Power Station permit application for reissuance was submitted in the
fourth quarter of 1996. The permit is not expected until the third or fourth
quarter of 1999. The Vermilion Power Station permit was reissued in the fourth
quarter of 1996. The Wood River Power Station permit was reissued in the first
quarter of 1996. The Baldwin Power Station permit was reissued in the first
quarter of 1998.
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Other Issues
- ------------
Hazardous and non-hazardous wastes generated by IP must be managed in
accordance with federal regulations under the Toxic Substances Control Act
(TSCA), the Comprehensive Environmental Response, Compensation and Liability Act
and the Resource Conservation and Recovery Act (RCRA) and additional state
regulations promulgated under both RCRA and state law. Regulations promulgated
in 1988 under RCRA govern IP's use of underground storage tanks. The use,
storage, and disposal of certain toxic substances, such as polychlorinated
biphenyls (PCBs) in electrical equipment, are regulated under the TSCA.
Hazardous substances used by IP are subject to reporting requirements under the
Emergency Planning and Community-Right-To-Know Act. The State of Illinois has
been delegated authority for enforcement of these regulations under the Illinois
Environmental Protection Act and state statutes. These requirements impose
certain monitoring, recordkeeping, reporting and operational requirements which
IP has implemented or is implementing to assure compliance. IP does not
anticipate that compliance will have a material adverse impact on its financial
position or results of operations.
Electric and Magnetic Fields
- ----------------------------
For information on Electric and Magnetic Fields, see "Electric and
Magnetic Fields" in "Note 5 Commitments and Contingencies" on page a-36 of the
1998 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement which is incorporated herein by reference.
Environmental Expenditures
- --------------------------
Operating expenses for environmentally-related activities were $53
million in 1998 (including the incremental costs of alternative fuels to meet
environmental requirements). IP's net capital expenditures (including AFUDC and
capitalized interest) for environmental protection programs were approximately
$28.4 million in 1998. Accumulated net capital expenditures since 1969 have
reached approximately $822 million.
Year 2000 Data Processing
-------------------------
For information on Year 2000 Data Processing, see "Year 2000" in
"Management's Discussion and Analysis" on pages a-5 through a-8 of the 1998
Annual Report to Shareholders in the appendix to the Illinova Proxy Statement
which is incorporated herein by reference.
Research and Development
------------------------
Illinova's research and development expenditures for 1998 were
comprised entirely of IP expenditures of approximately $5.1 million. In 1997,
Illinova's research and development expenditures were approximately $5.4 million
for IP and $2.0 million for Illinova. Illinova's research and development
expenditures for 1996 consisted entirely of IP expenditures of $5.4 million.
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Regulation
----------
The Illinois Public Utilities Act was significantly modified in 1997 by
P.A. 90-561, but the ICC continues to have broad powers of supervision and
regulation with respect to the rates and charges of IP, its services and
facilities, extensions or abandonment of service, classification of accounts,
valuation and depreciation of property, issuance of securities and various other
matters. Before a significant plant addition may be included in IP's rate base,
the ICC must determine that the addition is reasonable in cost, prudent and used
and useful in providing utility service to customers. IP must continue to
provide bundled retail electric service to all who choose to continue to take
service at tariff rates, and IP must provide unbundled electric distribution
services to all eligible customers as defined by P.A. 90-561 at rates to be
determined by the ICC as early as September 1, 1999. During 1998, pursuant to
authority granted in P.A. 90-561, the ICC issued rules associated with (i)
transactions between the utility and its affiliates; (ii) service reliability;
(iii) environmental disclosure; and (iv) alternative retail electric supplier
certification criteria and procedures. During 1999, it is expected that the ICC
will rule on (i) the rates and terms associated with the provision of delivery
services for commercial and industrial customers; (ii) establishing the neutral
fact finder price utilized in (a) calculating competitive transition costs and
(b) IP's power purchase tariff; (iii) the competitive transition cost
methodology; and (iv) guidelines regarding standards of conduct and functional
separation. Additionally, the ICC has initiated a proceeding to investigate the
further unbundling of the utility's delivery services and expects to rule on the
issue in early 1999.
Illinova and IP are exempt from all the provisions of the Public
Utility Holding Company Act of 1935 except Section 9(a)(2) thereof. That section
requires approval of the Securities and Exchange Commission prior to certain
acquisitions of any securities of other public utility companies or public
utility holding companies.
IP is subject to regulation under the Federal Power Act by the FERC as
to rates and charges in connection with the transmission of electric energy in
interstate commerce and the sale of such energy at wholesale in interstate
commerce, the issuance of debt securities maturing in not more than 12 months,
accounting and depreciation policies, interaction with affiliates, and certain
other matters. The FERC has declared IP exempt from the Natural Gas Act and
related FERC orders, rules and regulations.
IP is subject to the jurisdiction of the NRC with respect to Clinton.
NRC regulations control the granting of permits and licenses for the
construction and operation of nuclear power stations and subject such stations
to continuing review and regulation. Additionally, the NRC review and regulatory
process covers decommissioning, radioactive waste, environmental and
radiological aspects of such stations.
IP is subject to the jurisdiction of the Illinois Department of Nuclear
Safety (IDNS) with respect to Clinton. IDNS and the NRC entered a memorandum of
understanding which allows IDNS to review and regulate nuclear safety matters at
state nuclear facilities. The IDNS review and regulatory process covers
radiation safety, environmental safety, non-nuclear pressure vessels, emergency
preparedness and emergency response.
Important Information
---------------------
Certain of the statements contained in this report, including those in
Management's Discussion and Analysis are forward-looking. Other statements,
22
<PAGE>
particularly those using words like "expect," "intend," "predict," "estimate,"
and "believe," also are forward-looking. Although Illinova and IP believe these
statements are accurate, its businesses are dependent on various regulatory
issues, general economic conditions and future trends, and these factors can
cause actual results to differ materially from the forward-looking statements
that have been made. In particular:
Illinova's activities, particularly the utility activities of IP, are
heavily regulated by both the federal government and the State of
Illinois. This regulation has changed substantially over the past
several years. The impacts of these changes include reductions in rates
pursuant to P.A. 90-561 and a phasing in of the opportunity for an
increasing number of customers to choose alternative energy suppliers.
In addition, future regulatory changes are certain to occur and their
nature and impact cannot be predicted.
IP is likely to face increased competition in the future. Deregulation
of certain aspects of IP's business at both the state and federal
levels is occurring, the primary results of which so far are that
competing generators of electricity will increasingly have the ability
to sell electricity to IP's customers and to require IP to transmit and
distribute that electricity. In addition, alternative sources of
electricity, such as co-generation facilities, are becoming
increasingly popular. When customers elect suppliers other than IP for
their electricity, IP can avoid certain costs and can gain revenue from
transmitting and distributing that electricity; however, the net effect
of these elections generally is a decrease in IP's revenue and
operating income. Illinois transition law is designed to protect
utilities in three principal ways:
1. Departing customers are obligated to pay transition charges based on
the utility's lost revenue from that customer;
2. Utilities are provided the opportunity to lower their financing and
capital costs through the issuance of "securitized" bonds; and
3. Utilities are permitted to seek rate relief in the event the change
in law leads to their ROE falling below a specified minimum based on
a prescribed test.
Illinova is exploring various strategies to best respond to its
changing business and regulatory environment. These strategies include
acquisitions, focused growth of unregulated businesses, and other
options. Although Illinova would only plan to undertake transactions
that it believes are in the best interests of its shareholders, there
can be no certainty that any transaction will fulfill these
expectations.
To meet IP customers' electricity requirements, IP produces electricity
in Company-owned generation plants. Although IP has in place programs
designed to match its supplies with its needs, many circumstances can
occur which upset this balance. Specifically, generation facilities may
experience unplanned outages forcing the Company to acquire additional
supplies in the electricity marketplace. The availability and price of
these additional supplies are uncertain and at times highly volatile.
Such situations can lead to less profitable or even unprofitable
outcomes.
Clinton is a nuclear-fueled generation facility. Although IP believes
that it operates this facility in accordance with all regulatory
guidelines and in a safe manner, accidents can occur. Liabilities and
23
<PAGE>
costs from such accidents could exceed insurance provisions established
for the Company and have a significantly negative effect on IP.
There are various financial risks attendant to selling or shutting down
Clinton. These risks include the possibility that IP has underestimated
the costs necessary to effect a particular exit strategy. No nuclear
facility sale has been completed and relatively little financial
information regarding these transactions is available. Although the
amounts used in IP's analyses and in recording year-end accounting
results represent estimates based on guidance from industry experts,
actual results may be materially different from the estimates. In
addition, the Company continues to have ongoing nuclear operational
exposures until the plant is sold or shut down.
Illinova does not currently foresee any inability to obtain necessary
financing on reasonably favorable terms. However, events can occur in
the Company's business operations or in general economic conditions
that could negatively impact the Company's financial flexibility. In
addition, restructuring activities, such as the formation of an
unregulated generation subsidiary, can introduce other factors that
could impact the Company's financial flexibility. Further, the sale or
shutdown of Clinton will substantially reduce the Company's ability to
issue indebtedness under its existing mortgages. While the Company does
not foresee any of these events resulting in significant difficulties
in obtaining future financing on reasonably favorable terms, there can
be no assurances that difficulties will not occur.
The impact of environmental regulations on utilities is significant;
and the expectation is that more stringent requirements will be
introduced over time. Although Illinova believes it is in substantial
compliance with all current regulations, Illinova cannot predict the
future impact of environmental compliance. However, if more stringent
requirements are introduced they are likely to have a negative
financial effect.
IGC has interest in foreign facilities and is likely to purchase
additional foreign interest in the future. The risks of doing business
in foreign countries are different from those attendant to doing
business in the United States. These include business risks such as
currency fluctuations, cyclical and sustained economic downturns, and
political risks. The adverse impact of these risks could be
significant.
Illinova, through IEP and IP, actively purchases and sells electricity
and natural gas futures and similar contracts with respect thereto.
While Illinova has adopted various risk management practices intended
to minimize the risk of significant loss, trading in assets of these
types is inherently risky and these risk management practices cannot
guarantee that losses will not occur.
Although Illinova believes that it will complete its Year 2000
preparation in a timely fashion, there can be no assurances that it
will, or that unforeseen problems will not arise. The consequences of
Year 2000 problems are so varied that Illinova cannot predict this
ultimate impact, if any.
All forward-looking statements in this report are based on information
that currently is available. Illinova disclaims any obligation to update any
forward-looking statement.
24
<PAGE>
Executive Officers of Illinova Corporation
------------------------------------------
Name of Officer Age Position
Charles E. Bayless 56 Chairman, President and Chief
Executive Officer
Larry F. Altenbaumer 51 Chief Financial Officer, Treasurer
and Controller
Alec G. Dreyer 41 Senior Vice President
George W. Miraben 57 Senior Vice President and Chief
Administrative Officer
Leah Manning Stetzner 50 General Counsel and Corporate
Secretary
Mr. Bayless joined Illinova as President and Chief Executive Officer in
July of 1998 and was elected chairman in August 1998. Prior to joining Illinova,
Mr. Bayless was Chairman, President, and Chief Executive Officer of Tucson
Electric Power Company.
Mr. Altenbaumer was elected Chief Financial Officer, Treasurer and
Controller in June 1994.
Mr. Dreyer was elected Senior Vice President in February 1999 in addition
to his position as President of IGC, a subsidiary of Illinova, which he has held
since September 1995. Prior to being elected President of IGC, Mr. Dreyer was
Treasurer and Controller of IP since December 1994 and Controller since June
1992.
Mr. Miraben joined Illinova in January 1999 and was elected Senior Vice
President in February 1999. Prior to joining Illinova, Mr. Miraben was Senior
Vice President of UniSource Energy Corporation and Executive Vice President of
Tucson Electric Power Company, a subsidiary of UniSource.
Ms. Stetzner was elected General Counsel and Corporate Secretary in June
1994.
The executive officers are elected annually by the Board of Directors at
the first meeting of the Board held after the annual meeting of shareholders,
and hold office until their successors are duly elected or until their death,
resignation or removal by the Board.
For Illinova, the information under the caption "Board of Directors" on
pages 3 through 7 of Illinova's Proxy Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
25
<PAGE>
Executive Officers of Illinois Power Company
--------------------------------------------
Name of Officer Age Position
Charles E. Bayless 56 Chairman, President and Chief
Executive Officer
Larry F. Altenbaumer 51 Senior Vice President and Chief
Financial Officer
David W. Butts 44 Senior Vice President
Alec G. Dreyer 41 Senior Vice President
Paul L. Lang 58 Senior Vice President
George W. Miraben 57 Senior Vice President and Chief
Administrative Officer
Richard W. Eimer, Jr. 50 Vice President
Kim B. Leftwich 51 Vice President
Robert D. Reynolds 42 Vice President
Robert A. Schultz 58 Vice President
Leah Manning Stetzner 50 Vice President, General Counsel
and Corporate Secretary
Cynthia G. Steward 41 Controller
Eric B. Weekes 47 Treasurer
John P. McElwain 48 Chief Nuclear Officer
Mr. Bayless joined IP as President and Chief Executive Officer in July 1998
and was elected Chairman in August 1998. Prior to joining Illinova, Mr. Bayless
was Chairman, President and Chief Executive Officer of Tucson Electric Power
Company.
Mr. Altenbaumer was elected Senior Vice President and Chief Financial
Officer in June 1992. Prior to being elected Senior Vice President he was
previously Vice President, Chief Financial Officer, and Controller.
Mr. Butts was elected Senior Vice President in February 1999 in addition
to his position as President of IEP, a subsidiary of Illinova, which he has held
since February 1998. Prior to being elected President of IEP, Mr. Butts was a
Senior Vice President at Illinois Power Company. From November 1993 through
August 1995, he was President of IGC, an Illinova subsidiary.
Mr. Dreyer was elected Senior Vice President in February 1999 in
addition to his position as President of IGC, a subsidiary of Illinova, which he
has held since September 1995. Prior to being elected President of IGC, Mr.
Dreyer was Treasurer and Controller of IP from December 1994.
Mr. Lang was elected Senior Vice President in June 1992. He joined IP as
Vice President in July 1986.
Mr. Miraben joined IP in January 1999 and was elected Senior Vice
President and Chief Administrative Officer in February 1999. Prior to joining
IP, Mr. Miraben was Senior Vice President of UniSource Energy Corporation and
Executive Vice President of Tucson Electric Power Company, a subsidiary of
UniSource.
Mr. Eimer was elected Vice President in December 1995. He previously held
the positions of Assistant to the Vice President and Manager of Marketing.
Mr. Leftwich was elected Vice President in February 1998. He previously
held the positions of Managing Director - Customer Management Processes and
Manager of Marketing.
26
<PAGE>
Mr. Reynolds was elected Vice President in May 1996. Prior to his election
to Vice President, Mr. Reynolds
served as Director of Pricing and Manager of Electric Supply.
Mr. Schultz was elected Vice President in February 1998. He previously held
the positions of President of IEP, President of Illinova Power Marketing and
Treasurer of IP.
Ms. Stetzner was elected Vice President, General Counsel and Corporate
Secretary in February 1993. She joined IP as General Counsel and Corporate
Secretary in October 1989.
Ms. Steward was elected Controller in September 1995. She previously held
the positions of Manager of Employee Services and Director of Accounting.
Mr. Weekes joined IP as Treasurer in January 1997. He previously served as
Senior Financial Manager with a unit of Kraft Foods.
Mr. McElwain was contracted from PECO Energy Company in Philadelphia in
December 1998 and appointed Chief Nuclear Officer in January 1999. Prior to
joining IP, as a contractor from PECO, Mr. McElwain held the positions of Vice
President, Nuclear Projects and Director of Outage Management for PECO.
The present term of office of each of the above executive officers
extends to the first meeting of Illinova's and IP's Boards of Directors after
the Annual Election of Directors. There are no family relationships among any of
the executive officers and directors of Illinova and IP.
For IP, the information under the caption "Board of Directors" on pages
3 through 7 of IP's Information Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
Operating Statistics
---------------------
For Illinova the information under the caption "Selected Illinois Power
Company Statistics" on page a-53 of the 1998 Annual Report to Shareholders in
the appendix to the Illinova Proxy Statement is incorporated herein by
reference.
For IP the information under the caption "Selected Illinois Power
Company Statistics" on page a-49 of the 1998 Annual Report to Shareholders in
the appendix to the IP Information Statement is incorporated herein by
reference.
Item 2. Properties
- -------
IP owns and operates six steam generating stations with composite net
summer capacity of 4,421,000 kilowatts. In addition, IP owns nine quick start
combustion turbine peaking units at three locations with a combined net summer
capacity of 147,000 kilowatts. All of IP's generating stations are in the State
of Illinois, including IP's only nuclear generating station, Clinton. IP owns
50% of three combustion turbine units, located in Bloomington, Illinois, with
combined net capacity of 5,250 kilowatts. State Farm Insurance Company owns the
other 50% of these units. The total IP available net summer capability is
4,571,250 kilowatts.
The major coal-fired units at Baldwin, Havana, Hennepin, Vermilion and
Wood River make up 3,491,000 kilowatts of summer capacity. Three natural
27
<PAGE>
gas-fired units at Wood River were reactivated in 1997. These units have a
combined net summer capacity of 139,000 kilowatts. Five oil-fired units at
Havana were reactivated in 1998. These units have a combined net summer capacity
of 238,500 kilowatts.
IP owns an interconnected electric transmission system of approximately
2,800 circuit miles, operating from 69,000 to 345,000 volts and a distribution
system which includes about 36,000 circuit miles of overhead and underground
lines.
All outstanding First Mortgage Bonds issued under the Mortgage and Deed
of Trust dated November 1, 1943 are secured by a first mortgage lien on
substantially all of the fixed property, franchises and rights of IP with
certain exceptions expressly provided in the mortgage securing the bonds. All
outstanding New Mortgage Bonds issued under the General Mortgage and Deed of
Trust dated November 1, 1992, are secured by a lien on IP's properties used in
the generation, purchase, transmission, distribution and sale of electricity and
gas. In December of 1997, the Mortgage and Deed of Trust dated November 1, 1943,
was amended to generally conform with the General Mortgage and Deed of Trust
dated November 1, 1992, following a bondholder vote and approval of the IP Board
of Directors.
Item 3. Legal Proceedings
- -------
See discussion of legal proceedings in "Manufactured-Gas Plant" in
"Note 5 - Commitments and Contingencies" on page a-36 of the 1998 Annual Report
to Shareholders in the appendix to the Illinova Proxy Statement which is
incorporated herein by reference.
See "Environmental Matters" reported under Item 1 of this report for
information regarding legal proceedings concerning environmental matters.
See "Fuel Supply" reported under Item 1 of this report for information
regarding legal proceedings concerning nuclear fuel disposal.
Item 4. Submission of Matters to a Vote of Security Holders
- -------
None.
28
<PAGE>
PART II
- -------------------------------------------------------------------------------
Item 5. Market for Registrants' Common Equity and Related
- ------- Stockholder Matters
For Illinova, the information under the caption "Note 17 - Quarterly
Consolidated Financial Information and Common Stock Data (Unaudited)" on page
a-51 of the 1998 Annual Report to Shareholders in the appendix to the Illinova
Proxy Statement is incorporated herein by reference.
For IP the information under the caption "Note 16 - Quarterly
Consolidated Financial Information and Common Stock Data (Unaudited)" on page
a-47 of the 1998 Annual Report to Shareholders in the appendix to the IP
Information Statement is incorporated herein by reference.
Item 6. Selected Financial Data
- -------
For Illinova, the information under the caption "Selected Consolidated
Financial Data" on page a-52 of the 1998 Annual Report to Shareholders in the
appendix to the Illinova Proxy Statement is incorporated herein by reference.
For IP the information under the caption "Selected Consolidated
Financial Data" on page a-48 of the 1998 Annual Report to Shareholders in the
appendix to the IP Information Statement is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial
- ------- Condition and Results of Operations
For Illinova, the information under the caption "Management's Discussion
and Analysis" on pages a-2 through a-18 of the 1998 Annual Report to
Shareholders in the appendix to the Illinova Proxy Statement is incorporated
herein by reference.
For IP the information under the caption "Management's Discussion and
Analysis" on pages a-2 through a-16 of the 1998 Annual Report to Shareholders in
the appendix to the IP Information Statement is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
For information on Quantitative and Qualitative Disclosures About Market
Risk, see "Market Risk" in "Management's Discussion and Analysis" on pages a-16
through a-17 of the 1998 Annual Report to Shareholders in the appendix to the
Illinova Proxy Statement which is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -------
For Illinova, the consolidated financial statements and related notes
on pages a-21 through a-51 and Report of Independent Accountants on page a-20 of
the 1998 Annual Report to Shareholders in the appendix to the Illinova Proxy
Statement are incorporated herein by reference. With the exception of the
aforementioned information and the information incorporated in Items 1, 3, 5, 6
and 7, the 1998 Annual Report to Shareholders in the appendix to the Illinova
Proxy Statement is not to be deemed filed as part of this Form 10-K Annual
Report.
29
<PAGE>
For IP the consolidated financial statements and related notes on pages
a-19 through a-47 and Report of Independent Accountants on page a-18 of the 1998
Annual Report to Shareholders in the appendix to the IP Information Statement
are incorporated herein by reference. With the exception of the aforementioned
information and the information incorporated in Items 1, 3, 5, 6 and 7, the 1998
Annual Report to Shareholders in the appendix to the IP Information Statement is
not to be deemed filed as part of this form 10-K Annual Report.
Item 9. Changes in and Disagreements With Accountants on
- ------- Accounting and Financial Disclosure
None.
30
<PAGE>
PART III
- -------------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrants
- --------
For Illinova, the information under the caption "Board of Directors" on
pages 3 through 7 of Illinova's Proxy Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference. The information relating to
Illinova's executive officers is set forth in Part I of this Annual Report on
Form 10-K.
For IP the information under the caption "Board of Directors" on pages 3
through 7 of IP's Information Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference. The information relating to
Illinois Power Company's executive officers is set forth in Part I of this
Annual Report on Form 10-K.
Item 11. Executive Compensation
- --------
For Illinova, the information under the caption "Executive
Compensation" on pages 8 through 13 of Illinova's Proxy Statement for its 1999
Annual Meeting of Stockholders is incorporated herein by reference.
For IP the information under the caption "Executive Compensation" on
pages 8 through 13 of IP's Information Statement for its 1999 Annual Meeting of
Stockholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- --------
For Illinova, the information under the caption "Security Ownership of
Management and Certain Beneficial Owners" on page 7 and the information
regarding securities owned by certain officers and directors under the caption
"Board of Directors" on pages 3 through 7 of Illinova's Proxy Statement for its
1999 Annual Meeting of Stockholders is incorporated herein by reference.
For IP the information under the caption "Security Ownership of
Management and Certain Beneficial Owners" on page 7 and the information
regarding securities owned by certain officers and directors under the caption
"Board of Directors" on pages 3 through 7 of IP's Information Statement for its
1999 Annual Meeting of Stockholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------
None.
31
<PAGE>
PART IV
- --------------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- -------- Form 8-K
(a) Documents filed as part of this report.
(1a) Financial Statements:
Page in 1998
Annual Report
to Shareholders
in the appendix
to the Illinova
Proxy Statement*
----------------
Report of Independent Accountants a-20
Consolidated Statements of Income for the
three years ended December 31, 1998,
1997, 1996 a-21
Consolidated Balance Sheets at
December 31, 1998 and 1997 a-22
Consolidated Statements of Cash Flows for
the three years ended December 31, 1998,
1997, 1996 a-23
Consolidated Statements of Retained
Earnings for the three years
ended December 31, 1998, 1997, 1996 a-23
Notes to Consolidated Financial Statements a-24 - a-51
* Incorporated by reference from the indicated pages of the 1998 Annual
Report to Shareholders in the appendix to the Illinova Proxy Statement.
(1b) Financial Statements:
Page in 1998
Annual Report
to Shareholders
in the appendix
to the IP
Information
Statement**
---------------
Report of Independent Accountants a-18
Consolidated Statements of Income for the
three years ended December 31, 1998,
1997, 1996 a-19
Consolidated Balance Sheets at
December 31, 1998 and 1997 a-20
Consolidated Statements of Cash Flows for
the three years ended December 31, 1998,
1997, 1996 a-21
Consolidated Statements of Retained
Earnings for the three years
ended December 31, 1998, 1997, 1996 a-21
Notes to Consolidated Financial Statements a-22 - a-47
** Incorporated by reference from the indicated pages of the 1998 Annual
Report to Shareholders in the appendix to the IP Information Statement
32
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on
- -------- Form 8-K (Continued)
(2) Financial Statement Schedules:
All Financial Statement Schedules are omitted because they are not applicable
or the required information is shown in the financial statements or notes
thereto.
(3) Exhibits
The exhibits filed with this Form 10-K are listed in the Exhibit Index
located elsewhere herein. All management contracts and compensatory
plans or arrangements set forth in such list are marked with a ~.
(b) Reports on Form 8-K since September 30, 1998:
Report filed on Form 8-K on October 20, 1998
Other Events: Illinova releases results of
third-quarter earnings and Board of Directors
approval of common stock repurchase. IP
announces status of progress made to restart
Clinton Power Station, new restart date, and new
estimation of costs to return Clinton to
operation.
Report filed on Form 8-K on November 25, 1998
Other Events: IP announces SEC acceptance of quasi-
reorganization accounting procedures if
the company decides to exit the nuclear
business.
Report filed on Form 8-K on December 14, 1998
Other Events: Illinova announces it will exit the
nuclear business and proceed with a
quasi-reorganization to position itself as a
competitive leader in new energy markets.
Report filed on Form 8-K on December 22, 1998
Other Events: Illinois Power Special Purpose Trust
offers transitional funding trust notes
on Form S-3
Financial
Statements,
Pro Forma
Financial
Information
and Exhibits: Exhibits
33
<PAGE>
Report filed on Form 8-K on January 13, 1999
Other Events: Illinois Power Securitization Limited
Liability company files a corrected copy of Form
T-1, Statement of Eligibility Under the Trust
Indenture
Act of 1939.
Financial
Statements,
Pro Forma
Financial
Information
and Exhibits: Exhibits
Report filed on Form 8-K on February 12, 1999
Other Events: Illinois Power announces potential
impact of quasi on financial reorganization
entries and discusses progress in restoring
Clinton to service and status of the company in
exiting the nuclear business.
Report filed on Form 8-K on March 3, 1999
Other Events: Illinova releases 1998 earnings
and discusses impact of the Clinton
Power Station impairment and
quasi-reorganization
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ILLINOIS POWER COMPANY
(REGISTRANT)
By/s/Charles E. Bayless
Charles E. Bayless, Chairman, President
and Chief Executive Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
/s/Charles E. Bayless Chairman, President, Chief
Charles E. Bayless Executive Officer and Director
(Principal Executive Officer)
/s/Larry F. Altenbaumer Senior Vice President and
Larry F. Altenbaumer Chief Financial Officer
(Principal Financial Officer)
/s/Cynthia G. Steward Controller
Cynthia G. Steward
(Principal Accounting Officer)
/s/J. Joe Adorjan
J. Joe Adorjan
/s/C. Steven McMillan
C. Steven McMillan
/s/Robert M. Powers
Robert M. Powers
/s/Sheli Z. Rosenberg
Sheli Z. Rosenberg Director March 29, 1999
/s/Walter D. Scott
Walter D. Scott
/s/Joe J. Stewart
Joe J. Stewart
/s/Ronald L. Thompson
Ronald L. Thompson
/s/Walter M. Vannoy
Walter M. Vannoy
/s/Marilou von Ferstel
Marilou von Ferstel
/s/John D. Zeglis
John D. Zeglis
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ILLINOVA CORPORATION
(REGISTRANT)
By /s/Charles E. Bayless
Charles E. Bayless, Chairman, President
and Chief Executive Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
/s/Charles E. Bayless Chairman, President, Chief
Charles E. Bayless Executive Officer and Director
(Principal Executive Officer)
/s/Larry F. Altenbaumer Chief Financial Officer,
Larry F. Altenbaumer Treasurer and Controller
(Principal Financial
and Accounting Officer)
/s/J. Joe Adorjan
J. Joe Adorjan
/s/C. Steven McMillan
C. Steven McMillan
/s/Robert M. Powers
Robert M. Powers
/s/Sheli Z. Rosenberg
Sheli Z. Rosenberg
/s/Walter D. Scott
Walter D. Scott Director March 29, 1999
/s/Joe J. Steward
Joe J. Stewart
/s/Ronald L. Thompson
Ronald L. Thompson
/s/Walter M. Vannoy
Walter M. Vannoy
/s/Marilou von Ferstel
Marilou von Ferstel
/s/John D. Zeglis
John D. Zeglis
36
<PAGE>
Exhibit Index
Exhibit Description
- ------- -----------
(3)(i) Articles of Incorporation
Illinova Corporation
(a)(1) Articles of Amendment to the Articles of
Incorporation of Illinova Corporation, filed as
of October 31, 1994. Filed as Exhibit 3(a) to
the Quarterly Report on Form 10-Q under the
Securities Exchange Act of 1934 for the quarter
ended September 30, 1994 (File No. 1-11327). *
(a)(2) Statement of Correction to the Articles of
Incorporation of Illinova Corporation, filed as
of October 31, 1994. Filed as Exhibit 3(b) to
the Quarterly Report on Form 10-Q under the
Securities Exchange Act of 1934 for the quarter
ended September 30, 1994 (File No. 1-11327). *
Illinois Power Company
(b)(1) Amended and Restated Articles of Incorporation
of Illinois Power Company, dated September 7, 1994.
Filed as Exhibit 3(a) to the Current Report on
Form 8-K dated September 7, 1994 (File No. 1-3004). *
(3)(ii) By-Laws
(a) By-laws of Illinova Corporation, as amended,
April 8, 1998. Filed as Exhibit 3(a)(1) to the
Annual Report on Form 10-K under the Securities
and Exchange Act of 1934 for the year ended
December 31, 1998.
(b) By-laws of Illinova Corporation, as amended
December 14, 1994. Filed as Exhibit 3(b)(2)
to the Annual Report on Form 10-K under
the Securities Exchange Act of 1934 for the
year ended December 31, 1994 (File No. 1-11327). *
(c) By-laws of Illinois Power Company, as amended
December 14, 1994. Filed as Exhibit 3(b)(1)
to the Annual Report on Form 10-K under
the Securities Exchange Act of 1934 for the
year ended December 31, 1994 (File No. 1-3004). *
(4) Instruments Defining Rights of Security Holders,
Including Indentures
37
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
Illinova Corporation
(a)(1) See (4)(b) below for instruments defining the rights
of holders of long-term debt of Illinois Power Company.
(a)(2) Indenture dated February 1, 1997, between Illinova
Corporation and The First National Bank of Chicago,
as trustee. Filed as Exhibit (4)(a)(2) to the Annual
Report on Form 10-K under the Securities Exchange Act
of 1934 for the year ended December 31, 1996.
(File No. 1-11327) *
(a)(3) Distribution Agreement dated January 16, 1998, and
Officers' Certificate and Issuer Order of Illinova
Corporation, dated January 16, 1998 (with forms of
Fixed Rate Note and Floating Rate Note attached),
delivered pursuant to the terms of the Indenture
dated as of February 1, 1997, between Illinova
Corporation and The First National Bank of Chicago.
Filed as Exhibit (1) and (4) of Form 8-K under the
Securities Exchange Act of 1934 dated January 21,
1998. (File No. 1-11327) *
Illinois Power Company
(b)(1) Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 2(b) Registration No. 2-14066. *
(b)(2) Supplemental Indenture dated July 1, 1991, providing
for $84,710,000 principal amount of 7 3/8% First
Mortgage Bonds due July 1, 2021. Filed as Exhibit
4(mm) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1991 (File No. 1-3004). *
(b)(3) Supplemental Indenture No. 1 dated June 1, 1992.
Filed as Exhibit 4(nn) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(b)(4) Supplemental Indenture No. 2 dated June 1, 1992.
Filed as Exhibit 4(oo) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(b)(5) Supplemental Indenture No. 1 dated July 1, 1992.
Filed as Exhibit 4(pp) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(b)(6) Supplemental Indenture No. 2 dated July 1, 1992.
Filed as Exhibit 4(qq) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
38
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(b)(7) Supplemental Indenture dated September 1, 1992,
providing for $72,000,000 principal amount of 6 1/2%
First Mortgage Bonds due September 1, 1999. Filed
as Exhibit 4(rr) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1992
(File No. 1-3004). *
(b)(8) General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992. Filed as Exhibit 4(cc) to
the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December
31, 1992 (File No. 1-3004). *
(b)(9) Supplemental Indenture dated February 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(dd) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1992 (File No. 1-3004). *
(b)(10) Supplemental Indenture dated February 15, 1993, to
General Mortgage Indenture and Deed of Trust dated as
of November 1, 1992. Filed as Exhibit 4(ee) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31,
1992 (File No. 1-3004). *
(b)(11) Supplemental Indenture No. 1 dated March 15, 1993,
to Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(ff) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1992 (File No. 1-3004). *
(b)(12) Supplemental Indenture No. 1 dated March 15, 1993,
to General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(gg) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1992 (File No. 1-3004). *
(b)(13) Supplemental Indenture No. 2 dated March 15, 1993,
to Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(hh) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1992 (File No. 1-3004). *
(b)(14) Supplemental Indenture No. 2 dated March 15, 1993,
to General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(ii) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1992 (File No. 1-3004). *
39
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(b)(15) Supplemental Indenture dated July 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(jj) to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993
(File No. 1-3004). *
(b)(16) Supplemental Indenture dated July 15, 1993, to
General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(kk)to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 (File No. 1-3004). *
(b)(17) Supplemental Indenture dated August 1, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(ll) to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993
(File No. 1-3004). *
(b)(18) Supplemental Indenture dated August 1, 1993, to
General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(mm) to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 (File No. 1-3004). *
(b)(19) Supplemental Indenture dated October 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(nn) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993
(File No. 1-3004). *
(b)(20) Supplemental Indenture dated October 15, 1993, to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992. Filed as Exhibit 4(oo) to
the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (File No. 1-3004). *
(b)(21) Supplemental Indenture dated November 1, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(pp) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993
(File No. 1-3004). *
(b)(22) Supplemental Indenture dated November 1, 1993, to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992. Filed as Exhibit 4(qq) to
the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (File No. 1-3004). *
(b)(23) Supplemental Indenture dated February 1, 1994, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(hh) to the Annual Report on
Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1993
(File No. 1-3004). *
40
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(b)(24) Indenture dated October 1, 1994 between Illinois
Power Company and the First National Bank of
Chicago. Filed as Exhibit 4(a) to the Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1994 (File No. 1-3004). *
(b)(25) Supplemental Indenture dated October 1, 1994, to
Indenture dated as of October 1, 1994. Filed as
Exhibit 4(b) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1994
(File No. 1-3004). *
(b)(26) Indenture dated January 1, 1996 between Illinois
Power Company and Wilmington Trust Company. Filed
as Exhibit 4(b)(36) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1995 (File No. 1-3004). *
(b)(27) First Supplemental Indenture dated January 1, 1996,
between Illinois Power Company and Wilmington Trust
Company. Filed as Exhibit 4(b)(37) to the Annual
Report on Form 10-K under the Securities Exchange
Act of 1934 for the year ended December 31, 1995
(File No. 1-3004). *
(b)(28) Supplemental Indenture dated April 1, 1997, to
Mortgage and Deed of Trust dated November 1, 1943
Filed as Exhibit 4(a) to the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997.
(File No. 1-3004) *
(b)(29) Supplemental Indenture dated April 1, 1997 to General
Mortgage Indenture and Deed of Trust dated November 1,
1992. Filed as Exhibit 4(b) to the Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997.
(File No. 1-3004) *
(b)(30) Supplemental Indenture dated December 1, 1997 to
Mortgage and Deed of Trust dated November 1, 1943. *
(b)(31) Supplemental Indenture dated as of March 1, 1998 to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the issuance of
$18,700,000 principal amount of 5.40% pollution
control bonds. Filed as Exhibit 4.41 to the
Registration Statement on Form S-3, filed January
22, 1999. (File No. 333-71061)
(b)(32) Supplemental Indenture dated as of March 1, 1998
to Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $18,700,000 principal
amount of pollution control bonds. Filed as Exhibit
4.39 to the Registration Statement on Form S-3, filed
January 22, 1999. (File No. 333-71061)
41
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(b)(33) Supplemental Indenture dated as of March 1, 1998 to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the issuance
of $33,755,000 principal amount of pollution control
bonds. Filed as Exhibit 4.42 to the Registration
Statement on Form S-3, filed January 22, 1999.
(File No. 333-71061)
(b)(34) Supplemental Indenture dated as of March 1, 1998 to
Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $33,755,000 principal
amount of pollution control bonds. Filed as Exhibit
4.40 to the Registration Statement on Form S-3,
filed January 22, 1999. (File No. 333-71061)
(b)(35) Supplemental Indenture dated as of July 15, 1998
to General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992 providing for the
issuance of $100,000,000 principal amount of 6.25%
New Mortgage Bonds. Filed as Exhibit 4.44 to the
Registration Statement on Form S-3, filed January
22, 1999. (File No. 333-71061)
(b)(36) Supplemental Indenture dated as of July 15, 1998 to
Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $100,000,000 principal
amount of 6.25% First Mortgage Bonds. Filed as Exhibit
4.43 to the Registration Statement on Form S-3, filed
January 22, 1999. (File No. 333-71061)
(b)(37) Supplemental Indenture dated as of September 15, 1998
to General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the issuance of
$100,000,000 principal amount of 6.00% New Mortgage
Bonds. Filed as Exhibit 4.46 to the Registration
Statement on Form S-3, filed January 22, 1999.
(File No. 333-71061)
(b)(38) Supplemental Indenture dated as of September 15,
1998 to Mortgage and Deed of Trust dated November 1,
1943 providing for the issuance of $100,000,000
principal amount of 6.00% First Mortgage Bonds.
Filed as Exhibit 4.45 to the Registration Statement
on Form S-3, filed January 22, 1999.
(File No. 333-71061)
(b)(39) Supplemental Indenture dated as of October 1, 1998
to General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the transfer of
Letter of Credit providers on three series of pollution
control bonds totaling $111,770,000. Filed as Exhibit
4.47 to the Registration Statement on Form S-3, filed
January 22, 1999. (File No. 333-71061).
42
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(10) Material Contracts
Illinova Corporation
(a)(1) Illinova Corporation Deferred Compensation Plan
for Certain Directors, as amended April 10, 1991.
Filed as Exhibit 10(b) to the Annual Report on
Form 10-K under the Securities Exchange Act of
1934 for the year ended December 31, 1991
(File No. 1-3004). ~ *
(a)(2) Illinova Corporation Director Emeritus Plan for
Outside Directors. Filed as Exhibit 10(e) to
the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year
ended December 31, 1989 (File No. 1-3004). ~ *
(a)(3) Illinova Corporation Stock Plan for Outside
Directors as amended and restated by the Board of
Directors on April 9, 1992 and as further amended
April 14, 1993. Filed as Exhibit 10(h) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December
31, 1993 (File No. 1-3004).~ *
(a)(4) Illinova Corporation Retirement Plan for Outside
Directors, as amended through December 11, 1991.
Filed as Exhibit 10(j) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1991 (File No. 1-3004).~ *
(a)(5) Illinova Corporation 1992 Long-Term Incentive
Compensation Plan. Filed as Exhibit 10(k) to the
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1992 (File No. 1-3004).~ *
(a)(6) Illinova Corporation Comprehensive Deferred Stock
Plan for Outside Directors, as approved by the Board
of Directors on February 7, 1996. Filed as Exhibit 10
(a)(6) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1995 (File No. 1-11327).~ *
(a)(7) Form of Employee Retention Agreement in place between
Illinova Corporation and its elected officers,
Illinois Power Company's elected officers, and the
Presidents of Illinova Corporation's subsidiaries.
Filed as Exhibit 10(g) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1989 (File no. 1-3004).~ *
(a)(8) Illinova Corporation Leadership Incentive Program,
effective January 1, 1996.~ *
43
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(a)(9) Illinova Corporation Retirement Plan for Outside
Directors, as amended by resolutions adopted by the
Board of Directors on February 7, 1996.~ *
(a)(10) Illinova Corporation Employee Retention Agreement,
as amended by resolutions adopted by the Board of
Directors on February 7, 1996.~ *
(a)(11) Illinova Corporation Deferred Compensation Plan for
Certain Directors as amended October 9, 1996, effective
January 1, 1997.~ *
(a)(12) Illinova Corporation Employee Retention Agreement,
as amended by resolutions adopted by the Board of
Directors on June 10-11, 1997.~ *
(a)(13) Illinova Corporation Deferred Compensation Plan for
Certain Directors, as amended by resolutions adopted
by the Board of Directors on June 10-11, 1997.~ *
(a)(14) Employment Agreement entered into as of August 13,
1998 between Illinova Corporation and Charles E.
Bayless. ~ *
(a)(15) Employment Agreement entered into as of January 18,
1999 between Illinova Corporation and George W.
Miraben. ~
Illinois Power Company
(b)(1) Group Insurance Benefits for Managerial Employees
of Illinois Power Company as amended January 1, 1983.
Filed as Exhibit 10(a) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1983 (File No. 1-3004).~ *
(b)(2) Illinois Power Company Incentive Savings Trust and
Illinois Power Company Incentive Savings Plan and
Amendment I thereto. Filed as Exhibit 10(d) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31,
1984 (File No. 1-3004).~ *
(b)(3) Illinois Power Company's Executive Incentive
Compensation Plan. Filed as Exhibit 10(f) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31,
1989 (File No. 1-3004).~ *
44
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(b)(4) Illinois Power Company Incentive Savings Plan, as
amended and restated effective January 1, 1991.
Filed as Exhibit 10(h) to the Annual Report on
Form 10-K under the Securities Exchange Act of
1934 for the year ended December 31, 1990
(File No. 1-3004).~ *
(b)(5) Illinois Power Company Executive Deferred
Compensation Plan. Filed as Exhibit 10(l) to
the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year
ended December 31, 1993. (File No. 1-3004)~ *
(b)(6) Illinois Power Company Retirement Income Plan for
salaried employees as amended and restated effective
January 1, 1989, as further amended through January
1, 1994. Filed as Exhibit 10(m) to the Annual Report
on Form 10-K under the Securities Exchange Act of
1934 for the year ended December 31, 1994
(File No. 1-3004).~ *
(b)(7) Illinois Power Company Retirement Income Plan for
employees covered under a collective bargaining
agreement as amended and restated effective as of
January 1, 1994. Filed as Exhibit 10(n) to the Annual
Report on Form 10-K under the Securities Exchange Act
of 1934 for the year ended December 31, 1994
(File No. 1-3004).~ *
(b)(8) Illinois Power Company Incentive Savings Plan as
amended and restated effective January 1, 1991 and
as further amended through amendments adopted
December 28, 1994. Filed as Exhibit 10(o)to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December
31, 1994 (File No. 1-3004).~ *
(b)(9) Illinois Power Company Incentive Savings Plan for
employees covered under a collective bargaining
agreement as amended and restated effective January
1, 1991 and as further amended through amendments
adopted December 28, 1994. Filed as Exhibit 10(p)
to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1994 (File No. 1-3004).~ *
(b)(10) Illinois Power Company Executive Incentive Compensation
Plan, as amended, effective January 1, 1997. ~ *
(b)(11) Illinois Power Company Executive Deferred
Compensation Plan as amended by resolutions adopted
by the Board of Directors on June 10-11, 1997.~ *
45
<PAGE>
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(b)(12) Illinois Power Company Supplemental Retirement
Income Plan for Salaried Employees of Illinois
Power Company as amended by resolutions adopted
by the Board of Directors on June 10-11, 1997.~ *
(b)(13) Retirement and Consulting Agreement entered into
as of June 30, 1997 between Illinois Power Company
and Wilfred Connell.~ *
(12) Statement Re Computation of Ratios
(a) Computation of ratio of earnings to fixed
charges for Illinova Corporation.
(b) Computation of ratio of earnings to fixed
charges for Illinois Power Company.
(13) Annual Reports to Shareholders
(a) Illinova Corporation Proxy Statement and 1998
Annual Report to Shareholders.
(b) Illinois Power Company Information Statement
and 1998 Annual Report to Shareholders.
(21) Subsidiaries of Registrants
(a) Subsidiaries of Illinova Corporation and Illinois
Power Company.
(23) Consents of Experts
Consent of Independent Accountants for Illinova
Corporation.
(27) Financial Data Schedules
(a) Illinova Corporation
(b) Illinois Power Company
- --------------------------------------
* Incorporated herein by reference.
~ Management contract and compensatory plans or arrangements.
46
<PAGE>
BYLAWS
ILLINOVA CORPORATION
(An Illinois Corporation)
As Amended April 8, 1998
ARTICLE I
Stockholders
Section 1. The annual meeting of the stockholders of
the Corporation shall be held on such date and at such time and place
as may be fixed from time to time by the Board of Directors of the
Corporation pursuant to a resolution adopted by a majority of the
members of the Board then in office, for the purpose of electing
directors and of transacting such other business as may properly be
brought before the meeting.
Section 2. Special meetings of the stockholders may
be held upon call of the Chairman, the President, or of the Board of
Directors or of stockholders holding not less than one-fifth of the
shares of the capital stock of the Corporation issued and outstanding,
at such time and as such place within the State of Illinois as may be
stated in the call and notice. In the event of war, rebellion or other
catastrophe, if the surviving members of the Board of Directors shall
be reduced to less than a majority of the number fixed by these Bylaws,
then any surviving member of the Board of Directors may so call a
special meeting of stockholders, at such time and at such place as may
be stated in the call and notice.
Section 3. Notice stating the place, day and hour of
every meeting of the stockholders, and in the case of a special meeting
further stating the purpose for which such meeting is called, shall be
mailed at least ten days before the meeting to each stockholder of
record who shall be entitled to vote thereat, at the last known post
office address of each such stockholder as it appears upon the books of
the Corporation. Such further notice shall be given by mail,
publication or otherwise, as may be required by law. Any meeting may be
held without notice if all of the stockholders entitled to vote are
present or represented at the meeting, or all of the stockholders
entitled to notice of the meeting sign a waiver thereof in writing.
Section 4. The holders of record of a majority of the
shares of the capital stock of the Corporation issued and outstanding,
entitled to vote thereat, present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders, and the
vote of a majority of such quorum shall be necessary for the
transaction of any business, unless otherwise provided by law, by the
Articles of Incorporation or by the Bylaws. If at any meeting there
shall be no quorum, the holders of record, entitled to vote, of a
majority of such shares of stock so present or represented may adjourn
the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall have been obtained, when any
business may be transacted which might have been transacted at the
meeting as first convened had there been a quorum.
Section 5. Meetings of the stockholders shall be
presided over by the Chairman, or, if he is not present, the President,
or a Vice President, in that order, or, if no such officer is present,
by a chairman to be chosen at the meeting. The Secretary of the
Corporation, or, if he is not present, an Assistant Secretary of the
Corporation, or, if neither the Secretary nor an Assistant Secretary is
present, a secretary to be chosen at the meeting, shall act as
secretary of the meeting.
Section 6. At all meetings of the stockholders every
holder of record of the shares of the capital stock of the Corporation,
entitled to vote thereat, may vote thereat either in person or by
proxy, provided that no stockholder may appoint more than three persons
as proxies at any time, and that no proxy shall be valid after eleven
months from the date of its execution, except where the stock is
pledged as security for a debt to the person holding the Proxy.
Section 7. At all elections of directors the voting
shall be by written ballot and stockholders may cumulate their votes.
Section 8. The stock transfer books of the
Corporation may, if so determined by the Board of Directors, be closed
before any meeting of the stockholders, and for any other purpose,
including the payment of any dividend, for such length of time as the
Board may from time to time determine.
ARTICLE II
Directors
Section 1. Initially, the Board of Directors of the
Corporation shall consist of between one and five members unless and
until IP Merging Corporation shall have merged with and into Illinois
Power Company, with Illinois Power Company surviving such merger (the
"Merger"). Upon consummation of the Merger, the Board of Directors of
the Corporation shall consist of between ten and fifteen members, with
all of the directors of Illinois Power Company replacing the directors
of the Corporation and serving in such capacity until their successors
are duly elected at the next regular annual meeting of the stockholders
of the Corporation. The directors shall be elected at the regular
annual meeting of the stockholders; but if the election of directors is
not held on the day of the annual meeting, the directors shall cause
the election to be held as soon thereafter as conveniently may be. The
directors shall hold office for a term of one year and until their
successors are elected and qualified. No director who is not also an
employee of the Corporation shall be elected to serve more than twelve
(12) terms as a member of the Board of Directors with the initial term
beginning in April, 1992, with respect to those directors elected in
April of 1994 or earlier. A majority of the members of the Board shall
constitute a quorum for the transaction of business, but if at any
meeting of the Board there shall be less than a quorum present, a
majority of the directors present may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a
quorum shall have been obtained, when any business any be transacted
which might have been transacted at the meeting as first convened had
there been a quorum. The acts of a majority of the directors present at
any meeting at which there is a quorum shall, except as otherwise
provided by law, by the Articles of Incorporation or by the Bylaws, be
the acts of the Board.
No person shall be eligible for election as a
director after he has attained the age of 70, and no officer or
employee of the Corporation other than the Chairman or the President,
shall be eligible for election as director after he has attained the
age of 65.
Section 2. Vacancies in the Board of Directors,
caused by death, resignation or otherwise, may be filled at any meeting
of the Board of Directors and the directors so elected shall hold
office until the next annual meeting of the stockholders and until
their successors are elected and qualified.
Section 3. Meetings of the Board of Directors shall
be held at such place within or without the State of Illinois as may
from time to time be fixed by resolution of the Board or as may be
specified in the call of any meeting. Regular meetings of the Board
shall be held at such time as may from time to time be fixed by
resolution of the Board, and notice of such meetings need not be given.
Special meetings of the Board may be held at any time upon call of the
President or a Vice President, by oral telegraphic or written notice,
duly served on or sent or mailed to each director not less than two
days before any such meeting. A meeting of the Board may be held
without notice immediately after the annual meeting of the stockholders
at the same place at which such meeting it held. Any meeting may be
held without notice if all of the directors are present at the meeting,
or if all of the directors sign a waiver thereof in writing.
Section 4. Meetings of the Board of Directors shall
be presided over by the Chairman or, if he is not present, the
President, or a Vice President, in that order, or, if no such officer
if present, by a chairman to be chosen at the meeting. The Secretary of
the Corporation or, if he is not present, an Assistant Secretary of the
Corporation or, if neither the Secretary nor an Assistant Secretary is
present, a secretary to be chosen at the meeting shall act as secretary
of the meeting.
Section 5. The Board of Directors, by the affirmative
vote of a majority of the whole Board may appoint an Executive
Committee and a Finance Committee, in each case to include three or
more Directors, one of whom shall be a resident of the State of
Illinois, as the Board may from time to time determine. Each such
Committee shall have and may exercise such powers as may from time to
time be specified in the resolution or resolutions of the Board of
Directors creating such Committee, respectively. The Board shall have
the power at any time to fill vacancies in, to change the membership of
or to dissolve, either such Committee. Each Committee may make rules
for the conduct of its business, and may appoint such committees and
assistants as it shall from time to time deem necessary. A majority of
the members of each Committee shall constitute a quorum and the action
of a majority thereof shall be the action of such Committee. All
actions taken by such Committee shall be reported to the Board at its
meeting next succeeding such action.
Section 6. The Board of Directors may also appoint
one or more other committees to consist of such number of directors and
to have such powers as the Board may from time to time determine. The
Board shall have the power at any time to fill vacancies in, to change
the membership of, or to dissolve, any such committee. A majority of
the members of any such committee shall constitute a quorum and may
determine its action and fix the time and place of its meetings unless
the Board shall otherwise provide. All action taken by any such
committee shall be reported to the Board at its meeting next succeeding
such action.
Section 7. Each member of the Board of Directors who
is not a salaried officer or employee of the Corporation shall be
compensated for his services as a director of the Corporation. The
Board of Directors shall fix the amount of such compensation.
Section 8. Nomination of persons for election to the
Board of Directors of the Corporation shall be made only at a meeting
of stockholders and only (i) by or at the direction of the Board of
Directors or a Committee thereof or (ii) by any stockholder of the
Corporation entitled to vote for the election of Directors at the
meeting who complies with the notice procedure set forth in this
Section. Such nominations, other than those made by or at the direction
of the Board, shall be made pursuant to timely notice in writing to the
committee of the Board of Directors which has responsibility for
nominating persons for election to the Board of Directors, or in the
event there is no such committee to the Chairman of the Board of
Directors, or in the event there is no such person to the President of
the Company (the "Notice"). To be timely, a Notice shall be delivered
to, or mailed and received at, the principal executive offices of the
Corporation not less than ninety (90) days nor more than one hundred
twenty (120) days prior to the Annual Meeting; provided, however, that
in the event that Directors are to be elected by the stockholders at
any other time, the Notice shall be delivered to, or mailed and
received at, the principal executive offices of the Corporation not
later than the tenth day following the day on which Notice of the date
of the meeting was first mailed to stockholders. For purposes of this
Section, any adjournment or postponement of the original meeting
whereby the meeting will reconvene within thirty (30) days from the
original date will be deemed for purposes of Notice to be a
continuation of the original meeting, and no nominations by a
stockholder of persons to be elected Directors of the Corporation may
be made at any such reconvened meeting unless pursuant to a Notice
which was timely for the meeting on the date originally scheduled.
The Notice shall set forth: (i) as to each person
whom the stockholder proposes to nominate for election or re-election
as a Director, all information relating to such person that is required
to be disclosed in solicitations of proxies for election of Directors,
or as otherwise required, in each case pursuant to the Securities
Exchange Act of 1934 (including such person's written consent to being
named in the proxy statement as a nominee and to serving as a Director
if elected); and (ii) as to the stockholder giving the Notice (A) the
name and address of the stockholder (B) the class and number of shares
of voting stock of the Corporation which are beneficially owned by such
stockholder, and (C) a representation that the stockholder intends to
appear in person or by proxy at the meeting to nominate the person or
persons specified in the Notice. Notwithstanding the foregoing, nothing
in this Section shall be interpreted or construed to require the
inclusion of information about any such nominee in any proxy statement
distributed by, at the direction of, or on the behalf of, the Board.
ARTICLE III
Officers
Section 1. As soon as may be after the election held
in each year, the Board of Directors shall elect a President (who shall
be a director), one or more Vice Presidents, one or more of whom may be
designated as Executive Vice President or Senior Vice President, and a
Secretary and a Treasurer and a Controller, and may elect a Chairman
(who shall be a director); provided, however, that unless and until the
consummation of the Merger, the officers of the Corporation may consist
only of a President (who shall be a director), a Treasurer, a Secretary
and a Chairman (who shall be a director). The Board of Directors may
from time to time appoint such Assistant Secretaries, Assistant
Treasurers and other officers and agents of the Corporation as it may
deem proper. The same person may be elected or appointed to more than
one office.
Section 2. The term of office of all officers shall
be one year or until their respective successors are elected, but any
officer or agent may be removed, with or without cause, at any time by
the affirmative vote of a majority of the members of the Board then in
office.
Section 3. The officers of the Corporation shall each
have such powers and duties as may be prescribed from time to time by
the Board of Directors or, in the absence of such prescription, the
officers of the Corporation shall each have such powers and duties as
generally pertain to their respective offices. The Treasurer, the
Assistant Treasurers and any other officers or employees of the
Corporation may be required to give bond for the faithful discharge of
their duties, in such sum and of such character as the Board may from
time to time prescribe.
Section 4. The salaries of all officers and agents of
the Corporation shall be fixed by the Board of Directors, or pursuant
to such authority as the Board may from time to time prescribe.
ARTICLE IV
Certificates of Stock
Section 1. The interest of each stockholder in the
Corporation shall be evidenced by a certificate or certificates for
shares of stock of the Corporation, in such form as the Board of
Directors may from time to time prescribe. The certificates for shares
of stock of the Corporation shall be signed by the President or a Vice
President and the Secretary or an Assistant Secretary, sealed with the
seal of the Corporation (which seal may be a facsimile), and shall be
countersigned and registered in such manner, if any, as the Board may
by resolution prescribe.
Section 2. The shares of stock of the Corporation
shall be transferable on the books of the Corporation by the holders
thereof in person or by a duly authorized attorney, upon surrender for
cancellation of certificates for a like number of shares of the same
class of stock, with a duly executed assignment and power of transfer
endorsed thereon or attached thereto and such proof of the authenticity
of the signatures as the Corporation or its agents may reasonably
require.
Section 3. No certificate for shares of stock of the
Corporation shall be issued in place of any certificate alleged to have
been lost, stolen or destroyed, except upon production of such evidence
of the loss, theft, or destruction, and upon indemnification of the
Corporation and its agents to such extent and in such manner as the
Board of Directors may from time to time prescribe.
ARTICLE V
Checks, Notes, etc.
All checks and drafts on the Corporation's bank
accounts and all bills of exchange and promissory notes, and all
acceptances, obligations and other instruments for the payment of
money, shall be signed by such officer or officers or agent or agents
as shall be thereunto authorized from time to time by the Board of
Directors; provided that checks drawn on the Corporation's bank
accounts may bear facsimile signature or signatures, affixed thereto by
a mechanical device, of such officer or officers and/or agent or agents
as the Board of Directors shall authorize.
ARTICLE VI
Fiscal Year
The fiscal year of the Corporation shall begin on the
first day of January in each year and shall end on the thirty-first day
of December following.
ARTICLE VII
Corporate Seal
The corporate seal shall have inscribed thereon, the
name of the Corporation and the words "Corporate Seal 1994 Illinois."
ARTICLE VIII
Indemnification
Section 1. Indemnification of Directors, Officers and
Employees. The Corporation shall, to the fullest extent to which it is
empowered to do so by the Business Corporation Act of 1983 or any other
applicable laws, as may from time to time be in effect, indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee, trustee, or fiduciary
of the Corporation, or of a Corporation-sponsored or
Corporation-administered trust or benefit plan, or is or was serving at
the request of the Board of Directors of the Corporation as a director,
officer, employee, trustee, or fiduciary of another corporation,
partnership, joint venture, trust, benefit plan, or other enterprise,
against all expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceedings.
Section 2. The provisions of this Article VIII shall
be deemed to be a contract between the Corporation and each director or
officer who serves in any such capacity at any time while this Article
is in effect, and any repeal or modification of this Article shall not
affect any rights or obligations hereunder with respect to any state of
facts then or theretofore existing or any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in
part upon any such state of facts.
Section 3. The indemnification provided or permitted
by this Article shall not be deemed exclusive of any other rights to
which those indemnified may be entitled by law or otherwise, and shall
continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Section 4. The provisions of this Article are to be
given retroactive effect.
ARTICLE IX
Amendments
These Bylaws, or any part thereof, may be altered,
amended or repealed at any meeting of the Board of Directors, provided
that notice of such meeting shall set forth the substance of such
proposed change.
--END--
January 18, 1999
George W. Miraben
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521
Dear Mr. Miraben:
This letter is to confirm the terms of your employment with Illinova
Corporation.
1. Salary. Your annual base salary will be $325,000, 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. Your bonus under the Executive Incentive Compensation
Plan will be $130,000 (which is 40% of your salary) if the target level of
performance is achieved, and your bonus will be $195,000 (which is 60% of
your salary) at the maximum achievement level.
3. Long-Term Incentive Award. For 1999, your entire long-term incentive award
will be in the form of a stock option, the terms of which are reflected in
the enclosed stock option agreement. After 1999, 50% of your long-term
incentive award will be made as a stock option grant, and the remaining 50%
will be made as performance share grant.
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 amount you have foregone by leaving Tucson
Electric Power Company to join Illinova Corporation, you will be entitled
to a loan from the Company of $250,000. The terms of the loan are reflected
in the enclosed letter and promissory note.
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.
If the foregoing reflects your understanding of the terms of your
agreement with the Company, please so indicate by signing and returning a copy
of this letter to the undersigned, along with a signed copy of each of the
enclosures.
Very truly yours,
ILLINOVA CORPORATION
---------------------------
Charles E. Bayless
Accepted and agreed to this
18th Day of January, 1999
- -------------------------
George W. Miraben
<PAGE>
George W. Miraben
Illinova Corporation
500 South 27th Street
Decatur, Illinois 62521
Dear Mr. Miraben:
This letter is to confirm our verbal agreement that Illinova Corporation (the
"Company") will loan you $250,000.00. The Company is making the loan to
compensate you for amounts you have foregone by leaving 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 February 2,
1999, if you are employed by the Company on such anniversary. Also, as of each
such anniversary, the entire amount of interest accrued on the outstanding
principal during the prior one-year period shall be forgiven.
As of each anniversary, the amount of the forgiveness of principal or interest
on that date will be taxable income to you as of each date on which the
forgiveness occurs. You will become entitled to a tax gross-up payment from the
Company in an amount equal to the aggregate of the additional Federal, state and
local income taxes payable by you by reason of the forgiveness of the interest
amount (but not by reason of the forgiveness of the principal amount), and by
reason of your receipt of the gross-up payment.
If, prior to February 2, 2004, your employment is terminated by the Company for
reasons other than Cause (as defined in the attached promissory note), the
amount of any outstanding balance of principal and interest will be forgiven,
and you will become entitled to a tax gross-up payment in an amount equal to the
aggregate of the additional Federal, state and local income taxes payable by you
by reason of the forgiveness of the interest amount (but not by reason of the
forgiveness of the principal amount), and by reason of your receipt of the
gross-up payment. However, if your employment is terminated (i) by the Company
for Cause, or (ii) by reason of your death, disability, or voluntary resignation
then the amount of any outstanding balance of principal and interest will become
immediately due and payable. Furthermore, if termination of employment occurs at
any time without cause or with good reason, as those terms are defined in your
Employee Retention Agreement (whether or not such agreement is then in effect),
while there is a remaining balance under this agreement, then such outstanding
balance of principal and interest shall be forgiven, and 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. After termination of your employment, if amounts are due from
you to repay the loan, and such amounts are otherwise unpaid, the Company
retains the right to offset such liability against amounts otherwise due to you
from the Company.
If the foregoing reflects your understanding of the terms of your agreement with
the Company, please so indicate by signing and returning a copy of this letter
to the undersigned, along with a signed copy of each of the enclosures.
Very truly yours,
Illinova Corporation
By:________________________
Charles E. Bayless
Accepted and agreed to this
18th day of January, 1999.
- ----------------------------
George W. Miraben
<PAGE>
PROMISSORY NOTE
$250,000.00
February 2, 1999
Decatur, Illinois
FOR VALUE RECEIVED, the undersigned, George W. Miraben, an individual (the
"Employee"), promises to pay to the order of Illinova Corporation, an Illinois
corporation (the "Company"), on the date on which the Employee's employment with
the Company terminates (the "Maturity Date"), the principal sum of $250,000.00
and any accrued interest on this Note, subject to the provisions of this Note
relating to forgiveness of such obligations.
This Note evidences obligations in connection with a loan made by the Company to
the Employee as part of the inducement to the Employee to become employed by the
Company.
The unpaid principal amount of this Note from time to time outstanding shall
bear interest at a rate per annum (based upon a 365/366 day year) equal to the
applicable Federal rate as of February 2, 1999, as determined for purposes of
section 1274(d) of the Internal Revenue Code of 1986, as amended, compounded
annually. After the Maturity Date, any unpaid and unforgiven principal amount
and accrued unforgiven interest on the unpaid principal amount of this Note
shall be payable on demand.
As of each of the first five one-year anniversaries of February 2, 1999, if the
Employee is employed by the Company on such anniversary, an amount equal to
$50,000.00 of the principal amount due under this Note, together with the amount
of interest that has accrued with respect to the entire unpaid principal and
interest amount since the preceding February 2, 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
1
<PAGE>
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,
(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.
Notwithstanding the foregoing, if termination of employment occurs at any time
without cause or with good reason, as those terms are defined in Employee's
Employee Retention Agreement, while there is a remaining balance under this
promissory note, then such outstanding balance of principal and interest shall
be forgiven.
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 payment 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.
2
<PAGE>
The Employee agrees that if any of the following events of default (each an
"Event of Default") shall occur and be continuing:
(i) default in the performance or observance of any other agreements
of the Employee contained herein, or
(ii) the institution of any bankruptcy, insolvency, receivership or
similar proceeding relating to the Employee or his assets, and if such
case or proceeding is not commenced by the Employee, it is consented
to or acquiesced in by the Employee or remains for 60 days
undismissed;
then the Company may declare this Note and all unpaid and unforgiven principal
of and interest on this Note and all accrued costs, expenses and other amounts
under this Note be due and payable, whereupon all unpaid and unforgiven
principal of and interest on this Note and all such costs, expense 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
3
<PAGE>
Decatur, Illinois 62521
Attention: General Counsel
If to the Employee: George W. Miraben
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 five days after the date mailed
by registered or certified mail, postage prepaid; and notices sent by hand
delivery shall be deemed to have been given when received.
This Note has been made and delivered at Decatur, Illinois and shall be
construed in accordance with and governed by the internal laws of the State of
Illinois. Wherever possible, each provision of this Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited by or invalid under applicable law,
such provision shall be ineffective to the least extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Note.
IN WITNESS WHEREOF, the Employee has caused this Note to be executed as of the
day and year first above written.
---------------------------
George W. Miraben
4
<PAGE>
ILLINOVA CORPORATION
SUPPLEMENTAL PENSION PLAN
The Supplemental Pension Plan (the "Plan") is adopted effective January
18, 1999. The Plan is established and maintained by Illinova Corporation for the
purpose of providing benefits for the Participant, George W. Miraben.
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 engagement in any misconduct in the
performance of the Participant's duty that materially injures the
Company,
(c) the Participant's performance of any act which, if known to
the shareholders or regulators of the Company or any of its
subsidiaries, would materially and adversely affect the business
of the Company or any of its subsidiaries, or
(d) the Participant's willful and substantial nonperformance of
assigned duties provided that such nonperformance has continued
more than ten days after the Company has given written notice of
such nonperformance and of its intention to terminate the
Participant's employment because of such nonperformance.
1.4 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and any regulations relating thereto.
1
<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 the annual bonus shall be deemed to
be earned evenly during each of the months in which the Participant
was employed by the Company during that year.
1.7 "Final Average Earnings" means the average of the
Participant's monthly Earnings during the 36 consecutive calendar
months that produces the highest average and that occurs during the
last 60 calendar months ending with the calendar month in which the
Participant's employment with the Company terminates. If the
Participant total employment period with the Company is less than 36
calendar months, his Final Average Earnings shall be determined by
averaging (on a calendar month basis) the Earnings received by him
from the Company during his entire period of employment.
1.8 "Normal Retirement Date" means the first day of the calendar
month coinciding with or next following the Participant's 65th
birthday.
1.9 "Participant" means George W. Miraben.
1.10 "Plan" means the Illinova Corporation Supplemental Pension
Plan.
2
<PAGE>
1.11 "Qualified Plan" means the Illinois Power Company Retirement
Income Plan for Salaried Employees or any successor plan.
1.12 "Qualified Plan Retirement Benefit" means the benefit
payable to a Participant pursuant to the Qualified Plan by reason of
his termination of employment with the Company for any reason other
than death.
1.13 "Qualified Plan Surviving Spouse Benefit" means the benefit
payable to the Surviving Spouse of the Participant pursuant to the
Qualified Plan in the event of the death of the Participant at any
time prior to commencement of payment of his Qualified Plan Retirement
Benefit.
1.14 "Supplemental Retirement Benefit" means the benefit payable
to the Participant pursuant to the Plan by reason of his termination
of employment with the Company for any reason other than death.
1.15 "Surviving Spouse" means a person who is married to the
Participant at the date of his death and for at least one year prior
thereto.
1.16 "Supplemental Surviving Spouse Benefit" means the benefit
payable to a Surviving Spouse pursuant to the Plan.
1.17 The Participant's "termination" of employment with the
Company shall be deemed to occur on the day immediately following the
date on which he is last employed by the Company.
1.18 Words in the masculine gender shall include the feminine and
the singular shall include the plural, and vice versa, unless
qualified by the context. Any headings used herein are included for
ease of reference only, and are not to be construed so as to alter the
terms hereof.
ARTICLE II
Eligibility
The Participant shall be eligible to receive a Supplemental Retirement
Benefit to the extent provided in Article III of the Plan. If the Participant
dies prior to commencement of payment of his Qualified Plan Retirement Benefit,
the Surviving Spouse of the Participant shall be eligible to receive a
Supplemental Surviving Spouse Benefit to the extent provided in Article IV of
the Plan.
3
<PAGE>
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 prior
to January 1, 2000 for any reason except circumstances pursuant to
which benefits are owed under the Employee Retention Agreement between
the Company and Participant, whether or not such agreement is then in
effect ("Retention Agreement"), 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 before
December 31, 1999 as a result of circumstances pursuant to which
benefits are owed under the Retention Agreement, or after December 31,
1999 and prior to February 1, 2004, by reason of his being discharged
by the Company without Cause or as a result of circumstances pursuant
to which benefits are owed under the Retention Agreement, or if the
Participant's employment with the Company terminates on or after
February 1, 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
4
<PAGE>
(iii) if the Participant's employment with the Company terminates after
December 31, 1999 and prior to February 1, 2004, and the termination
occurs for any reason other than his being discharged by the Company
without Cause or under circumstances pursuant to which benefits are
owed under the Retention Agreement, the Participant's Accrued Vested
Benefit shall be equal to 40% of the Participant's Final Average
Earnings as of the date of his termination of employment, multiplied by
the vesting percentage determined in accordance with the following
schedule:
- --------------------------------------------------------------------------------
If the Participant's employment with The vesting percentage shall be:
the Company terminates during this period:
- --------------------------------------------------------------------------------
On or after February 1, 2000, and 20%
before February 1, 2001
- --------------------------------------------------------------------------------
On or after February 1, 2001, and 40%
before February 1, 2002
- --------------------------------------------------------------------------------
On or after February 1, 2002, and 60%
before February 1, 2003
- --------------------------------------------------------------------------------
On or after February 1, 2003, and 80%
before February 1, 2004
- --------------------------------------------------------------------------------
After February 1, 2004 100%
- --------------------------------------------------------------------------------
3.2 Form of Benefit. The Supplemental Retirement Benefit payable to the
Participant shall be paid in the same form under which the Qualified Plan
Retirement Benefit is payable to the Participant. The Participant's election
under the Qualified Plan of any optional form of payment of his Qualified Plan
Retirement Benefit shall also be applicable to the payment of his Supplemental
Retirement Benefit.
3.3 Commencement of Benefit. Payment of the Supplemental Retirement
Benefit to the Participant shall commence on the same date as payment of the
Qualified Plan Retirement Benefit to the Participant commences. Any election
under the Qualified Plan made by the Participant with respect to the
commencement of payment of his Qualified Plan Retirement Benefit shall also be
applicable with respect to the commencement of payment of his Supplemental
Retirement Benefit.
3.4 Approval of Company. Notwithstanding the provisions of Sections 3.2
and 3.3 above, an election made by the Participant under the Qualified Plan with
respect to the form of payment of his Qualified Plan Retirement Benefit or the
date for commencement of payment thereof shall not be effective with respect to
5
<PAGE>
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 the the Participant, subject to the consent of the Company, from among
the alternatives that would be available under the Qualifed 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 Qualifed Plan, but determined by
applying the Surviving Spouse Benefit provisions of the
6
<PAGE>
Qualified Plan as though the amount of the monthly benefit
(payable in the form of a straight life annuity commencing at
the Participant's Normal Retirement Date) which the
Participant had earned on the date of his death had been equal
to the amount of his Accrued Vested Benefit (as defined in
Section 3.1 of this Plan);
LESS
(b) the monthly amount of the Qualifed 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 provisons of the January 13, 1999 letter to the Participant
from the Company, with such waiver to be made within 90 days after the
Participant's death in accordance with the procedures established by the
Company.
4.2 Form and Commencement of Benefit. A Supplemental Surviving Spouse
Benefit shall be payable over the lifetime of the Surviving Spouse only in
monthly installments commencing on the date for commencement of payment of the
Qualified Plan Surviving Spouse Benefit to the Surviving Spouse and termination
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.
7
<PAGE>
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.
8
<PAGE>
7.4 No Enlargement of the Employee Rights. No Participant or Surviving
Spouse shall have any right to a benefit under the Plan except in accordance
with the terms of the Plan. Establishment of the Plan shall not be construed to
give any Participant the right to be retained in the service of the Company.
7.5 Spendthrift Provision. No interest of any person or entity in, or
right to receive a benefit under, the Plan shall be subject in any manner to
sale, transfer, assignment, pledge, attachment, garnishment, or other alienation
or encumbrance of any kind; nor may such interest or right to receive a benefit
be taken, either voluntarily or involuntarily, for the satisfaction of the debts
of, or other obligation 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 Participant shall keep the Company informed
of his current address and the current address of his spouse. The Company shall
not be obligated to search for the whereabouts of any person. If the location of
9
<PAGE>
the Participant is not made known to the Company within three (3) years after
the date on which payment of the Participant's Supplemental Retirement Benefit
may first be made, payment may be made as though the Participant had died at the
end of the three-year period. If, within one additional year after such
three-year period has elapsed, or within three years after the actual death of
the Participant, the Company is unable to locate any Surviving Spouse of the
Participant, then the Company shall have no further obligation to pay any
benefit hereunder to such Participant or Surviving Spouse or any other person
and such benefit shall be irrevocably forfeited.
7.10 Limitations on Liability. Notwithstanding any of the preceding provisions
of the Plan, neither the Company nor any individual acting as an employee or
agent of the Company shall be liable to any Participant, former Participant,
Surviving Spouse or any other person for any claim, loss, liability or expense
incurred in connection with the Plan.
IN WITNESS WHEREOF, the undersigned director of the Company, on behalf
of the Company, has executed this Plan to witness its adoption by the Company as
of January 18, 1999, and the Participant has executed this Plan to witness his
understanding that it reflects his agreement with the Company.
10
<PAGE>
ILLINOVA CORPORATION
By:________________________
Accepted and agreed to this
18th day of January, 1999.
- -------------------------
George W. Miraben
11
<PAGE>
ILLINOVA CORPORATION
EMPLOYEE RETENTION AGREEMENT
THIS EMPLOYEE RETENTION AGREENENT (the "Agreement") is entered into this 18
day of January 1999 by and between ILLINOVA CORPORATION, an Illinois corporation
(the "Company") and George W. Miraben (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. In the event of a Termination Event (as
defined below) the Company shall, within 30 days of the Termination Event, make
a lump sum cash payment to the Employee equal to thirty-six (36) months' salary
at the greater of (I) the Employee's salary rate in effect on the date of the
Change in Control, or (II) the Employee's salary rate in effect on the date of
the Termination Event; plus three times the latest bonus earned by Employee
during the three calendar years last preceding the Termination Event.
Also in such event the Employee and his or her dependents, if any,
shall, for thirty-six (36) months following the Termination Event or until the
Employee reaches 65 years of age, or is employed by another employer, if sooner,
continue to participate in any benefit plans of the Company which provide health
(including medical and dental), life ordisability insurance, or similar
coverage, and if the Employee becomes 50 years of age prior to the beginning of
such period then for so long as the Employee is not employed by another
employer, the Employee and dependents, if any, shall continue to participate in
any benefit plans of the Company which provide health and life insurance or
similar. coverage until the Employee becomes 55 years of age whereupon the
Employee and dependents, if any, shall be eligible to participate in any such
benefits as are then extended
1
<PAGE>
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. For purposes of all
incentive and retirement plans of the Company The Employee shall be given
service credit for all purposes for, and shall be deemed to be an employee of
the Company during, the period the Employee continues to be eligible to
participate in benefit plans hereunder, notwithstanding the fact that the
Employee is not an employee of the Company during such period; provided that, if
the terms of any such plan do not permit such credit or deemed employee
treatment, the Company will make payments and distributions to the Employee
outside the plans in amounts substantially equivalent to the payments and
distributions, the Employee would have received pursuant to the terms of the
plans and attributable to such credit or deemed employee treatment, had such
credit or deemed employee treatment been permitted pursuant to the terms of the
plans. 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 section 2 shall not be reduced in any way by reason of
any compensation received by the Employee from sources other than the Company
after the termination of the Employee's employment with the Company.
Notwithstanding any provision in this Agreement to the contrary, the
benefits under this paragraph 1 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.
For purposes of this paragraph 1 (including the defined terms used herein)
references to the "Company" shall include any subsidiary of the Company by which
the Employee is employed.
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.
2
<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 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 Employee's express
written consent, the Company shall:
(A) reduce the salary of the Employee; or
(B) materially reduce the amount of paid vacations to which
the Employee is entitled, or the Employee's fringe benefits
and perquisites; or
(C) significantly change the nature or decrease the scope of
the Employee's authority; or
(D) change by 50 miles or more the principal location in
which the Employee is required to perform services.
(iii) "Change in Control" shall be deemed to occur on the
earliest of the existence of one of the following and the receipt
of all necessary regulatory approvals tberefore:
(A) The acquisition other than from the company, by any
entity, person or group (including all Affiliates or
Associates of such entity, person or group) of beneficial
ownership, as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934, of more than 20% of the
outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors, but
excluding for this purpose any such acquisition by the
Company or any of its subsidiaries or any employee benefit
plan (or related trust) or the Company or its subsidiaries,
or any corporation with respect to which, following such
acquisition, more than 80% of, respectively, the then
outstanding shares of common stock of such corporation and
the combined vote 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
3
<PAGE>
were the beneficial owners respectively, of the common stock
and voting securities of the Company immediately prior to
such acquisition in substantially the same proportion as
their ownership, immediately. prior to such acquisition of
the then outstanding shares of common stock of the Company
or the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the
election of directors, as the case may be;
(B) The effective time of a reorganization, merger or
consolidation of the Company, in each case, with respect to
which all or substantially all of the individuals and
entities who were the respective beneficial owners. of the
common. stock and voting securities of the Company
immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger
or consolidation, beneficially own, directly and indirectly,
more than 80% of respectively, the then outstanding shares
of common stock or the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors, as the case may be, of the
corporation resulting from such reorganization, merger or
consolidation, or of a complete liquidation or dissolution
of the Company or of the sale or other disposition of a
Substantial Portion of the Property of the Company, or
(C) The election to the Board of Directors of the Company,
of directors constituting a majority of the number of the
directors in office unless such directors were recommended
for election by the existing Board of Directors.
(iv) A "Termination Event" means the date that the Employee's
employment with the Company terminates under one of the following
circumstances:
(A) The Employee's employment is terminated by the Company
without Good Cause within two (2) years following a Change
in Control.
(B) The Employee voluntarily terminates employment with Good
Reason within two (2) years following a Change in Control.
(C) The Employee's employment is terminated prior to a
Change in Control at the request of a potential acquiror.
4
<PAGE>
For purposes of the foregoing, a termination will not be deemed to have
occurred solely because of the transfer of the Employee from one subsidiary of
the Company to another.
(b) For purposes of the foregoing, (i) "Affiliate" or "Associate" shall
have the meaning set forth in Rule 12b-2 under the Securities Exchange Act of
1934; and (ii) "Substantial Portion of the Property of the Company" shall mean
80% of the aggregate book value of the assets of the Company and its Affiliates
and Associates as set forth on the most recent balance sheet. of the Company,
prepared on a consolidated basis, 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 all
out-of-pocket expenses, including 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. If so
requested by the Employee, such expenses shall be advanced to the Employee as
they are incurred from time to time during the pendency of such claim, legal
action or proceeding; provided that if the proviso of the preceding sentence
becomes applicable, the Employee shall, within ten (10) days after the Company
has prevailed, repay all advanced amounts with interest from the date or dates
on which they were advanced at the rate described in the next sentence. 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 Plan.
5
<PAGE>
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 Plan 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 ensure 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 effect the validity or enforceability of any other provision.
8. Amendment and Termination. This agreement may be amended or terminated
by the Board of Directors of the Company, provided that from and after the date
of a Change in Control or during any period of time when the Company has
knowledge that any third person has taken steps reasonably calculated to effect
a Change in Control until twelve (12) months after the third person has
abandoned or terminated the efforts to effect Change in Control, the Agreement
may not be terminated and may not be amended 'in amended in a manner that
adversely affects the rights of the Employee.
6
<PAGE>
9. Tax Documents. This paragraph shall apply if all or any portion of the
payments and benefits provided to an Employee under the Agreement, any benefit
(including any such plan adopted in the future), would otherwise constitute
"excess parachute payments" within the meaning of Section 280G of the Internal
Revenue Code of I986 as amended (the "Code"), that are subject to the tax
imposed by Section 4999 of the Code (or similar tax and/or assessment). If after
the application of such tax and/or assessment, the amount of such payment and
benefits would be less than if the payment and benefits had been, reduced to an
amount that would result in there being no excess parachute payments then such
payments and benefits shall be so reduced (the minimum extent necessary so that
no excess parachute payments result). If reduction is necessary hereunder, the
Employee shall elect which of the payments and benefits shall be reduced.
Determination of whether payments and benefits would constitute excess parachute
payments, and the amount of reduction so that no excess parachute payments shall
exist, shall be made, at the Company's expense, by the independent accounting
firm employed by the Company immediately prior to the occurrence of any change
of control of the Company which will result in the imposition of such tax.
IN WITNESS WHEREOF, the Company and the Employee have executed the
Agreement on and as of the 18 day of January, 1999. This Agreement supersedes
and replaces any prior agreement between the company and the undersigned
regarding this subject
ILLINOVA CORPORATION
By:
-----------------
-----------------
Employee
7
<PAGE>
NON-QUALIFIED STOCK OPTION AGREEMENT
ILLINOVA CORPORATION
1992 LONG-TERM INCENTIVE COMPENSATION PLAN
THIS AGREEMENT, entered into as of the 18th day of January, 1999 (the "Grant
Date") by and between ILLINOVA CORPORATION, an Illinois corporation, (the
"Company") and George M. Miraben (the "Employee"),
WITNESSETH THAT:
WHEREAS, the Company maintains the Illinova Corporation 1992 Long-Term Incentive
Compensation Plan (the "Plan"), which is incorporated and forms a part of this
Agreement, for the benefit of key employees of the Company and its Subsidiaries;
WHEREAS, to induce the Employee to accept employment by the Company, the Company
has agreed to grant to the Employee the option described in this Agreement; and
WHEREAS, the Employee and the Company desire to enter into this Agreement
reflecting the award of such option;
NOW, THEREFORE, IT IS AGREED, by and between the Company and the Employee as
follows:
SECTION ONE
GRANT
Subject to the terms and conditions of the Plan and this Agreement, the Employee
is hereby awarded an option to purchase 30,000 shares of Stock (the "Option").
The Option is not intended, and shall not be treated, as an incentive stock
option (as that term is used in Section 422 of the Code).
<PAGE>
SECTION TWO
OPTION PRICE
The option price of each share of stock subject to the Option is $24.688.
SECTION THREE
EXERCISE, EXPIRATION AND CANCELLATION
OF OPTION
The option shall be exercisable by the Employee at any time subsequent to a
Change in Control as defined in the Employee Retention Agreement between the
Company and the Employee (whether or not such agreement is then in effect) and
otherwise in accordance with the following schedule:
- --------------------------------------------------------------------------------
If the Employee is employed through The Option shall become exercisable
the following date: with respect to the following
number of shares on and after that
date:
- --------------------------------------------------------------------------------
One-year anniversary of Grant Date 10,000 shares
- --------------------------------------------------------------------------------
Two-year anniversary of Grant Date 10,000 shares
- --------------------------------------------------------------------------------
Three-year anniversary of Grant Date 10,000 shares
- --------------------------------------------------------------------------------
If the Employee's employment by the Company continues through the 9-1/2 year
anniversary of the Grant Date, then any portion of the Option herein granted and
not previously exercisable shall become exercisable on such 9-1/2-year
anniversary.
The Option shall expire as to any unexercised portion on the earliest of:
(a) the tenth anniversary of the date first above written;
(b) the first anniversary of the Employee's death;
(c) five years following the Employee's date of retirement; or
(d) the date of the Employee's Termination as defined in the Plan;
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.
<PAGE>
For purposes of this Agreement, the Employee's "date of retirement" shall be the
date of Retirement, Early Retirement or Disability Retirement as those terms are
defined in the Plan.
If the Employee exercises the Option with respect to a portion, but not all, of
the shares of Stock subject thereto, the Option shall thereafter cease to be
exercisable with respect to the shares of Stock for which it was exercised but,
subject to the terms and conditions of the Plan and this Agreement, shall
continue to be exercisable with respect to the shares of Stock with respect to
which it was not exercised.
If the Employee's Termination occurs prior to the date on which any portion of
the Option has become exercisable, that portion of the Option shall be forfeited
upon such Termination. Notwithstanding the foregoing provisions of this
Agreement, the Option shall not become exercisable and shall be forfeited if the
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 cancelled. Such notice shall specify
the date as of which the exercise is to occur and the number of shares of Stock
which the Employee elects to purchase and shall be in such form and shall
contain such other information as the Secretary of the Company may reasonably
require. The election shall be accompanied by payment of the option price for
such shares of Stock indicated by the Employee's election, together with the
amount of any required state, federal or local withholding taxes arising in
connection with the purchase of such Stock. Subject to the provisions of the
preceding sentence and the terms of the Plan, payment shall be by cash or check
payable to the Company, by delivery of shares of Stock having an aggregate Fair
Market Value (determined as of the date of exercise) equal to the option price,
and if elected in accordance with this Section 4, the Employee's tax withholding
obligation for the shares of Stock, indicated by the Employee's election, or a
combination of both.
SECTION FIVE
TRANSFERABILITY
The Option shall not be transferable by the Employee other than by will or the
laws of descent and distribution and, during the life of the Employee, is
exercisable only by the Employee or Employee's guardian or legal representative.
<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.
<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.
--------------------------------
GEORGE W. MIRABEN
ILLINOVA CORPORATION
BY:_____________________________
CHARLES E. BAYLESS
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
ATTEST:
- ------------------------------------
LEAH MANNING STETZNER
CORPORATE SECRETARY
<TABLE>
<CAPTION>
Exhibit (12)(a)
ILLINOVA CORPORATION
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Thousands of Dollars)
Year Ended December 31, Supplemental 1 Supplemental 2 Supplemental 3
-----------------------------------------------------------------------------------------------------------------
1992 1993 1993 1994 1995 1996 1997 1997 1998 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Available for
Fixed Charges:
Net Income (Loss) $122,100 ($55,800) ($55,800) $176,700 $175,312 $213,379 ($69,057) ($69,057) ($1,363,260) ($1,363,260)
Add:
Income Taxes:
Current 22,930 25,260 25,260 58,354 98,578 163,873 70,975 70,975 7,556 7,556
Deferred - Net 63,739 82,057 82,057 71,177 34,137 (16,028) 36,963 36,963 309,070 309,070
Allocated income taxes (6,632) (12,599) (12,599) (8,285) (11,851) (12,641) (20,345) (20,345) (11,330) (11,330)
Investment tax
credit - deferred (519) (782) (782) (11,331) (6,894) (7,278) (7,278) (7,278) (8,256) (8,256)
Income tax effect of
disallowed costs - (70,638) (70,638) - - - - - - -
Income tax effect of
FAS 71 write-off - - - - - - (117,998) (117,998) - -
Income tax effect of
CPS Impairment - - - - - - - - (1,014,047) (1,014,047)
Interest on
long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 116,137 116,137 116,968 116,968
Amortization of debt
expense and premium-net,
and other interest
charges 12,195 17,007 17,007 15,826 29,558 24,031 27,984 27,984 29,064 29,064
One-third of all rentals
(Estimated to be
representative of the
interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229 4,054 4,054
Interest on
in-core fuel 8,278 6,174 6,174 7,185 6,716 4,757 3,842 3,842 3,716 3,716
Disallowed Clinton
plant costs - - 270,956 - - - - - - -
FAS 71 Regulatory
Write-Offs - - - - - - - 313,030 - -
CPS Impairment - - - - - - - - - 2,341,185
-------- -------- -------- -------- -------- -------- -------- -------- ----------- -----------
Earnings (loss) available
for fixed charges $388,003 $150,781 $421,737 $450,588 $456,358 $492,877 $45,452 $358,482 ($1,926,465) $414,720
======== ======== ======== ======== ======== ======== ======== ======== =========== ===========
Fixed charges:
Interest on long-
term debt $160,795 $154,110 $154,110 $135,115 $125,581 $118,438 $116,137 $116,137 $116,968 $116,968
Amortization of debt
expense and premium-net,
and other interest charges 25,785 27,619 27,619 25,381 38,147 30,663 32,928 32,928 36,787 36,787
One-third of all rentals
(Estimated to be
representative of the
interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229 4,054 4,054
-------- -------- -------- -------- ------- -------- -------- -------- ----------- -----------
Total Fixed Charges $191,697 $187,721 $187,721 $166,343 $168,949 $153,447 $153,294 $153,294 $157,809 $157,809
======== ======== ======== ======== ======== ======== ======== ======== =========== ===========
Ratio of earnings to
fixed charges 2.02 N/A * 2.25 2.71 2.70 3.21 N/A * 2.34 N/A * 2.63
======== ======== ======== ======== ======= ======== ======== ======== =========== ===========
* Earnings are inadequate to cover fixed charges. Additional earnings (thousands) for 1993 , 1997 and 1998 of $36,940,
$107,842 and $2,084,274, respectively, are required to attain a one-to-one ratio of Earnings to Fixed Charges.
1 Supplemental ratio of earnings to fixed charges presented to exclude nonrecurring item - Disallowed Clinton plant costs.
2 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.
3 Supplemental ratio of earnings to fixed charges presented to exclude write-off related to Clinton impairment.
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12(b)
ILLINOIS POWER COMPANY
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
(Thousands of Dollars)
Year Ended December 31, Supplemental 1 Supplemental 2 Supplemental 3
----------------------------------------------------------------------------------------------------------------------
1992 1993 1993 1994 1995 1996 1997 1997 1998 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings Available for
Fixed Charges:
Net Income (Loss) $122,088 ($56,038) ($56,038) $180,242 $182,713 $228,618 ($44,173) ($44,173) ($1,355,916) ($1,355,916)
Add:
Income Taxes:
Current 22,930 25,260 25,260 58,354 98,578 163,873 72,680 72,680 7,556 7,556
Deferred - Net 63,739 82,057 82,057 71,177 34,137 (16,028) 36,963 36,963 309,070 309,070
Allocated income taxes (6,632) (12,599) (12,599) (8,285) (8,417) (2,642) (1,446) (1,446) 3,506 3,506
Investment tax
credit- deferred (519) (782) (782) (11,331) (6,894) (7,278) (7,278) (7,278) (8,256) (8,256)
Income tax effect of
disallowed costs - (70,638) (70,638) - - - - - - -
Income tax effect of
FAS 71 write-off - - - - - - (117,998) (117,998) 0 0
Income tax effect of
CPS impairment - - - - - - - - (1,014,047) (1,014,047)
Interest on
long-term debt 160,795 154,110 154,110 135,115 125,581 118,438 109,595 109,595 106,879 106,879
Amortization of debt
expense and premium-net,
and other interest
charges 12,195 17,007 17,007 15,826 29,558 22,325 26,260 26,260 28,107 28,107
One-third of all rentals
(Estimated to be
representative of the
interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229 4,054 4,054
Interest on
in-core fuel 8,278 6,174 6,174 7,185 6,716 4,757 3,842 3,842 3,716 3,716
Disallowed Clinton
plant costs - - 270,956 - - - - - - -
FAS 71 Regulatory
Write-Off - - - - - - - 313,030 - -
CPS Impairment - - - - - - - - - 2,341,185
-------- -------- -------- -------- -------- -------- ------- -------- ----------- -----------
Earnings (loss) available
for fixed charges $387,991 $150,543 $421,499 $454,130 $467,193 $516,409 $82,674 $395,704 ($1,915,331) $425,854
======== ======== ======== ======== ======== ======== ======== ======== =========== ===========
Fixed charges:
Interest on long-
term debt $160,795 $154,110 $154,110 $135,115 $125,581 $118,438 $109,595 $109,595 $106,879 $106,879
Amortization of debt
expense and premium-net,
and other interest charges 25,785 27,619 27,619 25,381 38,147 28,957 31,204 31,204 35,829 35,829
One-third of all rentals
(Estimated to be
representative of the
interest component) 5,117 5,992 5,992 5,847 5,221 4,346 4,229 4,229 4,054 4,054
-------- -------- -------- -------- -------- -------- -------- -------- ------------ -----------
Total Fixed Charges $191,697 $187,721 $187,721 $166,343 $168,949 $151,741 $145,028 $145,028 $146,762 $146,762
======== ======== ======== ======== ======== ======== ======== ======== ============ ===========
Ratio of earnings to
fixed charges 2.02 N/A * 2.25 2.73 2.77 3.40 N/A * 2.73 N/A * 2.90
======== ======== ======== ======== ======== ======== ======== ======== =========== ===========
* Earnings are inadequate to cover fixed charges. Additional earnings (thousands) for 1993, 1997 and 1998 of $37,178,
$62,354 and $2,062,093 respectively, are required to attain a one-to-one ratio of Earnings to Fixed Charges.
1 Supplemental ratio of earnings to fixed charges presented to exclude nonrecurring item Disallowed Clinton plant costs.
2 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.
3 Supplemental ratio of earnings to fixed charges presented to exclude write-off related to Clinton Impairment.
</TABLE>
1998 PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
Notice of Annual Meeting of Shareholders
PROXY STATEMENT TABLE OF CONTENTS
Notice of Annual Meeting............................ 2
Proxy Statement..................................... 3
Appendix: 1998 Annual Report to Shareholders....... .a-1
TO THE SHAREHOLDERS OF ILLINOVA CORPORATION:
Notice is hereby given that the Annual Meeting of Shareholders of Illinova
Corporation ("Illinova") will be held at 10 a.m. Wednesday, May 5, 1999, at
Shilling Community Education Center, Richland Community College, One College
Park, Decatur, Illinois 62521, for the following purposes:
1) To elect the Board of Directors for the ensuing year.
2) To transact any other business that may properly come before the meeting
or any adjournment.
Shareholders of record at the close of business on March 8, 1999, are
entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
General Counsel and Corporate Secretary
Decatur, Illinois
March 31, 1999
IMPORTANT
Illinova invites each of its approximately 32,100 shareholders to attend the
Annual Meeting. Shareholders will be admitted on verification of record share
ownership at the admission desk. Shareholders who own shares through banks,
brokerage firms, nominees or other account custodians must present proof of
beneficial share ownership (such as a brokerage account statement) at the
admission desk. If you are unable to be present at the meeting, it is important
that you sign and return the enclosed proxy, no matter how many shares you own.
Illinova has enclosed a prepaid, self-addressed envelope for that purpose.
You will ensure that you are represented at the Annual Meeting by returning
your executed proxy. Your cooperation is appreciated.
Proxy Statement
SOLICITATION AND REVOCATION OF PROXIES
This Proxy Statement is furnished in connection with a solicitation of proxies
by the Board of Directors of Illinova, for use at the Annual Meeting of
Shareholders to be held at Shilling Community Education Center, Richland
Community College, One College Park, Decatur, Illinois 62521, at 10 a.m.
Wednesday, May 5, 1999, and at any adjournment thereof (the "Annual Meeting").
Any shareholder giving a proxy may revoke it at any time by giving a later proxy
or by giving written notice of revocation to the Corporate Secretary of Illinova
prior to the Annual Meeting. All duly executed proxies received prior to the
Annual Meeting will be voted.
Shares credited to the accounts of participants in Illinova's Investment Plus
Plan and Illinois Power Company's Incentive Savings Plans will be voted in
accordance with the instructions of the participants or otherwise in accordance
with the terms of those plans.
VOTING RIGHTS
Shareholders of record at the close of business on Monday, March 8, 1999 (the
"Record Date"), will be entitled to receive notice of and to vote at the Annual
Meeting. As of that date, Illinova had outstanding 69,919,287 shares of Common
Stock. Shareholders who are present at the Annual Meeting in person or by proxy
will be entitled to one vote for each share of Illinova's Common Stock which
they held of record at the close of business on the Record Date.
All shareholders will be entitled to 10 votes (the number of directors to be
elected) for each of their shares for candidates nominated to serve as
directors. Shareholders may cast all of their votes for any one candidate whose
name has been placed in nomination prior to the voting, or distribute their
votes among two or more candidates. Election of directors requires the
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy and entitled to vote.
Shareholders will be entitled to one vote for each share of Common Stock held
of record at the close of business on the Record Date when voting on other
matters presented for consideration at the Annual Meeting.
ANNUAL REPORT, PROXY AND PROXY STATEMENT
Accompanying this Proxy Statement, which includes Consolidated Financial
Statements, is a Notice of Annual Meeting of Shareholders, a form of Proxy and
the Summary Annual Report to Shareholders covering operations of Illinova for
the year 1998. This Proxy Statement and accompanying documents are first being
mailed to shareholders on or about March 31, 1999.
BOARD OF DIRECTORS
Information Regarding the Board of Directors
The Board of Directors held nine Board meetings during 1998. All directors
attended at least 75 percent of the aggregate meetings of the Board and
Committees of which they were members during 1998. The Board has three standing
committees: the Audit Committee, the Finance Committee, and the Compensation and
Nominating Committee.
The duties and members of the standing committees are:
Audit Committee
1) Review with the Chairman, President and Chief Executive Officer and the
independent accountants the scope and adequacy of Illinova's system of
internal controls;
2) Review the scope and results of the annual examination performed by the
independent accountants;
3) Review the activities of Illinova's internal auditors;
4) Report its findings to the Board and provide a line of communication
between the Board and both the internal auditors and the independent
accountants;
5) Recommend to the Board the appointment of the independent accountants; and
6) Approve the services performed by the independent accountants.
The Audit Committee met three times during 1998.
This Committee consists of the following directors who are not employees of
the Company ("Outside Directors"): Robert M. Powers (Chairman), C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel and John D. Zeglis.
Finance Committee
1) Review management's cash flow forecasts, financial forecasts and financing
program, and make recommendations to the Board regarding the approval of
such plans;
2) Review Illinova's banking relationships, short-term borrowing arrangements,
dividend policies, arrangements with the transfer agent and registrar, and
investment objectives;
3) Review the performance of Illinois Power's pension and other trust funds,
evaluate fund managers, and make recommendations to the Board concerning
such matters;
4) Review Illinova's risk management programs, including insurance coverage,
and make recommendations to the Board; and
5) Act in an advisory capacity to management, the Board of Directors, and the
Chairman, President and Chief Executive Officer on other financial matters
as they may arise.
The Finance Committee met five times during 1998.
This Committee consists of the following members of the Board: Walter D.
Scott (Chairman), Charles E. Bayless, C. Steven McMillan, Sheli Z. Rosenberg,
Joe J. Stewart, and Walter M. Vannoy.
Compensation and Nominating Committee
1) Review performance of and recommend salaries plus other forms of
compensation for elected Illinova officers and the Board of Directors;
2) Review Illinova's benefit plans for elected Illinova officers and make
recommendations to the Board;
3) Review with the Chairman, President and Chief Executive Officer any
organizational or other personnel matters; and
4) Recommend to the Board candidates for election as director to fill
vacancies on the Board of Directors as they occur.
The Compensation and Nominating Committee will consider shareholders'
recommendations for candidates for director made in writing and addressed to the
Chairman of the Committee at the executive offices of Illinova. The
recommendation should include a full description of the qualifications and
business and professional experience of the candidates and a statement of the
candidates' willingness to serve. The notice must be delivered to or mailed and
received at the executive offices of Illinova not less than 90 nor more than 120
days prior to the Annual Meeting.
The Compensation and Nominating Committee met three times during 1998.
This Committee consists of the following Outside Directors: Ronald L.
Thompson (Chairman), J. Joe Adorjan, Robert M. Powers, Marilou von Ferstel, and
John D. Zeglis.
Board Compensation
The Outside Directors of Illinova receive a retainer fee of $18,000 per year.
Outside Directors who also chair Board Committees receive an additional $2,500
per year. Outside Directors receive a grant of 650 shares of Common Stock on the
date of each Annual Shareholders Meeting. Outside Directors elected to the Board
between Annual Shareholders Meetings are paid $850 for each Board and Committee
meeting attended prior to the first Annual Shareholders Meeting after their
election to the Board. Other than the foregoing, there are no attendance-based
fees.
Illinova had a Retirement Plan for Outside Directors. Under this plan, each
Outside Director who attained age 65 and served on the Board for a period of 60
or more consecutive months was eligible for annual retirement benefits at the
rate of the annual retainer fee in effect when the director retired. Each former
Outside Director whose right to receive the retirement benefit had vested
continues to receive such benefits in accordance with the terms of the
Retirement Plan.
In 1996, the Board of Directors adopted a Comprehensive Deferred Stock Plan
for Outside Directors, replacing the Retirement Plan. All Outside Directors
serving at the time this new plan was adopted were granted a lump sum amount
based on the net present value of these benefits to them, were they to have
retired under the Retirement Plan, based on the number of years they served on
the Board but not to exceed 10. This dollar amount was converted into stock
units, based on the then market value of Illinova Common Stock, and placed into
an account. The value of these stock units is to be paid to the director in
cash, in a lump sum or installments, on termination of service, based on the
then market value of Illinova Common Stock, plus dividend equivalents.
In addition, each Outside Director receives an annual award of stock units
having a value of $6,000. This award is paid to the Outside Director in cash on
retirement, at once or in installments as the director may elect. The amount of
such payment is determined by multiplying the number of stock units in the
account times the then market value of Illinova Common Stock, and adding the
dividend equivalents attributable to such stock units.
Illinova has a Deferred Compensation Plan for Certain Directors. Outside
Directors may elect to defer all or any portion of their fees and stock grants
until termination of their services as directors. Deferred fees and grants are
converted into stock units representing shares of Illinova's Common Stock with
the value of each stock unit based on the last reported sales price of such
stock. Additional credits are made to the participating director's account in
dollar amounts equal to the dividends paid on Common Stock which the director
would have received if the director had been the record owner of the shares
represented by stock units, and these amounts are converted into additional
stock units. On termination of the participating directors' services as
directors, payment of deferred fees and stock grants is made in shares of Common
Stock in an amount equal to the aggregate number of stock units credited to
their accounts.
Illinova amended the plan in 1997 to provide for a payout in cash instead of
shares of Common Stock. Deferred amounts are still converted into stock units
representing shares of Common Stock with the value of each stock unit based on
the last reported sales price of such stock. Payment is made in cash, in a lump
sum or installments, as soon as practical following a director's termination.
The cash paid on termination equals the number of stock units times the share
price at the close of market on the last business day of the month preceding
termination. Directors receive no other payments after their service on the
Board ceases.
ELECTION OF DIRECTORS
Illinova's entire Board of Directors is elected at each Annual Meeting of
Shareholders. Directors hold office until the next Annual Meeting of
Shareholders or until their successors are elected and qualified. At the Annual
Meeting a vote will be taken on a proposal to elect the 10 directors nominated
by Illinova's Board of Directors. Their names and certain additional information
is set forth on the following pages. The dates shown for service as a director
include service as a director of Illinois Power prior to the May 1994
restructuring in which Illinois Power became a subsidiary of Illinova. If any
nominee should become unable to serve as a director, another nominee may be
selected by the current Board of Directors.
Name of Director Nominee, Age, Year in Which First
Business Experience and Elected a Director
Other Information of Illinova
J. Joe Adorjan, 60 1997
Chairman of Borg-Warner Security Corporation, Chicago, Ill., a security systems
services firm, since 1995. He was President of Emerson Electric Company from
1993 to 1995. Prior to that, he was Chairman and Chief Executive Officer of ESCO
Electronics Corporation. He is a director of The Earthgrains Company, ESCO
Electronics Corporation, Hussmann Corporation and Goss Graphics Systems, Inc.
Charles E. Bayless, 56 1998
Chairman of Illinova and Illinois Power since August 1998, and President and
Chief Executive Officer since July 1998. He was Chairman, President and Chief
Executive Officer of Tucson Electric Power from 1992 to 1998, President and
Chief Executive Officer from 1990 to 1992, and Senior Vice President and Chief
Financial Officer from 1989 to 1990. He is a director of Trigen Energy
Corporation.
C. Steven McMillan, 53 1996
President, Chief Operating Officer, and Director of Sara Lee Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was Executive Vice President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy Development from 1986 to 1993. He is a director of Pharmacia
and Upjohn.
Robert M. Powers, 67 1984
From 1980 until retirement in December 1988, President and Chief Executive
Officer of A. E. Staley Manufacturing Company, Decatur, Ill., a processor of
grain and oil seeds. He is a director of A. E. Staley Manufacturing Company.
Sheli Z. Rosenberg, 57 1997
President and Chief Executive Officer since 1994 and General Counsel 1980 to
1994 of Equity Group Investments, LLC, Chicago, Ill., a privately held business
conglomerate holding controlling interests in seven publicly traded corporations
involved in basic manufacturing, radio stations, retail, insurance, and real
estate. She is a director of Jacor Communications, Inc.; Capitol Trust; Anixter
International, Inc.; Equity Office Properties Trust; Equity Residential
Properties Trust; CVS Corporation; and Manufactured Home Communities, Inc.
Walter D. Scott, 67 1990
Professor of Management and Senior Austin Fellow, J. L. Kellogg Graduate School
of Management, Northwestern University, Evanston, Ill., since 1988. He was
Chairman of GrandMet USA from 1984 to 1986 and President and Chief Executive
Officer of IDS Financial Services from 1980 to 1984. He is a director of
Neodesic Corporation and Intermatic Incorporated.
Joe J. Stewart, 60 1998
From 1995 until retirement in 1998, President of BWX Technologies, Inc.,
formerly The Babcock & Wilcox Government Group, Lynchburg, Va., a diversified
energy equipment and services company, and Executive Vice President of McDermott
International, Inc. (parent of BWX Technologies, Inc. and The Babcock & Wilcox
Company). He was President and Chief Operating Officer of The Babcock and Wilcox
Company and Executive Vice President of McDermott International, Inc., from 1993
to 1995 and Executive Vice President of the Power Generation Group of The
Babcock and Wilcox Company from 1987 to 1993.
Ronald L. Thompson, 49 1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing Co.,
Bowling Green, Ohio, a manufacturer of automotive parts, since 1993. He was
President and Chief Executive Officer and a director of The GR Group, Inc., St.
Louis, Mo., from 1980 to 1993. He is a director of Teachers Insurance and
Annuity Association, and Ryerson Tull.
Marilou von Ferstel, 61 1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. She was Managing Director and Senior Vice President of Hill and Knowlton,
Chicago, Ill., from 1981 to 1990. She is a director of Walgreen Company.
John D. Zeglis, 51 1993
President and Director of AT&T, Basking Ridge, N.J., a diversified
communications company, since October 1997. He was Vice Chairman from June 1997
to October 1997, Senior Executive Vice President and General Counsel, from 1995
to June 1997 and Senior Vice President -- General Counsel and Government Affairs
from 1989 to 1995. He is a director of the Helmerich & Payne Corporation, and
Sara Lee Corporation.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below shows shares of Illinova Common Stock beneficially owned as of
December 31, 1998, by each director nominee, executive officers named in the
Summary Compensation Table, and entities owning more than 5 percent.
Number Number of Stock
of Shares Units in Deferred
Name of Beneficially Compensation Percent
Beneficial Owner Owned (1)(2) Plans of Class
J. Joe Adorjan 1,650 205 (3)
Charles E. Bayless 2,501 2,000 (3)
Larry D. Haab 88,822 5,420 (3)
C. Steven McMillan 1,950 777 (3)
Robert M. Powers 9,200 4,937 (3)
Sheli Z. Rosenberg 1,000 3,704 (3)
Walter D. Scott 6,125 3,664 (3)
Joe J. Stewart 1,500 851 (3)
Ronald L. Thompson 3,806 6,091 (3)
Marilou von Ferstel 4,579 4,620 (3)
John D. Zeglis 2,714 3,170 (3)
Larry F. Altenbaumer 30,092 2,157 (3)
David W. Butts (4) 13,944 1,742 (3)
Alec G. Dreyer 13,673 3,035 (3)
Paul L. Lang (5) 27,991 2,402 (3)
Princeton Services, Inc (6) 6,321,253 9%
Merrill Lynch Asset
Management, L.P. (7) 5,765,450 8%
Franklin Resources, Inc (8) 5,030,560 7%
The Prudential Insurance
Company of America (9) 3,620,611 5%
(1) With sole voting and/or investment power.
(2) Includes the following shares issuable pursuant to stock options
exercisable June 30, 1998: Mr. Haab, 76,900; Mr. Altenbaumer, 24,300; Mr.
Butts, 12,900; Mr. Dreyer, 11,250; and Mr. Lang, 24,300.
(3) No director or executive officer owns any other equity securities of
Illinova or as much as 1 percent of the Common Stock. As a group, directors
and executive officers of Illinova and Illinois Power own 244,324 shares of
Common Stock (less than 1 percent).
(4) Includes 135 shares owned by family members.
(5) Includes 910 shares owned by spouse.
(6) With shared voting and dispositive power, per its January 27, 1999,
Schedule 13G, Princeton Services, Inc., 800 Scudders Mill Road, Plainsboro,
N.J. 08536
(7) With shared voting and dispositive power, per its January 27, 1999,
Schedule 13G, Merrill Lynch Asset Management, L.P., 800 Scudders Mill Road,
Plainsboro, N.J. 08536.
(8) Per its January 27, 1999, Schedule 13G, Franklin Resources, Inc., 777
Mariners Island Blvd., San Mateo, Calif. 94403. Adviser Subsidiaries of
Franklin Resources, Inc. have sole voting and dispositive power.
(9) Sole voting and dispositive power for 9,300 shares and shared voting and
dispositive power for 3,611,311 shares, per its February 1, 1999, Schedule
13G, The Prudential Insurance Company of America, 751 Broad Street, Newark,
N.J. 07102.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the Chief
Executive Officer, the retired Chief Executive Officer, and the four other most
highly compensated executive officers of Illinova subsidiaries for the years
indicated. The compensation shown includes all compensation paid for service to
Illinova and its subsidiaries, including Illinois Power, Illinova Generating
Company, and Illinova Energy Partners.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (4)
<S> <C> <C> <C> <C> <C> <C> <C>
LARRY D. HAAB 1998 $338,625 $ 16,931 $ 46,025 $ 0 27,000 shs. $ 2,660
Retired Chairman, President 1997 514,952 41,840 16,557 41,840 20,000 shs. 2,614
and Chief Executive Officer 1996 493,709 69,267 15,973 69,267 22,000 shs. 2,615
of Illinova and Illinois Power
CHARLES E. BAYLESS 1998 $272,372 $137,500 $ 2,868 $309,625(3) 165,000 shs. $ 0
Chairman, President and
Chief Executive Officer of
Illinova and Illinois Power
PAUL L. LANG 1998 $250,875 $ 24,304 $ 7,705 $ 24,304 8,000 shs. $ 2,697
Senior Vice President 1997 242,325 10,602 8,305 10,601 6,500 shs. 2,615
of Illinois Power 1996 233,450 19,747 8,863 19,747 6,500 shs. 2,595
LARRY F. ALTENBAUMER 1998 $244,375 $ 19,855 $ 7,010 $ 19,855 10,000 shs. $ 2,500
Chief Financial Officer, 1997 232,048 8,992 9,521 8,992 6,500 shs. 1,985
Treasurer and Controller 1996 222,374 19,832 8,459 19,832 7,500 shs. 1,976
of Illinova, and Senior
Vice President and Chief
Financial Officer of
Illinois Power
ALEC G. DREYER 1998 $215,251 $ 27,338 $ 4,676 $ 27,338 10,000 shs. $ 2,691
Senior Vice President of 1997 185,875 31,060 4,793 31,060 6,000 shs. 2,585
Illinova and Illinois Power 1996 171,971 17,790 4,088 17,790 6,500 shs. 2,615
and President of Illinova
Generating Company
DAVID W. BUTTS 1998 $214,732 $ 14,441 $ 6,884 $ 14,441 10,000 shs. $ 2,339
Senior Vice President of 1997 188,227 7,529 7,185 7,529 6,000 shs. 2,595
Illinois Power and President 1996 181,402 17,314 7,350 17,314 6,500 shs. 2,595
of Illinova Energy Partners
</TABLE>
(1) The amounts shown in this column are the cash award portion of grants made
to these individuals under the Executive Incentive Compensation Plan
("Compensation Plan") for 1998, including amounts deferred under the
Executive Deferred Compensation Plan. See the Compensation Plan description
in footnote (2) below.
(2) This table sets forth stock unit awards for 1998 under the Compensation
Plan. One-half of each year's award under this plan is converted into stock
units representing shares of Illinova Common Stock based on the closing
price of Common Stock on the last trading day of the award year. The other
one-half of the award is cash and is included under Bonus in the Summary
Compensation Table. Stock units awarded in a given year, together with cash
representing the accumulated dividend equivalents on those stock units,
become fully vested after a three-year holding period. Stock units are
converted into cash based on the closing price of Common Stock on the first
trading day of the distribution year. Participants (or beneficiaries of
deceased participants) whose employment is terminated by retirement on or
after age 55, disability, or death receive the present value of all unpaid
awards on the date of such termination. Participants whose employment is
terminated for reasons other than retirement, disability, or death forfeit
all unvested awards. In the event of a termination of employment within two
years after a change in control of Illinova, without good cause or by any
participant with good reason, all awards of the participant become fully
vested and payable. As of December 31, 1998, named executive officers were
credited with the following total aggregate number of unvested stock units
under the Compensation Plan since its inception, valued on the basis of the
closing price of Common Stock on December 31, 1998: Mr. Haab, 5,420 units
valued at $135,513; Mr. Lang, 2,402 units valued at $60,069; Mr.
Altenbaumer, 2,157 units valued at $53,927; Mr. Dreyer, 3,035 units valued
at $75,889; Mr. Butts, 1,742 units valued at $43,572. Although stock units
have been rounded, valuation is based on total stock units, including
partial shares.
(3) In December the Company granted Mr. Bayless an award of 6,000 share units
which vest in three equal annual installments of 2,000 share units and may
be deferred by Mr. Bayless at his option. These units are converted into
Illinova common stock when paid.
(4) The amounts shown in this column are Illinois Power's contributions under
the Incentive Savings Plan (including the market value of shares of
Illinova Common Stock at the time of allocation).
The following tables summarize grants during 1998 of stock options under
Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards
outstanding at year end for the individuals named in the Summary Compensation
Table.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1998
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Grant Date
Granted (1) in 1998 Price Per Share (1) Expiration Date Present Value (2)
<S> <C> <C> <C> <C> <C>
Larry D. Haab 27,000 9.5% $29.094 2/11/2008 $129,600
Charles E. Bayless 50,000(3) 17.5% 30.25 6/23/2008 261,500
115,000(4) 40.3% 30.25 6/23/2008 478,400
Paul L. Lang 8,000 2.8% 29.094 2/11/2008 38,400
Larry F. Altenbaumer 10,000 3.5% 29.094 2/11/2008 48,000
Alec G. Dreyer 10,000 3.5% 29.094 2/11/2008 48,000
David W. Butts 10,000 3.5% 29.094 2/11/2008 48,000
</TABLE>
(1) Each option becomes exercisable on February 11, 2001. In addition to the
specified expiration date, the grant expires on the first anniversary of
the recipient's death and/or 5 years following date of retirement, and is
not exercisable in the event a recipient's employment terminates. In the
event of certain change-in-control circumstances, the Compensation and
Nominating Committee may declare the option immediately exercisable. The
exercise price of each option is equal to the fair market value of the
Common Stock on the date of the grant. Recipients shall also receive, on or
shortly after February 11, 2001, a target performance award, determined by
calculating the difference between the return earned by Illinova on its
invested capital and its cost of capital (the "spread"), then comparing
this spread to that of a peer group and reducing or increasing the target
award depending on Illinova's relative performance, but not reducing the
payment below zero. The target award is equal to one-half of the mid-point
of compensation for each officer's salary grade (a market-based number)
times a percentage, determined by the Compensation and Nominating
Committee. In 1998 those percentages ranged between 20 and 45 percent. This
range does not apply to Mr. Bayless's stock options as described in his
employment agreement on page 10. At the discretion of the Board of
Directors, the foregoing payment may be made in the form of Illinova Common
Stock of equivalent value based on the average New York Stock Exchange
price of the stock during February 2001, or in cash.
(2) The Grant Date Present Value has been calculated using the Black-Scholes
option pricing model. Disclosure of the Grant Date Present Value, or the
potential realizable value of option grants assuming 5% and 10% annualized
growth rates, is mandated by regulation; however, Illinova does not
necessarily view the Black-Scholes pricing methodology, or any other
present methodology, as a valid or accurate means of valuing stock option
grants. The calculation was based on the following assumptions: (i) As of
the grant date, Illinova's calculated Black-Scholes ratio was .1808. After
discounting for risk of forfeiture at three percent per year over
Illinova's three-year vesting schedule, the ratio is reduced to .1650; (ii)
An annual dividend yield on Illinova Common Stock of 4.48%; (iii) A
risk-free interest rate of 5.76%, based on the yield of a zero-coupon
government bond maturing at the end of the option term; and (iv) Stock
volatility of 18.65%.
(3) The Grant Date Present Value for Mr. Bayless's 50,000 time-vesting options
was calculated based on the following assumptions: (i) As of the grant
date, Illinova's calculated Black-Scholes ratio was .1836. After
discounting for risk of forfeiture by three percent per year over the
option vesting schedule, the ratio is reduced to .1728; (ii) An annual
dividend yield on Illinova Common Stock of 4.46%; (iii) a risk-free
interest rate of 5.64%, based on the yield of a zero-coupon government bond
maturing at the end of the option term; and (iv) Stock Volatility of
19.30%.
(4) Mr. Bayless has 115,000 options which will vest based on the satisfaction
of certain performance criteria -- specifically, when Illinova's stock
price appreciates to specified levels above the market price on the date of
grant. As a result, The Grant Date Present Value for Mr. Bayless's 115,000
performance-vesting options was calculated based on the same assumptions as
were used for the time-vesting options, with the exception of risk of
forfeiture which was assumed to be somewhat greater since the options will
vest sooner than 9.5 years only if the performance restrictions are
satisfied. As a result, the Black-Scholes ratio used for the
performance-vesting options was reduced to .1375.
<TABLE>
<CAPTION>
AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Shares Acquired Value Options at Fiscal Year-End Options at Fiscal Year-End
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable (1)
<S> <C> <C> <C> <C> <C> <C>
Larry D. Haab 76,900 shs./69,000 shs. $129,712/$0
Charles E. Bayless 0 shs./165,000 shs. $0/$0
Paul L. Lang 24,300 shs./21,000 shs. $41,487/$0
Larry F. Altenbaumer 24,300 shs./24,000 shs. $41,487/$0
Alec G. Dreyer 2,000 $7,750 11,250 shs./22,500 shs. $16,656/$0
David W. Butts 12,900 shs./22,500 shs. $22,713/$0
</TABLE>
(1) None of the unexercisable options were in the money at fiscal year-end
1998.
PENSION BENEFITS
Illinois Power maintains a Retirement Income Plan for Salaried Employees (the
"Retirement Plan") providing pension benefits for all eligible salaried
employees. In addition to the Retirement Plan, Illinois Power also maintains a
nonqualified Supplemental Retirement Income Plan for Salaried Employees (the
"Supplemental Plan") that covers certain officers eligible to participate in the
Retirement Plan and provides for payments from general funds of Illinois Power
of any monthly retirement income not payable under the Retirement Plan because
of benefit limits imposed by law or because of certain Retirement Plan rules
limiting the amount of credited service accrued by a participant.
The following table shows the estimated annual pension benefits on a
straight life annuity basis payable upon retirement based on specified annual
average earnings and years of credited service classifications, assuming
continuation of the Retirement Plan and Supplemental Plan and employment until
age 65. This table does not show the Social Security offset, but any actual
pension benefit payments would be subject to this offset.
Estimated Annual Benefits (rounded)
Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Average Credited Credited Credited Credited Credited
Earnings Service Service Service Service Service
$125,000 $37,500 $50,000 $62,500 $75,000 $87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
350,000 105,000 140,000 175,000 210,000 245,000
400,000 120,000 160,000 200,000 240,000 280,000
450,000 135,000 180,000 225,000 270,000 315,000
500,000 150,000 200,000 250,000 300,000 350,000
550,000 165,000 220,000 275,000 330,000 385,000
600,000 180,000 240,000 300,000 360,000 420,000
650,000 195,000 260,000 325,000 390,000 455,000
700,000 210,000 280,000 350,000 420,000 490,000
750,000 225,000 300,000 375,000 450,000 525,000
800,000 240,000 320,000 400,000 480,000 560,000
The earnings used in determining pension benefits under the Retirement Plan
are the participants' regular base compensation, as set forth under Salary in
the Summary Compensation Table.
See Employment Agreement for information relating to Mr. Bayless's pension
agreement.
At December 31, 1998, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Bayless, Lang, Altenbaumer, Dreyer and Butts had
completed 0, 17, 26, 6 and 20 years of credited service, respectively. As of the
date of his retirement, Mr. Haab had completed 33 years of credited service.
EMPLOYMENT AGREEMENT
Charles Bayless was hired in July 1998 and elected Chairman, President and CEO
in August 1998. Mr. Bayless received a base salary of $560,000, which will be
subject to periodic review. The 1998 bonus opportunity for Mr. Bayless had a
minimum guarantee of $232,000 with an opportunity for payment of up to $302,000.
Mr. Bayless has an option to purchase 165,000 shares of Illinova stock based on
the following vesting schedule:
If employed through Options available
the following date to Exercise
One-year anniversary of grant date 16,667 shares
Two-year anniversary of grant date 16,667 shares
Three-year anniversary of grant date 16,667 shares
The first date on which the stock
price is $35.00 57,500 shares
The first date on which the stock
price is $40.00 57,500 shares
An additional grant of 6,000 share units of Illinova stock was awarded Mr.
Bayless in December 1998. Mr. Bayless has a right to receive these shares in
2,000-share blocks in calendar years 1998, 1999, and 2000. These share units may
be deferred by Mr. Bayless at his option.
For future years, Mr. Bayless will participate in the Executive Incentive
Compensation Plan and the Long- Term Incentive Compensation Plan. Mr. Bayless
was provided with a Retention Agreement comparable to those issued to other
named Executives. Mr. Bayless will be entitled to a supplemental pension which
fully vests on December 31, 2004. Supplemental pension will pay an equivalent of
40 percent of his highest 36 consecutive months of his final 60 months of base
pay and bonus, less any payment made through the qualified pension plan. To
compensate for benefits or payments he was entitled to from his previous
employer but will not receive because of his departure, a $500,000 loan was made
to Mr. Bayless. This loan, plus all applicable taxes resulting from its receipt,
will be forgiven in 20 percent increments over a period of five years.
RETIREMENT AND CONSULTING AGREEMENT
Larry Haab became Chairman, President and Chief Executive Officer ("CEO") of
Illinois Power on June 12, 1991, and Chairman, President and Chief Executive
Officer of Illinova in December 1993. Mr. Haab retired from Illinova on August
12, 1998. Following his retirement, Illinova entered into a two-year retirement
and consulting agreement with Mr. Haab. Consulting services are to be provided
on request and Mr. Haab is compensated with a fee of $25,000 per month. Mr. Haab
is also entitled to office space and secretarial assistance for the period of
his consulting term. Financial consulting and tax preparation services are
provided to Mr. Haab for the five years following the year of his retirement.
Mr. Haab is also provided with certain personal property previously provided for
his business use. Additionally, the Board of Directors at its discretion may
elect to make a pro rata incentive compensation payment to Mr. Haab for the
period he was actually employed in 1998. As part of his retirement and
consulting agreement, Mr. Haab agrees to assist with any claims for a period of
48 months; will keep all non-public information regarding the company
confidential; will not make any disclosure or disparaging remarks about the
company; or solicit, employ, or offer to employ any person who was an employee
of the company in the previous year.
EMPLOYEE RETENTION AGREEMENTS
Illinova has entered into Employee Retention Agreements with each of its
executive officers and with officers of its subsidiaries. Under each agreement,
the officer would be entitled to receive a lump sum cash payment if his or her
employment were terminated without good cause or voluntarily by the officer for
good reason within two years following a change in control of Illinova (as
defined in the Agreement) or terminated prior to a change of control at the
request of a potential acquiror. The amount of the lump sum payment would be
equal to
1) 36 months' salary at the greater of the officer's salary rate in effect on
the date the change in control occurred or the salary rate in effect on the
date the officer's employment with Illinova terminated; plus
2) three times the latest bonus earned by the officer during the three
calendar years preceding termination of employment.
Under the agreement, the officer would continue, after any such termination
of employment, to participate in and receive benefits under other benefit plans
of Illinova. Such coverage would continue for 36 months following termination of
employment, or, if earlier, until the officer reached age 65 or was employed by
another employer; provided that, if the officer was 50 years of age or older at
the time of such termination, then coverage under health, life insurance and
similar welfare plans would continue until the officer became 55 years of age,
at which time he or she would be eligible to receive the benefits extended to
the employees of Illinova who elect early retirement.
COMPENSATION AND NOMINATING COMMITTEE REPORT ON OFFICER COMPENSATION
The five-member Compensation and Nominating Committee of the Board of Directors
(the "Committee") is composed entirely of Outside Directors. The Committee's
role includes an assessment of the Company's Compensation Strategy, a review of
the performance of the elected officers and the establishment of specific
officer salaries subject to Board approval. The Committee established
performance goals for the officers and approves payments to Illinova officers
made pursuant to the Annual Incentive Compensation Plan and recommends grants
under the Long-Term Incentive Compensation Plan approved by the shareholders in
1992. The Committee also reviews other forms of compensation and benefits,
making recommendations to the Board on changes whenever appropriate. The
Committee carries out these responsibilities with assistance from an executive
compensation consulting firm and with input from the Chief Executive Officer and
management as it deems appropriate.
OFFICER COMPENSATION PHILOSOPHY
Illinova's compensation philosophy reflects a commitment to compensate officers
competitively with other companies while rewarding executives for achieving
levels of operational and financial excellence consistent with continuous
improvement.
In 1998 it was determined that the company would broaden its competitive
reference beyond the regulated utility industry in order to compete sufficiently
for talent in the changing industry. Illinova's current compensation policy is
to provide a total compensation opportunity targeted to the median of the
appropriate comparable markets in which it competes for executive talent. Thus
the comparison markets will consist of Utility Industry, Independent Power
Producers, Energy Marketing and Trading Companies, and General Industry
companies, which is a considerably broader reference than the S&P Utilities
Index which is used to relate Illinova's shareholder value in the proxy
performance graphs. The S&P Utilities Index covers the utility industry widely
and includes electric and gas utilities.
The compensation program for officers consists of base salary, annual
incentive, and long-term incentive components. The Committee believes that the
combination of these three elements balances short and long-term business
performance goals and aligns officer financial rewards with those of Illinova's
shareholders. The compensation program is structured so that, depending on the
salary level, between approximately 30 percent and 60 percent of an officer's
total compensation target is composed of incentive compensation.
BASE SALARY PLAN
The Committee determines base salary ranges for executive officers based on
competitive pay practices for similarly sized companies in both the energy
specific and general industries. Officer salaries correspond to approximately
the median of the companies in the appropriate comparison market. Individual
increases are based on several factors, including the officer's performance
during the year, the relationship of the officer's salary to the market salary
level for the position, and competitive industry salary increase practices.
ANNUAL INCENTIVE COMPENSATION PLAN
Annual incentive awards are earned based on the achievement of specific annual
financial and operational goals by the Illinova officer group as a whole and
consideration of each officer's individual contribution. If payment is earned
under this Plan, one-half of the bonus is payable in cash during the year
following the performance year, and one-half is credited to the participants in
the form of Common Stock units, the number of which is determined by dividing
half of the earned bonus amount by the closing price of the Common Stock on the
last trading day of the performance year. The officer's interest in the stock
units vests at the end of the three-year period, which begins the year after the
performance year. The officer receives this award in cash equal to
1) the closing stock price on the first trading day of the distribution year
times the number of units held; plus
2) dividend equivalents that would have been received if the stock had
actually been issued.
Maximum awards under the plan may be up to 150 percent of target; threshold
awards are 50 percent of target.
For Illinois Power officers, 1998 awards under the Compensation Plan were
based on achievement in the following performance areas where applicable: cash
flow, earnings per share, return on invested capital, sales, customer
satisfaction, safety, employee teamwork, and cost management. Up to 20 percent
of the awarded amount is based on an assessment of the individual officer's
performance during the year.
Awards shown under Bonus in the Summary Compensation Table for performance
during 1998 were based on achievement of Business Unit Operational Goals and
Individual Goals for the Officer. Corporate Financial Goals were not satisfied
in 1998.
For the unregulated subsidiaries, Illinova Generating and Illinova Energy
Partners, 1998 officer awards were based on achievement of specific marketing
objectives, earnings objectives, and cash flow. Up to 30 percent of the awarded
amount is based on an assessment of the individual officer's performance during
the year.
LONG-TERM INCENTIVE COMPENSATION (LTIC) PLAN
Awards under the LTIC Plan are calibrated to median utility industry and the
general industry and are based on corporate performance as well as individual
officer's contributions to corporate performance subject to the review of this
Committee. The LTIC value granted to the officers for 1998 represent an award
based on market levels as well as on Illinova and individual performance as
evaluated by the Chairman and reviewed by the Committee. In 1998, it was
determined that awards under the LTIC plan be delivered in two components.
One-half of each officer's LTIC plan award is delivered in the form of stock
options granted at fair market value on the date of the award. The other half of
the LTIC plan award is distributed to officers in cash based on Illinova's
Shareholder Value-Added (SVA) performance relative to a peer group of utility
companies, as measured in overlapping three-year periods. SVA measures
Illinova's return on the Company's weighted average cost of capital. SVA
performance at the median of the peer group will result in target award levels.
Performance above the median will result in payouts greater than target to a
maximum of two times target; performance significantly below the median results
in no payouts. Since 1996 represented the first year of the SVA plan's first
three-year measurement cycle, no awards are due to be paid out under the plan
until 1999. Based on performance, no award was earned in 1998 for payment in
1999. No future payments will be made as a result of the SVA program.
In 1998 the Board elected to eliminate SVA as a criteria for the cash portion
of the LTIC. The rationale for this change was a desire for the component to
have a closer alignment to shareholder return. The SVA Plan was replaced with a
Total Shareholder-Return Performance Plan (TSR Plan). Awards from the TSR Plan
will be based on Illinova's stock price appreciation plus dividends compared to
a broad peer group of publicly traded utility companies. The plan has been
changed for 1999 to be awarded in restricted stock.
Beginning with plan year 1998, Illinova Generating replaced its SVA component
with an Economic Value Added Sharing Plan. Under this plan, participants receive
a percentage of IG's net income in excess of cost of capital.
CEO COMPENSATION
Charles E. Bayless became Chairman, President and Chief Executive Officer (CEO)
of Illinova and Illinois Power on August 13, 1998. Illinova and the Board based
Mr. Bayless's contract on the competitive market for CEOs in both the Utility
Industry as well as the broader competitive market for executive talent. The
Committee involves all outside Directors in reviewing Mr. Bayless's performance
before it makes recommendations regarding his compensation. The Committee is
responsible for administering the processes for completing this review. The
annual process begins the first of each year when the Board of Directors and Mr.
Bayless establish his personal goals and short- and long-term strategic goals
for Illinova. Mr. Bayless was hired in July 1998 and interim goals were
developed. At the conclusion of the year, Mr. Bayless reviews his performance
with the outside Directors. The Committee then recommends appropriate
compensation adjustments to the Board. The Committee with the participation of
all outside Directors developed a contract with Mr. Bayless that recognizes his
experience and ability to lead Illinova into the future. Progress has been made
to advance strategic objectives of the Company.
The 1998 Annual Incentive Compensation Plan award for the Chief Executive
Officer was consistent with the terms of the contract between Mr. Bayless and
the Board.
The option shares granted to the CEO reflect the Committee's recognition of
Mr. Bayless's work in directing Illinova toward its long-term objectives and
provide a strong incentive to maximize the creation of shareholder value.
COMPENSATION AND NOMINATING COMMITTEE
Ronald L. Thompson, Chairman
J. Joe Adorjan
Robert M. Powers
Marilou von Ferstel
John D. Zeglis
STOCK PERFORMANCE GRAPHS
The following performance graphs compare the cumulative total shareholder return
on Illinova's Common Stock to the cumulative total return on the S&P 500 Index,
S&P MidCap 400 Index and S&P Utilities Index from (i) December 31, 1993, through
December 31, 1998, and (ii) December 31, 1995, through December 31, 1998.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities
Assumes $100 invested on December 31, 1993, in Illinova Common Stock, S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.
Fiscal year ended December 31.
COMPARISON OF THREE-YEAR CUMULATIVE TOTAL RETURN
Among Illinova, S&P 500, S&P Midcap 400, and S&P Utilities
Assumes $100 invested on December 31, 1995, in Illinova Common Stock, S&P
500 Index, S&P MidCap 400 Index, and S&P Utilities Index.
Fiscal year ended December 31.
INDEPENDENT AUDITORS
The Board of Directors of Illinova has selected PricewaterhouseCoopers as
independent auditors for Illinova for 1999. A representative of that firm will
be present at the Annual Meeting and available to make a statement and to
respond to questions.
OTHER MATTERS
Illinova's 1998 Summary Annual Report to Shareholders was mailed to shareholders
on or about March 31, 1999. Copies of Illinova's Annual Report on Form 10-K will
be available to shareholders, after its filing with the Securities and Exchange
Commission on or before March 31, 1999. Requests should be addressed to Investor
Relations, G-21, Illinova Corporation, 500 South 27th Street, Decatur, Illinois
62521-2202.
Under the Securities and Exchange Commission rules, a shareholder proposal
submitted for inclusion in next year's proxy statement must be received at
Illinova's executive offices not later than November 10, 1999.
A shareholder proposal submitted for presentation at the Annual Meeting in
2000 will be considered untimely if notice of the proposal is received by
Illinova after January 24, 2000.
OTHER BUSINESS
Management does not know of any matter which will be presented for consideration
at the Annual Meeting other than the matters described in the accompanying
Notice of Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
General Counsel and Corporate Secretary
Decatur, Illinois
March 31, 1999
Appendix: 1998 Annual Report to Shareholders
TABLE OF CONTENTS
Management's Discussion and Analysis...................................... a-2
Responsibility for Information............................................ a-19
Report of Independent Accountants......................................... a-20
Consolidated Statements of Income......................................... a-21
Consolidated Balance Sheets............................................... a-22
Consolidated Statements of Cash Flows..................................... a-23
Consolidated Statements of Retained Earnings.............................. a-23
Notes to Consolidated Financial Statements................................ a-24
Selected Consolidated Financial Data...................................... a-52
Selected Illinois Power Company Statistics................................ a-53
ABBREVIATIONS USED THROUGHOUT THIS REPORT
AICPA American Institute of Certified Public Accountants
AFUDC Allowance for Funds Used During Construction
Baldwin Baldwin Power Station
Clinton Clinton Power Station
DOE U.S. Department of Energy
EITF Emerging Issues Task Force of the
Financial Accounting Standards Board
EMF Electric and Magnetic Fields
EPS Earnings Per Share
ESOP Employees' Stock Ownership Plan
FAS Statement of Financial Accounting Standards
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fuel Company Illinois Power Fuel Company
Hennepin Hennepin Power Station
IBE Illinova Business Enterprises, Inc.
ICC Illinois Commerce Commission
IEP Illinova Energy Partners, Inc.
IGC Illinova Generating Company
IIC Illinova Insurance Company
Illinova Illinova Corporation
IP Illinois Power Company
IPFI Illinois Power Financing I
IPSPT Illinois Power Special Purpose Trust
ISA Integrated Safety Assessment
ISO Independent System Operator
IT Information Technology
ITC Investment Tax Credits
kw Kilowatt
kwh Kilowatt-Hour
MAIN Mid-America Interconnected Network
MGP Manufactured-Gas Plant
MIPS Monthly Income Preferred Securities
MISO Midwest Independent Transmission System Operator, Inc.
MW Megawatt
MWH Megawatt-Hour
NAES North American Energy Services Company
NERC North American Electric Reliability Council
NOPR Notice of Proposed Rulemaking
NOx Nitrogen Oxide
NRC U.S. Nuclear Regulatory Commission
NWPA Nuclear Waste Policy Act of 1992
P.A. 90-561 Electric Service Customer Choice and Rate Relief Law of 1997
PCA Power Coordination Agreement
PECO PECO Energy Company
ROE Return on Equity
S&P Standard & Poor's
SCR Selective Catalytic Reduction
SEC U.S. Securities and Exchange Commission
SFP Secondary Financial Protection
SO2 Sulfur Dioxide
SOP Statement of Position
Soyland Soyland Power Cooperative, Inc.
TOPrS Trust Originated Preferred Securities
UFAC Uniform Fuel Adjustment Clause
UGAC Uniform Gas Adjustment Clause
U.S. EPA U.S. Environmental Protection Agency
VaR Value-at-Risk
Vermilion Vermilion Power Station
Wood River Wood River Power Station
MANAGEMENT'S DISCUSSION AND ANALYSIS
In this report, we refer to the Consolidated Financial Statements, related Notes
to Consolidated Financial Statements, Selected Consolidated Financial Data, and
Selected Illinois Power Company Statistics for information concerning
consolidated financial position and results of operations. Below is discussion
of the factors having significant impact on consolidated financial position and
results of operations since January 1, 1996.
ILLINOVA SUBSIDIARIES
The Consolidated Financial Statements include the accounts of Illinova
Corporation, a holding company, and its subsidiaries: Illinois Power Company, an
electric and gas utility; Illinova Generating Company, which invests in,
develops, and operates energy-related projects and facilities worldwide;
Illinova Energy Partners, Inc., which markets energy and energy-related services
in the United States and Canada; Illinova Insurance Company, which insures
certain risks of Illinova and its subsidiaries; and Illinova Business
Enterprises, Inc., which accounts for miscellaneous unregulated business
activities. IGC, IEP, IIC, and IBE are wholly owned by Illinova. IP has
preferred stock outstanding, but its common stock is wholly owned by Illinova.
See "Note 3 -- Illinova Subsidiaries" for additional information.
OPEN ACCESS AND WHEELING
On March 29, 1995, FERC issued a NOPR initiating the process of mandating
non-discriminatory open access to public utility transmission facilities at
cost-based rates. Transmission of electricity for a reseller or redistributor of
energy is called wholesale wheeling. Transmission of electricity for end-use
customers is known as retail wheeling.
On April 24, 1996, FERC issued Orders 888 and 889 which established the Final
Rule resulting from the NOPR. The Orders became effective July 9, 1996. The Rule
requires all public utilities under FERC jurisdiction that own transmission
facilities to file transmission service tariffs that comply with Pro Forma
Tariffs attached to the Orders. FERC also requires that all wholesale sales made
by a utility provide for transmission of the power under the prescribed terms
and conditions. IP made a compliance filing as required on July 9, 1996, which
was accepted by FERC.
FERC currently does not exercise jurisdiction over public utilities serving
customers at retail and FERC does not require public utilities to give retail
customers access to alternate energy suppliers or direct transmission service.
In 1996, IP received approval from both the ICC and FERC to conduct an open
access experiment beginning in 1996 and ending on September 30, 1999. The
experiment allows certain industrial customers to purchase electricity and
related services from other sources. Currently, 15 customers are participating
in the experiment. Since inception, the experiment has cost IP approximately
$19.2 million in lost revenue, net of avoided fuel cost and variable operating
expenses. This loss was partially offset by selling the surplus energy and
capacity on the open market and by $4.8 million in transmission service charges.
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with FERC for all approvals necessary to create and implement
the MISO. On September 16, 1998, FERC issued an order authorizing the creation
of a MISO. The MISO is governed by a seven-person independent board of
directors. The goals of the MISO 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 independent of any transmission owner(s)
or other market participants, thus furthering competition in the wholesale
generation market consistent with the objectives of FERC's Order 888.
Since January 1998, four other transmission-owning entities joined the MISO.
Participation in an ISO is a requirement of P.A. 90-561. The MISO has a stated
goal to begin limited operation in 1999 and to be fully operational in 2000.
COMPETITION
P.A. 90-561, Illinois electric utility restructuring legislation, was enacted in
December 1997. P.A. 90-561 gives IP's residential customers a 15 percent
decrease in base electric rates beginning August 1, 1998, and an additional 5
percent decrease effective May 1, 2002. The rate decreases resulted in revenue
reductions of approximately $35 million in 1998 and expected revenue reductions
of approximately $70 million in each of the years 1999 through 2001,
approximately $90 million in 2002, and approximately $100 million in 2003, based
on current consumption.
Under P.A. 90-561, customers with demand greater than 4 MW at a single site
and customers with at least 10 sites which aggregate at least 9.5 MW in total
demand are allowed to choose electric generation suppliers ("direct access")
starting in 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 customers
at regulated rates. In 1999, rates for delivery services for non-residential
customers will be established in proceedings mandated by P.A. 90-561. The
transition charges departing customers must pay to IP are not designed to hold
IP completely harmless from resulting revenue loss, because of the mitigation
factor described below. IP will be able to estimate the revenue impact of
customer choice more accurately when its delivery service charges are
established.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
ICC. The transition charges are calculated by subtracting from a customer's
fully bundled rate an amount equal to a) delivery charges the utility will
continue to receive from the customer, b) the market value of freed-up
energy, and c) a mitigation factor, which is the higher of a fixed rate per
kwh or a percentage of the customer's bundled base rate. The mitigation
factor increases during the transition period and is designed to provide
incentive for utilities 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 the change in law
leads to their ROE 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. See "Note 5 -- Commitments and Contingencies" for a more detailed
description of the earnings floor and ceiling.
The extent to which revenues are affected by P.A. 90-561 will depend on a
number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's existing service territory. The
impact on net income will depend on, among other things, the amount of revenues
earned and the cost of doing business.
CLINTON POWER STATION
See "Note 4 -- Clinton Power Station" for a discussion of Clinton.
Due to uncertainties of deregulated generation pricing in Illinois and to
various operation and management factors, Illinova's and IP's Boards of
Directors voted in December 1998 to sell or close Clinton. This decision
resulted in an impairment of Clinton-related assets and accrual of exit-related
costs. The impairment and accrual of related charges resulted in a $1,327.2
million, net of income taxes, charge against earnings.
IP has entered into discussions with parties interested in purchasing
Clinton. Principal concerns of interested parties are plant restart, funding the
decommissioning liability, terms of any purchase agreement for power generated
by Clinton, including the length of any agreement and price of electricity,
market price projections for electricity in the region, property tax obligations
of the purchaser, and income tax issues. These concerns create substantial
uncertainty with regard to the ability to convert any tentative agreement into
an executable transaction. Therefore, IP has accounted for the Clinton exit
based on the expectation of plant closure as of August 31, 1999. An August 31,
1999, closure allows IP to pursue opportunities to sell Clinton, which has the
potential economic benefit of reducing IP's financial exposure to
decommissioning. An August 31, 1999, closure also allows IP to refine its plans
to close and decommission Clinton if a tentative agreement cannot be converted
into an executable transaction. In addition, Clinton would be available for the
summer cooling season. The estimated Clinton other operating and maintenance
expense, including expensed capital expenditures, is $151 million for January
through August 1999.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for additional
information.
ACCOUNTING MATTERS
1998: Concurrent with the decision to exit Clinton operations, as discussed
above, Illinova's and IP's Boards of Directors also voted to effect a
quasi-reorganization in which Illinova's consolidated accumulated deficit in
retained earnings of $1,419.5 million was eliminated. A quasi-reorganization is
an accounting procedure whereby a company adjusts its accounts to obtain a
"fresh start." In a quasi-reorganization, a company restates its assets and
liabilities to their fair value, adopts accounting pronouncements issued but not
yet adopted, and eliminates any remaining deficit in retained earnings by a
transfer from other paid-in capital.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for additional
information.
See "Note 5 -- Commitments and Contingencies" for a discussion of
decommissioning.
1997: Prior to the enactment of P.A. 90-561, IP prepared its consolidated
financial statements in accordance with FAS 71, "Accounting for the Effects of
Certain Types of Regulation." Reporting under FAS 71 allows companies whose
service obligations and prices are regulated to maintain balance sheet assets
representing costs they expect to recover from customers through inclusion of
such costs in future rates. In July 1997, the EITF concluded that, for business
segments for which a plan of deregulation has been established, accounting under
FAS 71 should be discontinued when such deregulation legislation is enacted. The
EITF further concluded that regulatory assets and liabilities originating in the
business segment being deregulated should be written off, unless their recovery
is specifically provided for through future cash flows from the regulated
portion of the business.
Based on this conclusion and 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 the 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 had been expected to be
collected through future revenues, including deferred costs for Clinton,
unamortized losses on reacquired debt, previously recoverable income taxes, and
other generation-related regulatory assets. At December 31, 1998, IP's net
investment in generation facilities was $2.9 billion.
See "Note 1 -- Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
REGULATORY MATTERS
In accordance with P.A. 90-561, ICC rulemakings are completed or in progress
covering issues such as limits on affiliate interaction and reliability. These
regulatory proceedings, alone or in combination, could significantly impact the
way IP operates and is organized, but they are not likely to have a material
impact on financial results.
Under the new reliability 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 their
service and explaining their plans for reliability improvements. In addition,
each utility must also report the number and causes of service interruptions
that were within the utility's control. Outage targets were established for
service to individual customers and for system performance.
In March 1999, IP submitted a filing to the ICC to determine:
1) The rates and terms associated with the provision of unbundled delivery
services for select customer classes;
2) The methodology, terms, and conditions associated with billing competitive
transition charges; and
3) Terms and conditions associated with accepting service under IP's Market
Value Power Purchase Option tariff, a service option mandated by P.A.
90-561 which allows customers to purchase electricity from IP at current
market prices.
ICC orders on the foregoing rulemakings and filing are expected by September
1999.
Additionally, the ICC has initiated a proceeding to investigate the
feasibility of breaking out and unbundling various components of delivery
service, such as meter reading.
Delivery tariff revenues approved by the ICC are to be set at a level that
allows IP to recover all just and reasonable costs associated with providing
delivery services to those customers who choose to acquire power from alternate
retail electric suppliers.
P.A. 90-561 includes provisions allowing utilities to unbundle or segregate
assets. Illinova and IP are evaluating the benefits of creating a separate
Illinova subsidiary to which the IP fossil generation assets would be
transferred. IP would be required to demonstrate to the ICC that it will
continue to be able to serve its retail customers reliably and that the transfer
is not likely to cause IP to seek a rate increase during the mandatory
transition period, which extends through 2004. The new subsidiary, if formed,
will be regulated by FERC.
See "Note 5 -- Commitments and Contingencies" for a discussion of Fuel Cost
Recovery.
See "Note 7 -- Facilities Agreements" for a discussion of Soyland and the
Soyland PCA.
POWER SUPPLY AND RELIABILITY
See "Note 5 -- Commitments and Contingencies" for a discussion of Power Supply
and Reliability.
YEAR 2000
Passing from 1999 into 2000 creates a risk that computer-dependent processes
will fail because the date will be read as "1900." Illinova began its Year 2000
project in November 1996. The project scope encompasses all of Illinova's
subsidiaries including IP, IGC, and IEP. A central organization is providing
overall guidance and coordination among the business groups, meeting monthly to
share information, conducting internal project reviews, and producing monthly
status reports to all levels of Illinova management. Bi-monthly Year 2000
readiness reports are provided to Illinova's and IP's Boards of Directors.
The Year 2000 project involves evaluation and testing of software, hardware,
and business processes, including mainframe and personal computer software and
hardware, process computer software and hardware, end-user computing,
telecommunications and networks, vendor- purchased packages, embedded systems,
facility control systems, vendors/suppliers, financial institutions, and
electronic interfaces with outside agencies.
The Year 2000 efforts are focused on those systems and processes necessary to
provide safe, reliable service and essential administrative support. Priority is
given to "mission critical" and "important to operations" systems, components,
and processes, including generation facilities (e.g. power plants and fuel
suppliers), transmission and distribution facilities (e.g. power lines,
transformers, gas lines, and meters), building systems (e.g. climate control and
security), and administrative systems (e.g. billing, payroll, and accounts
payable).
The project is divided into two focus areas. The first deals with IT
software, hardware, and infrastructure. This includes the billing system,
payroll system, accounts payable system, personal computers, telecommunications,
networks, and mainframes.
The second focus area targets non-IT operational systems and processes, which
encompass most of the systems and business processes actually used to deliver
electricity and gas to customers. This is also the area where embedded systems
and microprocessors are found. Included in this focus area are power plant
facilities, transportation systems such as railways and barges, fuel suppliers,
electric and gas transmission and distribution facilities, substations and
transformers, meters, building systems such as HVAC and security, and financial
institutions.
The project has six phases: awareness, inventory, process analysis,
assessment, implementation, and contingency planning. The awareness phase
focuses on raising visibility of the Year 2000 issue with employees, top
management, customers, suppliers, and other business partners. This is an
on-going activity. The inventory and process analysis phases identify systems,
hardware, and business processes that may be affected by the Year 2000 problem.
In the assessment phase, an analysis is performed on each inventoried item to
determine how it will be affected by Year 2000 and how critical the item may be.
In this phase, implementation plans and budgets are developed and documented.
The implementation phase consists of upgrading, replacing, or repairing "mission
critical" and "important to operations" items affected by Year 2000. Testing and
production implementation occur in this phase. In the contingency planning
phase, plans are developed and documented to ensure business continuity. These
plans address various ways of handling unusual and unexpected circumstances that
may occur due to Year 2000 problems.
Internal project reviews are performed to help ensure consistency of project
tasks and documentation and to identify weaknesses that need to be addressed. In
addition, these reviews help identify any issues that overlap business groups
which may need project sponsorship for resolution.
The overall status of Illinova's Year 2000 project is presented in the table
below.
Illinova Status -- February 1999
IT Non-IT
% Completion % Completion
Complete Date * Complete Date *
Awareness 100 02/01/97 a 100 05/31/98 a
Inventory 100 01/20/97 a 100 02/28/99 a
Assessment 100 05/09/97 a 100 02/28/99 a
Process Analysis 100 11/30/98 a 94 03/31/99 e
Implementation --
(Mission Critical) 69 06/30/99 e 50 11/30/99 e**
Implementation --
(Important to
Operations) 78 06/30/99 e 51 08/31/99 e
Contingency Planning 10 06/30/99 e 22 06/30/99 e
* "a" = Actual "e" = Estimated
** With the exception of four process computing systems at Clinton, it is
projected that all IP Year 2000 implementation activities will be completed by
June 30, 1999. However, Clinton still plans to be Year 2000 ready, per NRC
requirements, by developing contingency plans that will allow operation.
IP has completed its awareness, inventory, assessment, and process analysis
phases. The table below provides further details differentiating between IT and
non-IT.
IP Status -- February 1999
IT Non-IT
% Completion % Completion
Complete Date * Complete Date *
Awareness 100 02/01/97 a 100 04/29/98 a
Inventory 100 01/20/97 a 100 07/31/98 a
Assessment 100 05/09/97 a 100 09/30/98 a
Process Analysis 100 11/30/98 a 100 02/28/99 a
Implementation --
(Mission Critical) 69 06/30/99 e 52 11/30/99 e**
Implementation --
(Important to
Operations) 78 06/30/99 e 58 06/30/99 e
Contingency Planning 10 06/30/99 e 27 06/30/99 e
* "a" = Actual "e" = Estimated
** With the exception of four process computing systems at Clinton, it is
projected that all IP Year 2000 implementation activities will be completed by
June 30, 1999. However, Clinton still plans to be Year 2000 ready, per NRC
requirements, by developing contingency plans that will allow operation.
IEP has completed the awareness, inventory, assessment, and process analysis
phases. IGC has completed the awareness, inventory, and assessment phases.
IEP and IGC Status -- February 1999
IEP IGC
% Completion % Completion
Complete Date * Complete Date *
Awareness 100 04/24/98 a 100 05/31/98 a
Inventory 100 11/30/98 a 100 02/28/99 a
Assessment 100 01/29/99 a 100 02/28/99 a
Process Analysis 100 11/30/98 a 76 03/31/99 e
Implementation --
(Mission Critical) 36 06/30/99 e 49 06/30/99 e
Implementation --
(Important to
Operations) 39 06/30/99 e 25 08/31/99 e
Contingency Planning 5 06/30/99 e 11 06/30/99 e
* "a" = Actual "e" = Estimated
IT systems and infrastructure are approximately 74% complete, with 100%
completion projected by June 30, 1999. The customer billing system, materials
management system, accounts payable system, and power plant maintenance planning
system have been remediated and are now Year 2000 compliant. The payroll system
and shareholder system remediation will be completed during first quarter 1999.
Year 2000 work has not caused any IT projects to be delayed, and thus no
maintenance costs have been deferred.
The DOE has charged the NERC with taking the lead in facilitating North
America-wide coordination of electric utilities' Year 2000 efforts. The
collective efforts of the industry will minimize risks imposed by Year 2000 to
the reliable supply of electricity. NERC has in turn assigned the regional
reliability councils the responsibility of assessing their respective networks
to ensure reliable electric supply. IP is taking an active role within its
regional council (MAIN) in assessment and renovation of the grid and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.
NERC's second status report presented to the DOE on January 11, 1999, stated
that "with more than 44% of mission-critical components tested through November
30, 1998, findings continue to indicate that transition through critical Year
2000 (Y2k) rollover dates is expected to have minimal impact on electric system
operations in North America." IP's electric system operations Year 2000
completion status through November 30, 1998, is at 57%, which compares favorably
to the average status of all utilities reported to NERC.
NERC has recommended that all "mission critical" systems needed to meet
demand and reliability obligations be Year 2000 ready by June 30, 1999. IP is
working diligently to meet the June 30, 1999, deadline. It is currently
projected that all IP fossil power plants and field transmission and
distribution items will be fully Year 2000 ready by that date. With the
exception of four process computing systems at Clinton, it is projected that all
IP Year 2000 implementation activities will be completed by June 30, 1999.
However, Clinton still plans to be Year 2000 ready, per NRC requirements, by
developing contingency plans that will allow operation.
IP is participating in the Year 2000 activities of other utility
organizations, such as Electric Power Research Institute, Nuclear Energy
Institute, American Gas Association, and Edison Electric Institute. Through
involvement in these organizations, IP is leveraging the combined knowledge and
expertise of all utilities to accelerate progress in resolving Year 2000 issues.
The total cost for achieving Year 2000 readiness for Illinova is estimated to
be approximately $20.6 million through 1999. Through the end of 1998, $8.4
million, or 41%, of the total $20.6 million had been spent. Expenditures in 1999
are expected to be higher than in 1998 due to $9.1 million yet to be spent for
Clinton.
Illinova has recently initiated contingency planning efforts. This work is
planned for completion by June 30, 1999. The majority of the work already
completed involves IP's role in MAIN's contingency planning efforts for electric
systems operations in accordance with NERC's guidelines.
The primary contingency planning activities in 1999 involve Illinova's
"mission critical" business processes. Contingency plans will be developed in
accordance with industry guidelines such as those of NERC and the General
Accounting Office and will require senior management review and approval. These
plans will address business continuity and the ability to maintain and deliver
essential products and services to customers in the event of unexpected Year
2000 problems.
Illinova and IP are currently assessing potential worst-case scenarios. Such
a scenario might include one or both of the following events: winter storms
coupled with a significant Year 2000 system problem that compounds emergency
response efforts and/or loss of a major telecommunications carrier that causes
disruptions in dispatching generation, dispatching emergency response crews, and
communicating with financial institutions.
Contingency plans will address the above scenarios as well as any other
potential scenarios that could affect the ability to serve customers and
maintain the financial viability of Illinova.
Illinova is taking a proactive role in working with vendors and suppliers
with respect to Year 2000 issues. Each business group within Illinova has taken
responsibility for contacting vendors for each of the "mission critical" and
"important to operations" items supplied by them. Each vendor is requested to
provide detailed information on Year 2000 functionality and operability on
products supplied by them. In addition, the Purchasing and Material Control
Group has sent letters to more than 3,600 IP vendors used in recent years. These
letters provide an overview of the Year 2000 problem and ask the vendors to
provide a summary of their Year 2000 efforts so that IP can gain a better
understanding of their ability to provide products and services beyond January
1, 2000.
In addition to letters, face-to-face discussions were conducted with IP's 16
alliance suppliers. Alliance suppliers are key suppliers with which IP has
worked to establish a business relationship based on mutual expectations and
trust. Both parties work together to achieve a single set of objectives which
result in reduced costs to IP. IP's alliance suppliers currently account for
roughly 80% of IP's purchasing volume. Because of this high percentage, a
dialogue was established with each supplier to assess its approach to Year 2000
compliance. Based on these discussions, IP believes each of these 16 suppliers
has adequately addressed Year 2000 concerns.
Illinova is also taking numerous steps to keep customers informed of the
status of the Year 2000 efforts. Illinova can best address customers' concerns
by providing open, forthright communications on a timely basis. Year 2000
communication efforts are multi-faceted to deal with all classes of customers,
from residential to major industries.
CONSOLIDATED RESULTS OF OPERATIONS
1998
Illinova is comprised of eight business groups. The business groups and their
principal services are as follows:
- - IP Customer Service Business Group -- transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas.
- - IP Wholesale Energy Business Group -- fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities.
- - IP Nuclear Generation Business Group -- nuclear-fueled electric generation.
- - Illinova Energy Partners -- develops and markets energy products and
energy-related services throughout the United States and Canada.
- - Illinova Generating Company --- invests in, develops, and operates
independent power projects throughout the world.
- - IP Financial Business Group -- provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - IP Support Services Business Group -- provides specialized support
functions, including information technology, human resources, environmental
resources, purchasing and materials management, and public affairs.
- - Corporate -- includes Illinova Insurance Company and Illinova Business
Enterprises.
These business groups review information monthly that provides contribution
margin, cash flow, and return on net invested capital measures. These measures
for Customer Service were favorable. Generally, the other business groups
reflected unfavorable results as the Clinton restart activity and the summer
supply situation negatively impacted their outcomes. IGC benefitted from the
settlement of a litigation, while IEP continued to work past a negative
transaction which occurred three years ago.
Customer Service
Transmission, Distribution and Sale of Electric Energy The Customer Service
Business Group derives its revenues through regulated tariffs. Its source of
electricity is the Wholesale Energy Business Group; electricity was provided to
the Customer Service Business Group at a fixed 2.5 cents per kwh.
Retail electric revenues, excluding interchange sales, decreased 1.6% due to
decreased sales to residential and commercial customers and the 15% residential
rate decrease mandated by P.A. 90-561, which became effective August 1, 1998.
Also contributing to the decrease in revenue was a voluntary one-time August
rate reduction of 7.5% for residential and small commercial customers.
Transmission, Distribution and Sale of Natural Gas Revenues are derived through
regulated tariffs. Revenues from gas sales and transportation were down 18.6%,
while therms sold and transported were down 8.9%. The decrease in therm sales
was caused by milder than usual weather. The margin on gas sales and
transportation decreased 5.5%, resulting from decreases in both therms sold and
therms transported, partially offset by decreased gas costs.
Wholesale Energy
Contracts for increased interchange sales were entered into with the expectation
that the Clinton nuclear generating station would operate during 1998. When the
station did not operate, it was necessary to purchase replacement power on the
market. This replacement power was much more expensive than normal, causing
electric margin to decrease.
Wholesale Energy provided interchange power to the Customer Service Business
Group at 2.5 cents per kwh.
Nuclear
Illinova's only nuclear generating station, Clinton, did not generate
electricity during 1998. Its only revenues were those paid by customers under
tariff riders to fund the decommissioning trust. Nuclear's results were
unfavorably affected by higher operating and maintenance expenses and capital
expenditures associated with the Clinton outage. Additionally, Nuclear was
assessed a cost of 1.43 cents (which represents a higher level of costs over
internal pricing due to market conditions) times its actual historical average
generation to simulate the cost of replacement power.
Illinova Energy Partners, Inc.
IEP's results were due to losses primarily related to a single three-year
transaction entered into prior to 1998, which is now fully hedged.
Illinova Generating Company
IGC's positive contribution margin, cash flow, and return on invested capital
results reflect receipt of proceeds from a favorable ruling by an arbitration
panel in connection with a lawsuit involving an IGC investment, contribution
from the Aguaytia plant in Peru which became operational in 1998, and continued
earnings and cash flow contributions from existing investments. Also
contributing to the results was the purchase of the remaining shares in North
American Energy Services late in 1998.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure.
See "Note 14 -- Segments of Business" for additional information regarding
Illinova's segments.
Overview
(Millions of dollars
except per share amounts) 1998 1997 1996
Net income (loss) applicable
to common stock $(1,383) $ (90) $ 190
Net income (loss) applicable
to common stock excluding
Clinton plant impairment
loss in 1998, extraordinary
item in 1997 and carrying
amount over (under)
consideration paid for
redeemed preferred stock
in 1997 and 1996 $ (56) $ 104 $ 191
Basic and diluted earnings
(loss) per share $(19.30) $ (1.22) $ 2.51
Basic and diluted earnings
(loss) per share excluding
Clinton plant impairment
loss in 1998, extraordinary
item in 1997 and carrying
amount over (under)
consideration paid for
redeemed preferred stock
in 1997 and 1996 $ (.78) $ 1.41 $ 2.52
1998: The decrease in 1998 earnings compared to 1997 was due primarily to the
Clinton impairment, an increase in power purchased cost due to unprecedented
summer price spikes, additional power purchases to serve increased volumes of
interchange sales, market losses recorded on forward power purchase and sales
contracts as part of the wholesale trading business, and higher operation and
maintenance expenses due to the extended outage at Clinton.
1997: The decrease in 1997 earnings compared to 1996 was due primarily to the
extraordinary item related to discontinued application of FAS 71 for the
generation segment, higher operation and maintenance expenses due to the
extended outage at Clinton, higher power purchased costs due to outages at
Clinton and Wood River, IEP losses, and an increase in uncollectible accounts
expense.
1996: The increase in 1996 earnings per share over 1995 was due primarily to the
one-time charge in 1995 for the enhanced retirement and severance programs,
lower operations expense due to the reduction in number of employees, and lower
financing costs.
Regulators historically have determined IP's rates for electric service: the
ICC at the retail level and FERC _at the wholesale level. The ICC determines
IP's rates for gas service. These rates have been designed to recover the cost
of service and allow shareholders the opportunity to earn a reasonable rate of
return. As described under "Competition" above, P.A. 90-561 phases in a
competitive marketplace for electric generation while maintaining cost-based
regulation for electric delivery services and gas service, protecting the
financial integrity of the company during the transition period. Future electric
and natural gas sales, including interchange sales, will continue to be affected
by an increasingly competitive marketplace, changes in the regulatory
environment, transmission access, weather conditions, competing fuel sources,
interchange market conditions, plant availability, fuel cost recoveries,
customer conservation efforts, and the overall economy.
Illinova and Illinois Power -- Results of Operations
Electric Operations: For the years 1996 through 1998, electric revenues,
including interchange, increased 32.9% and the gross electric margin decreased
22.5% as follows:
(Millions of dollars) 1998 1997 1996
Electric revenues $1,224.2 $1,244.4 $1,202.9
Interchange revenues 557.2 175.6 137.6
Fuel cost & power
purchased (985.4) (450.3) (313.3)
Electric margin $ 796.0 $ 969.7 $1,027.2
The components of annual changes in electric revenues were:
(Millions of dollars) 1998 1997 1996
Price $ (65.5) $ (11.5) $ (7.2)
Volume and other 35.1 9.7 6.4
Fuel cost recoveries 10.2 43.3 (48.9)
Revenue increase
(decrease) $ (20.2) $ 41.5 $ (49.7)
1998: Electric revenues excluding interchange sales decreased 1.6% due to the
15% residential rate decrease mandated by P.A. 90-561 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
and the discontinuance of certain revenue related taxes, in accordance with P.A.
90-561. Interchange revenues increased 217.4% primarily due to increased
activity on the interchange market. Electric margin decreased primarily due to
higher power purchased costs and the elimination of the UFAC.
1997: Electric revenues excluding interchange sales increased 3.4%, primarily
due to an increase in revenues under the UFAC and increased wheeling revenues.
Interchange revenues increased 27.6% due to the receipt of an opt-out fee from
Soyland under the amended PCA and increased interchange activity. Electric
margin decreased primarily due to increased power purchased costs as a result of
outages at Clinton and the fossil stations.
1996: Electric revenues excluding interchange sales decreased 4%, primarily due
to a reduction in revenues under the UFAC. Volume changes by customer class were
insignificant, as kwh sales to ultimate consumers (excluding interchange sales
and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of
higher plant availability in the first half of the year.
The cost of meeting IP's system requirements was reflected in fuel costs for
electric plants and power purchased. Changes in these costs are detailed below:
(Millions of dollars) 1998 1997 1996
Fuel for electric plants
Volume and other $ 28.3 $ (37.7) $ 15.4
Price 5.7 (8.5) (12.0)
Emission allowances (7.5) 12.3 .8
Fuel cost recoveries (8.7) 18.2 (30.0)
17.8 (15.7) (25.8)
Power purchased 517.3 152.7 5.7
Total increase (decrease) $ 535.1 $ 137.0 $(20.1)
Weighted average system
generating fuel cost
($/MWH) $ 12.79 $ 12.06 $ 11.01
System load requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities, emission allowance
costs, and fuel cost recovery through UFAC caused changes in these costs.
Changes in factors affecting the cost of fuel for electric generation are
detailed below:
1998 1997 1996
Increase (decrease)
in generation 10.9% (25.4)% 5.4%
Generation mix
Coal and other 100% 100% 78%
Nuclear 0% 0% 22%
1998: The cost of fuel increased 7.6% and electric generation increased 10.9%.
The increase in fuel cost was primarily a result of running peaking units and
reactivation of oil-fired plants from cold shutdown. These factors were
partially offset by effects of the 1997 UFAC and decreased emission allowance
costs.
Power purchased increased $517.3 million. This amount consisted of higher
prices resulting in an increase of $274 million, a $215 million increase to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts. Income from interchange
sales was $382 million higher than in 1997 due to increased sales volumes and
higher prices. Although IP's margin on volumes between 1998 and 1997 resulted in
IP being a net seller, higher prices resulted in a $135 million net purchase
margin. See "Note 5 -- Commitments and Contingencies" for additional
information.
1997: The cost of fuel decreased 6.3% and electric generation decreased 25.4%.
The decrease in fuel cost was primarily attributable to decreased generation and
a favorable price variance. These factors were partially offset by effects of
the UFAC and increased emission allowance costs. Power purchased increased
$152.7 million primarily due to Clinton and Wood River being out of service.
1996: The cost of fuel decreased 9.4% and electric generation increased 5.4%.
The decrease in fuel cost was primarily attributable to the effects of the UFAC,
as well as a favorable price variance. These factors were partially offset by an
increase in fuel cost due to the increase in generation. Power purchased
increased $5.7 million primarily due to the Clinton outage. Clinton's equivalent
availability and generation were lower than in 1995 due to that outage.
Gas Operations: For the years 1996 through 1998, gas revenues, including
transportation, decreased 17.3%, while the gross margin on gas revenues
decreased 5.1% as follows:
(Millions of dollars) 1998 1997 1996
Gas revenues $ 281.1 $ 345.2 $ 341.4
Gas cost (149.6) (207.7) (202.6)
Transportation revenues 6.7 8.7 6.8
Gas margin $ 138.2 $ 146.2 $ 145.6
(Millions of therms)
Therms sold 503 537 703
Therms transported 267 309 251
Total consumption 770 846 954
Changes in the cost of gas purchased for resale were:
(Millions of dollars) 1998 1997 1996
Gas purchased for resale
Cost $ (5.3) $ 8.0 $ 49.0
Volume (23.2) (30.0) 8.5
Gas cost recoveries (29.6) 27.1 6.3
Total increase (decrease) $(58.1) $ 5.1 $ 63.8
Average cost per therm
delivered 27.1(cents) 28.0(cents) 26.7(cents)
The 1998 decrease in gas costs was due to low gas prices and a decrease in
therm sales caused by mild weather. The 1997 increase in gas costs was due to
slightly higher prices from suppliers and effects of the UGAC, offset by a
decrease in volume. The 1996 increase in gas costs was primarily due to higher
prices from suppliers and the effects of the UGAC.
Diversified Enterprises: Due primarily to decreased power trading activity at
IEP in 1998, diversified enterprises revenues decreased $374 million which was
offset by a $400 million decrease in diversified enterprise expenses.
Diversified enterprises revenues increased $678 million for 1997 primarily due
to increased power trading activity at IEP. However, the diversified enterprises
expenses increased $705 million in 1997, offsetting the growth in revenues.
Diversified expenses primarily reflect the cost of power purchased for resale.
Other Expenses: A comparison of significant increases (decreases) in other
operating expenses, maintenance, and depreciation for the last three years is
presented in the following table:
(Millions of dollars) 1998 1997 1996
Other operating expenses $ 91.1 $ 40.6 $ (9.8)
Maintenance 44.6 12.0 (.3)
Depreciation and amortization 4.8 8.8 3.5
The increase in operating and maintenance expenses for 1998 is primarily due
to the outage at Clinton. Other increases include outside consulting fees,
customer marketing activities, and employee benefits.
The increase in operating and maintenance expenses for 1997 is primarily due
to increased company and contractor labor at Clinton and the fossil plants. An
increase in uncollectible accounts expense and disposal of surplus inventory
also contributed to the increase.
The decrease in operating expenses for 1996 is due primarily to the savings
from the 1995 enhanced retirement and severance program, partially offset by the
costs of the Clinton outage and increased amortization of MGP site expenses. The
ICC approved tariff riders in March 1996 that resulted in the current
recognition of MGP site remediation costs in operating expenses. The 1996
increase amounted to $5.5 million. This increase is offset by increased revenues
collected under the riders.
The increases in depreciation and amortization for each of the three years
were due to increases in utility plant balances.
General Taxes: The decrease in general taxes of $10.6 million in 1998 is
primarily the result of P.A. 90-561, which shifted the revenue tax burden from
IP_to its customers. The decrease was partially offset by costs to fund a
program, provided for in P.A. 90-561, that helps low-income customers avoid
shutoffs. The 1997 and 1996 changes in general taxes were negligible.
Clinton Plant Impairment Loss: See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
Miscellaneous -- Net: The 1998 decrease in miscellaneous-- net was negligible.
The 1997 decrease of $4.7 million in miscellaneous--net deductions was due
primarily to 1996 accruals recorded for the planned disposition of property. The
1996 change in miscellaneous--net deductions was negligible.
Equity Earnings in Affiliates: The increase in equity earnings in affiliates of
$5.0 million in 1998, $11.1 million in 1997, and $3.7 million in 1996 is
primarily due to increased earnings from IGC investments.
Interest Charges: Total interest charges, including AFUDC and preferred dividend
requirements, increased $1.9 million in 1998, increased $2.4 million in 1997,
and decreased $15.2 million in 1996. The increases in 1998 and 1997 are due
primarily to higher Illinova debt expenses, increased IP short-term borrowings,
and lower AFUDC, partially offset by the continued benefits of IP refinancing
efforts and capitalization reductions. The 1996 decrease was due to lower
short-term interest rates and the impact of IP refinancing efforts and
capitalization reduction during 1996.
Inflation: Inflation, as measured by the Consumer Price Index, was 1.6%, 2.3%,
and 3.0% in 1998, 1997, and 1996, respectively. IP recovers historical rather
than current plant costs in its regulated rates.
FINANCIAL CONDITION
Liquidity and Capital Resources
Illinova's financial condition is a product of its historical capital structure,
the terms of its existing indebtedness, various regulatory considerations and
the cash flow generated by its businesses. In general, Illinova historically has
been able to either generate sufficient funds or raise sufficient funds at
investment grade credit quality to meet substantially all of its financial
needs. Illinova's sources of funds and primary non-operating uses of funds are
described below. See "Note 10 -- Long-Term Debt" and "Note 11 -- Preferred Stock
of Subsidiary" for additional information regarding Illinova's and IP's
outstanding indebtedness.
Mortgages: Historically, a substantial portion of the funds needed by IP have
been provided by indebtedness issued pursuant to its general obligation
mortgages. These include a 1943 mortgage (First Mortgage) and a 1992 mortgage
(New Mortgage) that is intended, over time, to replace the First Mortgage. Both
mortgages are secured by liens on substantially all of IP's properties. In
general, IP is able to issue debt secured by the mortgages provided that (i) its
"adjusted net earnings" are at least two times its "annual interest
requirements," and (ii) the aggregate amount of indebtedness secured by the
mortgages does not exceed three-quarters of the original cost of the property
subjected to the lien of the mortgages, reduced to reflect property that has
been retired or sold. It also generally can issue indebtedness in exchange for
repurchased and retired indebtedness independent of whether these two tests are
met.
At December 31, 1998, IP had outstanding approximately $1.6 billion in
indebtedness pursuant to the mortgages and could have issued approximately $550
million in additional indebtedness based on its property levels. In addition, IP
could have issued approximately $334 million in exchange for previously issued
indebtedness that had been repurchased by IP. The sale or shutdown of Clinton or
IP's fossil plants, or both, would eliminate IP's capacity to issue indebtedness
under these mortgages based on property additions. As a consequence, IP is
exploring various strategies under which the mortgages may be amended to permit
further issuances or means to release the indebtedness from the mortgage.
Regardless of the status of Clinton, IP is still able to issue new indebtedness
pursuant to the mortgage based on repurchased and retired indebtedness. Also, IP
had unsecured non-mortgage borrowing capacity totaling approximately $450
million at December 31, 1998. This capacity is higher than normal as a result of
securitization proceeds received in December 1998.
Cash Requirements and Cash Flow: Illinova and IP need cash for operating
expenses, interest and dividend payments, debt and certain IP preferred stock
retirements, construction programs, decommissioning, and non-regulated
subsidiary funding requirements. Illinova and IP have met these needs with
internally generated funds and external financings, including debt and revolving
lines of credit. The timing and amount of external financings depend primarily
on cash needs, economic conditions, financial market conditions, and
capitalization ratio objectives.
Cash flows from operations during 1998 were supplemented by external
financings 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. Liquidity at both
Illinova and IP has decreased in 1998 as a result of higher than expected costs
for purchased power and for Clinton expenditures, coupled with lower electric
revenues resulting from the rate decrease mandated by P.A. 90-561.
Illinova expects that future cash flows, supplemented by external financing,
will continue to be adequate to meet operating requirements and to service
existing debt, IP preferred and Illinova common dividends, Illinova's
anticipated subsidiary investments, and IP's anticipated construction
requirements and decommissioning costs. It is anticipated there will be a need
for external financing to supplement cash flows for at least the years 1999
through 2003.
Dividends: On February 10, 1999, Illinova declared a quarterly common stock
dividend of $.31 per share, payable May 1, 1999. Illinova paid common dividends
of $.31 per share each quarter during 1998 and 1997, having increased the
dividend by 11%, from $.28 to $.31 per share, in December 1996 for dividends
payable in February 1997.
The provisions of Supplemental Indentures to IP's General Mortgage Indenture
and Deed of Trust contain certain restrictions with respect to the declaration
and payment of dividends. IP was not limited by any of these restrictions at
December 31, 1998. Under the Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock
IP is also limited in its payment of dividends by the Illinois Public
Utilities Act, which requires retained earnings equal to or greater than the
amount of any proposed dividend declaration or payment, and by the Federal Power
Act, which precludes declaration or payment of dividends by electric utilities
"out of money properly stated in a capital account." At December 31, 1998, IP
had a zero balance in retained earnings and was thus unable to declare a
dividend on its common or preferred stock. Payment of preferred dividends on
February 1, 1999, was made out of a trust created in November 1998 for this
purpose. IP's retained earnings balance is expected to grow sufficiently during
1999 to support payment of IP common and scheduled preferred dividends. Illinova
will secure payment of IP preferred dividends through 1999.
IP typically pays dividends on its common stock to provide Illinova cash for
operations. Contingent on IP meeting a free cash flow test, the ICC has
authorized IP to periodically repurchase its common stock from Illinova. IP did
not satisfy the test at year-end 1998 and does not anticipate satisfying the
test in 1999.
Illinova and IP periodically review their dividend policies based on several
factors, including their present and anticipated future use of cash, level of
retained earnings, and business strategy.
Debt Ratings: The availability and cost of external financing depend to a
significant degree on the financial health of the company seeking those funds.
Security ratings are an indication of a company's financial position and may
affect the cost and the willingness of investors to invest in these securities.
Illinova's and IP's securities are currently rated by four principal rating
agencies as follows:
Standard Duff & Fitch
Moody's & Poor's Phelps IBCA
Illinova long-term debt Baa3 BBB- -- BBB-
IP first/new mortgage
bonds Baa1 BBB BBB+ BBB+
IP preferred stock baa2 BB+ BBB- BBB-
IP commercial paper P-2 A-2 D-2 F2
IP transitional funding
trust notes Aaa AAA AAA AAA
Under current market conditions, these ratings would afford Illinova and IP
the ability to issue additional securities through external financing. Illinova
and IP have adequate short-term and intermediate-term bank borrowing capacity
In April 1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. In
July 1996, Moody's upgraded IP's securities, raising mortgage bond ratings from
Baa2 to Baa1 and preferred stock ratings from baa3 to baa2. In July 1998, both
Moody's and S&P revised their ratings outlook for Illinova and IP. Moody's
rating went from stable to negative and S&P from positive to stable, reflecting
effects of the extended Clinton outage and unprecedented prices for purchased
power during late June 1998. In November 1998, Fitch IBCA affirmed the ratings
of IP's first and new mortgage bonds at BBB+ and IP's preferred stock at BBB-.
Fitch IBCA also established a new commercial paper rating of F2 for IP.
In February 1999, S&P announced it had implemented a new single credit rating
scale for both debt and preferred stock. As a result, S&P rerated all the
preferred stock issues and similar debt/equity issues that carry ratings from
S&P to conform to the new scale. As a result of this change, the rating on IP's
preferred stock was changed to BB+ from BBB-. On March 4, 1999, Moody's placed
all of the securities of Illinova and IP under review for possible downgrade,
citing erosion of cash flow and an expected increase in leverage caused by the
extended Clinton outage. Moody's also acknowledged the positive impact of the
decision to exit Clinton and the progress made in bringing Clinton back to
on-line status. This review does not include the $864 million of Transitional
Funding Trust Notes issued by IPSPT, which are expected to remain rated Aaa.
In December 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes as allowed under the Illinois Electric Utility Transition Funding Law in
P.A. 90-561. All four agencies rated this debt triple A. See discussion of
"Securitization."
In 1997, Moody's and S&P established initial ratings of Baa3 and BBB-,
respectively, for Illinova long-term debt. In November 1998, Fitch IBCA
established a BBB- rating for Illinova senior unsecured debt. Illinova did not
ask Duff & Phelps to rate its long-term debt.
Recent Financing: Changes in principal amounts of capital sources for 1998,
1997, and 1996, including normal maturities and elective redemptions, were as
follows:
(Millions of dollars) 1998 1997 1996
Illinova long-term debt $ 70 $ 100 $ --
IP long-term debt 64 (11) (154)
IP preferred stock -- (39) 71
Illinova common stock
outstanding (49) (90) --
Transitional funding
trust notes* 864 -- --
Total increase (decrease) $ 949 $ (40) $ (83)
*See discussion of "Securitization."
The amounts shown in the preceding table for debt retirements do not include
all mortgage sinking fund requirements. IP has generally met these requirements
by pledging property additions as permitted under IP's 1943 Mortgage and Deed of
Trust and the 1992 New Mortgage. For additional information, see "Note 10 --
Long-Term Debt" and "Note 11 -- Preferred Stock of Subsidiary."
In January 1998, Illinova issued $40 million principal amount of 6.46%
medium-term notes due October 1, 2002, under an existing $300 million shelf
registration statement. In September 1998, Illinova issued an additional $30
million principal amount of 6.15% medium-term notes due September 10, 2001,
under the same shelf registration. In January 1999, Illinova replaced its former
$110 million revolving credit facility with a new $130 million facility.
Illinova's current $130 million capacity under the existing shelf registration,
in conjunction with its revolving credit facility, are expected to meet
currently estimated cash requirements for the balance of 1999. Illinova is
developing additional financing capabilities to meet future and contingency
needs in the form of a universal shelf registration to allow the future issuance
of debt or equity.
In March 1998, IP issued $18.7 million principal amount and $33.8 million
principal amount of 5.40% Pollution Control New Mortgage Bonds due 2028. In
April 1998, IP redeemed all principal amounts outstanding 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). In May 1998, a $200
million debt shelf registration for IP debt securities became effective. In July
1998, IP issued $100 million principal amount of 6.25% New Mortgage Bonds due
2002 against this registration. In September 1998, IP issued $100 million
principal amount of 6.00% New Mortgage Bonds due 2003 against this same shelf
registration. In September 1998, IP issued a call notice on the principal amount
outstanding of its 6.60% Series A Pollution Control First Mortgage Bonds due
2004 ($6.0 million). The bonds were called at par in November 1998. All of the
remaining $68 million principal amount IP medium-term notes matured and were
retired in 1998.
Securitization: In December 1998, IPSPT issued $864 million of Transitional
Funding Trust Notes, with IP as servicer. This debt, secured by collections of
future electric energy deliveries, represents 25% of IP's total capitalization
at December 31, 1996, as allowed by the 1997 Electric Utility Transition Funding
Law and approved by the ICC. The law allows IP to use this lower cost debt to
repurchase debt and equity, which lowers IP's overall cost of capital. IP has to
have at least a 40% common equity ratio, exclusive of securitized debt, when the
process is completed.
On September 16, 1998, IP filed a SEC Form S-3 shelf registration statement
for this $864 million offering. On September 30, 1998, the Internal Revenue
Service issued to IP a private letter ruling 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
IP has used funds from this offering to redeem all principal amounts
outstanding of its 6.60% Pollution Control First Mortgage Bonds due 2004 ($6.0
million), its 8.75% First Mortgage Bonds due 2021 ($57.1 million), and its 8.00%
New Mortgage Bonds due 2023 ($229 million). A redemption notice was issued in
December 1998, and the 8.75% First Mortgage Bonds and the 8.00% New Mortgage
Bonds were called January 11, 1999. Through March 9, 1999, IP has also used
funds from the IPSPT issuance to repurchase in the open market $36.8 million
principal amount of its 6.5% First Mortgage Bonds due 1999, $55.9 million
principal amount of its 7.95% First Mortgage Bonds due 2004, and $28.5 million
principal amount of its 7.50% New Mortgage Bonds due 2025. In addition, IP has
repurchased $6.6 million, net of premiums and discounts, of various series of
preferred stock and MIPS. IP has used another $49.3 million from the IPSPT to
repurchase approximately 2.3 million of its shares from Illinova, which in turn
used the $49.3 million received from IP to repurchase 1.8 million of its common
shares in the open market.
Preferred Stock: At a special meeting in May 1998, IP preferred shareholders
voted on a proposal to amend the Articles of Incorporation to remove a
limitation on the amount of unsecured debt IP can issue. A majority of votes
cast favored the proposal, but not the two-thirds majority required.
Capital Expenditures: Construction expenditures for 1996 through 1998 were
approximately $723 million, including $14.7 million of AFUDC. Illinova estimates
that it will spend approximately $370 million for IP construction expenditures
in 1999. IP construction expenditures for 1999 through 2003 are expected to
total approximately $1.2 billion. In light of the December 1998 decision to exit
Clinton and resulting Clinton impairment entries, no nuclear construction is
included in the above estimates.
Due to the failure of Clinton to restart by January 31, 1999, a provision in
the lease agreement between IP and the Fuel Company requires IP to deposit $62
million cash, in March 1999, with the Fuel Company Trustee for the benefit of
investors in secured notes of the Fuel Company. These notes mature December 1,
1999, at which time these funds will be used to pay principal and interest on
the notes' principal amount of $60 million.
Additional expenditures may be required during this period to accommodate the
transition to a competitive environment, environmental compliance, system
upgrades, and other costs which cannot be determined at this time.
In addition to IP construction expenditures, Illinova's capital expenditures
for 1999 through 2003 are expected to include $592 million for mandatory debt
retirement and approximately $600 million target levels for investment
opportunities by the non-regulated subsidiaries. In addition, IPSPT has
long-term debt maturities of $86.4 million in each of the above years.
Decommissioning: Because of Illinova's and IP's Boards of Directors' decision to
exit Clinton, IP must be prepared to fund the cost of decommissioning the plant.
Assuming the most conservative immediate decommissioning method, IP estimates it
will cost approximately $376 million between 1999 and 2003. IP currently has $84
million in decommissioning trust funds and would expect this amount to be used,
as well as $37 million in additional collections from customers, including
interest on the trust, during this time period. In addition, IP will need to
fund approximately $255 million from other sources. IP is pursuing insurance and
other options, including a delayed decommissioning method which requires
significantly less cash in the next few years.
IP continues to pursue discussions with various parties interested in
purchasing Clinton. In the event of a sale of Clinton, IP expects to incur some
amount of obligation to provide decommissioning funds. The timing and amount of
such obligations cannot be determined at this time.
See "Note 5 -- Commitments and Contingencies" for additional information.
Internally generated cash, supplemented by external financing, will meet all
decommissioning, construction, and capital requirements.
Environmental Matters: See "Note 5 -- Commitments and Contingencies" for a
discussion of environmental matters that impact or could potentially impact
Illinova and IP.
Tax Matters: See "Note 8 -- Income Taxes" for a discussion of effective tax
rates and other tax issues.
MARKET RISK
Risk Management: Illinova is exposed to both non-trading and trading market
risks. Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates,
commodity prices, and other relevant market rate or price changes. Non-trading
market risks include interest rate risk, equity price risk, foreign operations
risk, and commodity price risk. Trading market risk is comprised basically of
commodity price risk. For a discussion of credit risk exposure, see "Note 16 --
Financial and Other Derivative Instruments." Illinova's risk management policy
allows the use of derivative financial instruments to manage its financial
exposures. Market risk is measured through various means, including VaR models.
VaR represents the potential losses for an instrument or portfolio resulting
from hypothetical adverse changes in market factors for a specified time period
and confidence level. It does not represent the maximum loss that may occur.
Future gains and losses will differ from those estimated, based on actual
fluctuations in market rates, operating exposures, and the timing thereof, and
changes in the portfolio of derivative financial instruments during the year.
Interest Rate Risk: Illinova is or can be exposed to interest rate risk as a
result of financing through its issuance of fixed or variable-rate debt.
Interest rate risk is the exposure of an entity's financial condition to adverse
movements in interest rates. Illinova has no short-term borrowings outstanding
at December 31, 1998. IP is exposed to interest rate risk as the result of fixed
or variable-rate debt including commercial paper issuances or bank notes
obtained by IP. Interest rate exposure is managed according to policy by
limiting variable-rate exposure to a certain percentage of capitalization,
utilizing derivative instruments when deemed appropriate, and monitoring the
effects of market changes in interest rates. At December 31, 1998, there were no
derivative financial instruments in use related to interest rate risk.
Illinova's debt portfolio VaR was calculated quarterly based on
variance/covariance methodology using the RiskMetrics FourFifteen(TM) model. VaR
was calculated based on a 95 percent confidence factor and a holding period of
one business day. Interest rate risk as measured by VaR for 1998 follows:
Low High Average
(Millions of dollars) VaR VaR VaR
ILN, including IP debt $ 7.1 $ 14.9 $ 10.5
IP debt only $ 6.7 $ 14.2 $ 9.9
Other Market Risk: Illinova is exposed to equity price risk primarily through
IP. Equity price risk is the risk of loss on equity investments arising from
unfavorable movements in equity prices. IP maintains trust funds, as required by
the NRC, to fund certain costs of nuclear decommissioning. See "Note 5 --
Commitments and Contingencies." As of December 31, 1998, these funds were
invested in domestic and international equity securities, fixed income
securities, and cash and cash equivalents. By maintaining a portfolio that
includes equity investments, IP is maximizing the return to be used to fund
nuclear decommissioning, which in the long term will correlate better with
inflationary increases in decommissioning costs. The equity securities included
in the corporation's portfolio are exposed to price fluctuations in equity
markets, and the fixed-rate, fixed-income securities are exposed to market risk
as a result of fluctuations in interest rates. IP actively monitors its
portfolio by benchmarking the performance of its investments against equity and
fixed-income indexes. It maintains and periodically reviews established target
allocations of the trust assets approved in the investment policy statement.
Nuclear decommissioning costs have historically been recovered through IP's
electric rates and the Soyland PCA. Therefore, fluctuations in equity prices or
interest rates have not affected the earnings of the corporation. In the future,
changes in the investments' fair value will be reflected in the regulatory asset
for probable future collections from customers of decommissioning costs and
fluctuations in interest rates will be reflected in earnings.
Foreign Operations: Risk IP's foreign operations risk is its inherent risk of
loss due to the potential volatility of emerging countries and fluctuations in
foreign currency exchange rates in relation to the U.S. dollar. At December 31,
1998, IGC had invested $146 million in several international operations, many of
which are joint ventures. Primarily, these investments are with affiliates
owning energy-related production, generation, and transmission facilities.
IGC is exposed to foreign currency risk, sovereign risk, and other foreign
operations risks, primarily through investments in affiliates of $40 million in
Asia and $103 million in South and Central America. To mitigate risks associated
with foreign currency fluctuations, the majority of contracts entered into by
IGC or its affiliates are denominated in or indexed to the U.S. dollar.
Commodity Price Risk: Illinova is exposed to trading commodity price risk
through IEP and to both trading and non-trading commodity price risk through IP.
Commodity price risk is the risk of loss arising from adverse movements in
commodity prices.
IEP and IP are exposed to commodity price risks through their energy trading
businesses. To measure, monitor, and manage the commodity price risk of the
trading and marketing portfolio, IP utilizes a "Monte Carlo" simulation of
trading positions based on a 95 percent confidence level and a four-day holding
period. IP's trading VaR at December 31, 1998, was $1.3 million.
IEP utilizes a variance/covariance approach similar to RiskMetrics(TM). VaR
measures the amount that could potentially be lost given a 95 percent confidence
level and a four- day holding period. Based on the VaR analysis of its overall
commodity price risk exposure at December 31, 1998, management does not
anticipate a materially adverse effect on the company's consolidated financial
statements as a result of market fluctuations. IEP's trading commodity price
risk as measured by VaR for 1998 follows:
Low High Average
(Millions of dollars) VaR VaR VaR
IEP $ .1 $ .9 $ .3
IP is also exposed to non-trading commodity price risk through its energy
generation business. IP uses derivative financial instruments to manage its
native load requirements. To measure, monitor, and manage the commodity price
risk of its non-trading portfolio, IP utilizes a "Monte Carlo" simulation of
non-trading positions based on a 95 percent confidence level and a one-year
holding period. IP's non-trading commodity price VaR at December 31, 1998, was
$13.7 million.
SAFE HARBOR
Certain of the statements contained in this report, including those in
Management's Discussion and Analysis are forward-looking. Other statements,
particularly those using words like "expect," "intend," "predict," "estimate,"
and "believe," also are forward-looking. Although Illinova believes these
statements are accurate, its business is dependent on various regulatory issues,
general economic conditions and future trends, and these factors can cause
actual results to differ materially from the forward-looking statements that
have been made. In particular:
- - Illinova's activities, particularly the utility activities of IP, are
heavily regulated by both the federal government and the State of Illinois.
This regulation has changed substantially over the past several years. The
impacts of these changes include reductions in rates pursuant to P.A.
90-561 and a phasing in of the opportunity for an increasing number of
customers to choose alternative energy suppliers. In addition, future
regulatory changes are certain to occur and their nature and impact cannot
be predicted.
- - IP is likely to face increased competition in the future. Deregulation of
certain aspects of IP's business at both the state and federal levels is
occurring, the primary results of which so far are that competing
generators of electricity will increasingly have the ability to sell
electricity to IP's customers and to require IP to transmit and distribute
that electricity. In addition, alternative sources of electricity, such as
co-generation facilities, are becoming increasingly popular. When customers
elect suppliers other than IP for their electricity, IP can avoid certain
costs and can gain revenue from transmitting and distributing that
electricity; however, the net effect of these elections generally is a
decrease in IP's revenue and operating income. Illinois transition law is
designed to protect utilities in three principal ways:
1) Departing customers are obligated to pay transition charges based on
the utility's lost revenue from that customer;
2) Utilities are provided the opportunity to lower their financing and
capital costs through the issuance of "securitized" bonds; and
3) Utilities are permitted to seek rate relief in the event the change in
law leads to their ROE falling below a specified minimum based on a
prescribed test.
- - Illinova is exploring various strategies to best respond to its changing
business and regulatory environment. These strategies include acquisitions,
focused growth of unregulated businesses, and other options. Although
Illinova would only plan to undertake transactions that it believes are in
the best interests of its shareholders, there can be no certainty that any
transaction will fulfill these expectations.
- - To meet IP customers' electricity requirements, IP produces electricity in
Company-owned generation plants. Although IP has in place programs designed
to match its supplies with its needs, many circumstances can occur which
upset this balance. Specifically, generation facilities may experience
unplanned outages forcing the Company to acquire additional supplies in the
electricity marketplace. The availability and price of these additional
supplies are uncertain and at times highly volatile. Such situations can
lead to less profitable or even unprofitable outcomes.
- - Clinton is a nuclear-fueled generation facility. Although IP believes that
it operates this facility in accordance with all regulatory guidelines and
in a safe manner, accidents can occur. Liabilities and costs from such
accidents could exceed insurance provisions established for the Company and
have a significantly negative effect on IP.
- - There are various financial risks attendant to selling or shutting down
Clinton. These risks include the possibility that IP has underestimated the
costs necessary to effect a particular exit strategy. No nuclear facility
sale has been completed and relatively little financial information
regarding these transactions is available. Although the amounts used in
IP's analyses and in recording year-end accounting results represent
estimates based on guidance from industry experts, actual results may be
materially different from the estimates. In addition, the Company continues
to have ongoing nuclear operational exposures until the plant is sold or
shut down.
- - Illinova does not currently foresee any inability to obtain necessary
financing on reasonably favorable terms. However, events can occur in the
Company's business operations or in general economic conditions that could
negatively impact the Company's financial flexibility. In addition,
restructuring activities, such as the formation of an unregulated
generation subsidiary, can introduce other factors that could impact the
Company's financial flexibility. Further, the sale or shutdown of Clinton
will substantially reduce the Company's ability to issue indebtedness under
its existing mortgages. While the Company does not foresee any of these
events resulting in significant difficulties in obtaining future financing
on reasonably favorable terms, there can be no assurances that difficulties
will not occur.
- - The impact of environmental regulations on utilities is significant; and
the expectation is that more stringent requirements will be introduced over
time. Although Illinova believes it is in substantial compliance with all
current regulations, Illinova cannot predict the future impact of
environmental compliance. However, if more stringent requirements are
introduced they are likely to have a negative financial effect.
- - IGC has interests in foreign facilities and is likely to purchase
additional foreign interests in the future. The risks of doing business in
foreign countries are different from those attendant to doing business in
the United States. These include business risks such as currency
fluctuations, cyclical and sustained economic downturns, and political
risks. The adverse impact of these risks could be significant.
- - Illinova, through IEP and IP, actively purchases and sells electricity and
natural gas futures and similar contracts with respect thereto. While
Illinova has adopted various risk management practices intended to minimize
the risk of significant loss, trading in assets of these types is
inherently risky and these risk management practices cannot guarantee that
losses will not occur.
- - Although Illinova believes that it will complete its Year 2000 preparation
in a timely fashion, there can be no assurances that it will, or that
unforeseen problems will not arise. The consequences of Year 2000 problems
are so varied that Illinova can not predict this ultimate impact, if any.
All forward-looking statements in this report are based on information that
currently is available. Illinova disclaims any obligation to update any
forward-looking statement.
ILLINOVA CORPORATION
Responsibility for Information
The consolidated financial statements and all information in this annual report
are the responsibility of management. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
include amounts that are based on management's best estimates and judgments.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements. In the opinion of management, the consolidated financial statements
fairly reflect Illinova's financial position, results of operations, and cash
flows.
Illinova believes that its accounting and internal accounting control systems
are maintained so that these systems provide reasonable assurance that assets
are safeguarded against loss from unauthorized use or disposition and that the
financial records are reliable for preparing the consolidated financial
statements.
The consolidated financial statements have been audited by Illinova's
independent accountants, PricewaterhouseCoopers LLP, in accordance with
generally accepted auditing standards. Such standards include the evaluation of
internal accounting controls to establish a basis for developing the scope of
the examination of the consolidated financial statements. In addition to the use
of independent accountants, Illinova maintains a professional staff of internal
auditors who conduct financial, procedural, and special audits. To assure their
independence, both PricewaterhouseCoopers LLP and the internal auditors have
direct access to the Audit Committee of the Board of Directors.
The Audit Committee is composed of members of the Board of Directors who are
not active or retired employees of Illinova. The Audit Committee meets with
PricewaterhouseCoopers LLP and the internal auditors and makes recommendations
to the Board of Directors concerning the appointment of the independent
accountants and services to be performed. Additionally, the Audit Committee
meets with PricewaterhouseCoopers LLP to discuss the results of their annual
audit, Illinova's internal accounting controls and financial reporting matters.
The Audit Committee meets with the internal auditors to assess the internal
audit work performed, including tests of internal accounting controls.
Charles E. Bayless
Chairman, President
and Chief Executive Officer
Larry F. Altenbaumer
Chief Financial Officer,
Treasurer and Controller
ILLINOVA CORPORATION
Report of Independent Accountants
PricewaterhouseCoopers LLP
To the Board of Directors and Shareholders of Illinova Corporation
In our opinion, the accompanying consolidated balance sheets and the related
statements of income, statements of cash flows and statements of retained
earnings present fairly, in all material respects, the financial position of
Illinova Corporation and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit requires examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As explained in Note 2 to the consolidated financial statements, the
Company's commitment to exit nuclear operations resulted in an impairment of the
Clinton Power Station in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," in December 1998.
As explained in Note 2 to the consolidated financial statements, the Company
effected a quasi-reorganization in December 1998. In conjunction with the
accounting for a quasi-reorganization, the Company adjusted the recorded value
of specific assets and liabilities to fair value, including its fossil power
generation stations. In addition, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" and Emerging Issues Task Force Statement 98-10, "Accounting for
Energy Trading and Risk Management Activities."
As explained in Note 1 to the consolidated financial statements, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
for its generation segment of the business in December 1997.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 26, 1999
<TABLE>
<CAPTION>
Illinova Corporation
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
- -----------------------------------------------------------------------------------------------------------------------
(Millions of dollars except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Operating Revenues
<S> <C> <C> <C>
Electric $1,224.2 $1,244.4 $ 1,202.9
Electric interchange 557.2 175.6 137.6
Gas 287.8 353.9 348.2
Diversified enterprises 361.4 735.6 57.6
- -----------------------------------------------------------------------------------------------------------------------
Total 2,430.6 2,509.5 1,746.3
- -----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Fuel for electric plants 250.2 232.4 248.1
Power purchased 735.2 217.9 65.2
Gas purchased for resale 149.6 207.7 202.6
Diversified enterprises 392.0 792.3 87.5
Other operating expenses 381.6 290.5 249.9
Maintenance 156.3 111.7 99.7
Depreciation and amortization 203.6 198.8 190.0
General taxes 123.2 133.8 131.3
Clinton plant impairment loss (Note 2) 2,341.2 - -
- -----------------------------------------------------------------------------------------------------------------------
Total 4,732.9 2,185.1 1,274.3
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (2,302.3) 324.4 472.0
- -----------------------------------------------------------------------------------------------------------------------
Other Income
Miscellaneous-net 3.1 3.5 (1.2)
Equity earnings in affiliates 22.5 17.5 6.4
- -----------------------------------------------------------------------------------------------------------------------
Total 25.6 21.0 5.2
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges and income taxes (2,276.7) 345.4 477.2
- -----------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest expense 146.0 144.2 142.5
Allowance for borrowed funds used during construction (3.2) (5.0) (6.5)
Preferred dividend requirements of subsidiary 19.8 21.5 22.3
- -----------------------------------------------------------------------------------------------------------------------
Total 162.6 160.7 158.3
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,439.3) 184.7 318.9
- -----------------------------------------------------------------------------------------------------------------------
Income Taxes
Income tax - impairment loss (853.6) - -
ITC - Clinton impairment (160.4) - -
Other (42.3) 80.3 127.9
- -----------------------------------------------------------------------------------------------------------------------
Total (1,056.3) 80.3 127.9
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item (1,383.0) 104.4 191.0
Extraordinary item net of income tax benefit
of $118.0 million (Note 1) - (195.0) -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,383.0) (90.6) 191.0
Carrying amount over (under) consideration paid
for redeemed preferred stock of subsidiary - .2 (.7)
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $(1,383.0) $ (90.4) $ 190.3
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share before
extraordinary item (basic and diluted) $ (19.30) $ 1.41 $ 2.51
Extraordinary item per common share (basic and diluted) $ - $ (2.63) $ -
- -----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share (basic and diluted) $ (19.30) $ (1.22) $ 2.51
Cash dividends declared per common share $ 1.24 $ 1.24 $ 1.15
Cash dividends paid per common share $ 1.24 $ 1.24 $ 1.12
Weighted average common shares 71,666,864 73,991,651 75,681,937
See notes to consolidated financial statements which are an integral part of
these statements. Prior years restated to conform to new financial format.
</TABLE>
<TABLE>
<CAPTION>
Illinova Corporation
C O N S O L I D A T E D B A L A N C E S H E E T S
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------
December 31, 1998 1997
ASSETS
Utility Plant
<S> <C> <C>
Electric (includes construction work in progress
of $177.7 million and $214.3 million, respectively) $5,481.8 $6,690.4
Gas (includes construction work in progress of
$15.3 million and $10.7 million, respectively) 686.9 663.0
- -----------------------------------------------------------------------------------------------------------
6,168.7 7,353.4
Less -- accumulated depreciation 1,713.7 2,808.1
- -----------------------------------------------------------------------------------------------------------
4,455.0 4,545.3
Nuclear fuel in process - 6.3
Nuclear fuel under capital lease 20.3 126.7
- -----------------------------------------------------------------------------------------------------------
4,475.3 4,678.3
- -----------------------------------------------------------------------------------------------------------
Investments and Other Assets 246.9 198.8
- -----------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 518.1 33.0
Accounts receivable (less allowance for doubtful accounts
of $5.5 million)
Service 105.9 115.6
Other 116.1 102.3
Accrued unbilled revenue 82.6 86.3
Materials and supplies, at average cost
Fossil fuel 25.6 12.6
Gas in underground storage 28.9 29.3
Operating materials 36.3 76.7
Assets from commodity price risk management activities 51.5 -
Prepayments and other 51.5 64.4
- -----------------------------------------------------------------------------------------------------------
1,016.5 520.2
- -----------------------------------------------------------------------------------------------------------
Deferred Charges
Transition period cost recovery 783.0 -
Other 279.6 185.7
- -----------------------------------------------------------------------------------------------------------
1,062.6 185.7
- -----------------------------------------------------------------------------------------------------------
$6,801.3 $5,583.0
- -----------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
Capitalization
Common stock -- No par value, 200,000,000 shares
authorized; 69,919,287 and 71,681,937 shares
outstanding, respectively, stated at $1,319.7 $1,425.7
Less -- Deferred compensation -- ESOP 6.8 10.2
Retained earnings - 51.7
Less -- Capital stock expense 7.3 7.3
Less --5,762,650 and 4,000,000 shares of common stock
in treasury, respectively, at cost 138.7 90.4
- -----------------------------------------------------------------------------------------------------------
Total common stock equity 1,166.9 1,369.5
Preferred stock of subsidiary 57.1 57.1
Mandatorily redeemable preferred stock of subsidiary 199.0 197.0
Long-term debt 2,334.6 1,717.5
- -----------------------------------------------------------------------------------------------------------
Total capitalization 3,757.6 3,341.1
- -----------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 256.5 177.3
Notes payable 147.6 415.3
Long-term debt and lease obligations of subsidiary
maturing within one year 506.6 87.5
Dividends declared 21.7 22.9
Taxes accrued 30.6 26.7
Interest accrued 39.5 36.0
Liabilities from commodity price risk management activities 99.8 -
Other 112.0 96.0
- -----------------------------------------------------------------------------------------------------------
1,214.3 861.7
- -----------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated deferred income taxes 964.0 969.0
Accumulated deferred investment tax credits 39.6 208.3
Decommissioning liability 567.4 62.5
Other 258.4 140.4
- -----------------------------------------------------------------------------------------------------------
1,829.4 1,380.2
- -----------------------------------------------------------------------------------------------------------
$6,801.3 $5,583.0
- -----------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 5)
See notes to consolidated financial statements which are an integral part of
these statements. Prior year restated to conform to new financial format.
</TABLE>
<TABLE>
<CAPTION>
ILLINOVA CORPORATION
C O N S O L I D a T E D S T a T E M E N T S O F C a S H Fl O W S
- -----------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income (loss) ($1,383.0) ($90.6) $191.0
Items not requiring (providing) cash --
Depreciation and amortization 203.4 202.1 195.3
Allowance for funds used during construction (3.2) (5.0) (6.5)
Deferred income taxes (43.9) 30.8 57.4
Extraordinary item - 195.0 -
Impairment loss, net of tax 1,327.2 - -
Changes in assets and liabilities --
Accounts and notes receivable 24.4 (19.4) (52.2)
Accrued unbilled revenue 3.7 19.7 (16.9)
Materials and supplies (15.1) (5.4) (2.1)
Accounts payable (5.6) 26.4 46.8
Deferred revenue 87.4 - -
Interest accrued and other, net 72.7 14.7 (5.4)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 268.0 368.3 407.4
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures (311.5) (223.9) (187.3)
Allowance for funds used during construction 3.2 5.0 6.5
Other investing activities (53.7) (33.5) (75.0)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (362.0) (252.4) (255.8)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock (88.9) (92.4) (84.7)
Repurchase of common stock (49.1) (90.4) -
Reissuance of common stock 0.8 - -
Redemptions --
Short-term debt (607.9) (241.1) (355.8)
Long-term debt (188.3) (160.8) (153.7)
Preferred stock of subsidiary - (39.0) (29.5)
Issuances --
Short-term debt 340.2 269.5 383.2
Long-term debt 1,186.5 250.0 -
Preferred stock of subsidiary - - 100.0
Common stock - - 1.1
Other financing activities (14.2) (3.3) 1.1
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 579.1 (107.5) (138.3)
- -----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 485.1 8.4 13.3
Cash and cash equivalents at beginning of year 33.0 24.6 11.3
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $518.1 $33.0 $24.6
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
- ---------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 51.7 $ 233.0 $ 129.6
Net income (loss) before dividends and carrying amount adjustments (1,363.2) (69.1) 213.3
- --------------------------------------------------------------------------------------------------------------------------
(1,311.5) 163.9 342.9
- --------------------------------------------------------------------------------------------------------------------------
Less-
Dividends-
Preferred stock of subsidiary 19.9 21.7 22.6
Common stock 88.1 90.7 86.6
Plus-
Carrying amount over (under) consideration paid for redeemed
preferred stock of subsidiary - 0.2 (0.7)
Quasi-Reorganization adjustment (Note 2) 1,313.3 - -
Transfer from other paid-in capital to
eliminate retained earnings deficit (Note 2) 106.2 - -
- --------------------------------------------------------------------------------------------------------------------------
1,311.5 (112.2) (109.9)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ - $ 51.7 $ 233.0
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of
these statements.
</TABLE>
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of Illinova, a holding company, and its subsidiaries: IP, IGC, IEP,
IIC, and IBE. IP is an electric and gas utility. IGC invests in energy supply
projects and competes in the independent power market. IEP develops and markets
energy-related services to the unregulated energy market and brokers and markets
electric power and natural gas. IIC insures the risks of Illinova subsidiaries
and risks related to or associated with their business enterprises. IBE was
incorporated on February 23, 1998, 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. See "Note 3 - Illinova
Subsidiaries" for additional information.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. All transactions for Illinova's
unregulated subsidiaries are included in the sections "Diversified Enterprises,"
"Interest Charges," "Income Taxes," and "Other Income and Deductions" in
Illinova's Consolidated Statements of Income. Preparation of financial
statements in conformity with generally accepted accounting principles requires
the use of management's estimates. Actual results could differ from those
estimates.
Clinton Impairment and Quasi-Reorganization: In December 1998, Illinova's and
IP's Boards of Directors decided to exit the nuclear portion of the business by
either sale or shutdown of Clinton. FAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," requires that
all long-lived assets for which management has committed to a plan of disposal
be reported at the lower of carrying amount or fair value less cost to sell.
Consequently, IP wrote off the value of Clinton and accrued Clinton-related exit
costs, which resulted in an accumulated deficit in retained earnings.
Illinova's and IP's Boards of Directors also voted in December 1998 to effect
a quasi-reorganization. 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 liabilities to
their fair values, with the net amount of these adjustments added to or deducted
from the deficit. Any remaining deficit in retained earnings is then eliminated
by a transfer from paid-in capital, giving the company a "fresh start" with a
zero balance in retained earnings.
For additional information, see "Note 2 - Clinton Impairment and
Quasi-Reorganization."
Regulation: IP is regulated primarily by the ICC, FERC, and the NRC. Prior to
the enactment of P.A. 90-561, IP prepared its consolidated financial statements
in accordance with FAS 71, "Accounting for the Effects of Certain Types of
Regulation." Reporting under FAS 71 allows companies whose service obligations
and prices are regulated to maintain balance sheet assets representing costs
they expect to recover through inclusion in future rates. In July 1997, the 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 market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment in
December 1997 when P.A. 90-561 was enacted. IP evaluated the 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, i.e., the regulated portion of its business. In
December 1997, IP wrote off generation-related regulatory assets and liabilities
of approximately $195 million (net of income taxes). These net assets related to
previously incurred costs expected to be recoverable through future revenues,
including deferred Clinton post-construction costs, unamortized losses on
reacquired debt, previously recoverable income taxes, and other
generation-related regulatory assets. At December 31, 1998, the value of IP's
non-nuclear generation facilities was $2.9 billion.
Illinova's principal accounting policies are:
Regulatory Assets: Regulatory assets represent probable future revenues to IP
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Significant regulatory assets are as follows:
(Millions of dollars) 1998 1997
Unamortized losses on reacquired debt $ 40.1 $ 32.3
Manufactured-gas plant
site cleanup costs $ 44.7 $ 64.8
DOE decontamination and
decommissioning fees -- $ 6.3
Transition period cost recovery $ 783.0 --
Clinton decommissioning cost recovery $ 72.3 --
Utility Plant: The cost of additions to utility plant and replacements for
retired property units is capitalized. Cost includes labor, materials, and an
allocation of general and administrative costs, plus AFUDC as described below.
Maintenance and repairs, including replacement of minor items of property, are
charged to maintenance expense as incurred. When depreciable property units are
retired, the original cost and dismantling charges, less salvage value, are
charged to accumulated depreciation.
After 1998's write-off of Clinton, costs which would have been considered
capital additions at Clinton will be expensed. See "Note 2 - Clinton Impairment
and Quasi-Reorganization."
Allowance for Funds Used During Construction: The FERC Uniform System of
Accounts defines AFUDC as the net costs for the period of construction of
borrowed funds used for construction purposes and a reasonable rate on other
funds when so used. AFUDC is capitalized as a component of construction work in
progress by those business segments applying the provisions of FAS 71. In 1998,
1997, and 1996, the pre-tax rate used for all construction projects was 5.7%,
5.6%, and 5.8%, respectively. Although cash is not currently realized from the
allowance, it is realized through the ratemaking process over the service life
of the related property through increased revenues resulting from a higher rate
base and higher depreciation expense. Non-regulated business segments capitalize
interest under the guidelines in FAS 34, "Capitalization of Interest Cost."
Depreciation: For financial statement purposes, IP depreciates the various
classes of depreciable property over their estimated useful lives by applying
composite rates on a straight-line basis. In each of the years 1996 through
1998, the provision for depreciation was 2.8% of the average depreciable cost
for Clinton. Provisions for depreciation for all other electric plant facilities
were 2.3%, 2.8%, and 2.6% in 1998, 1997, and 1996, respectively. Provisions for
depreciation of gas utility plant, as a percentage of the average depreciable
cost, were 3.5% in 1998, 3.3% in 1997, and 3.9% in 1996.
Depreciation of Clinton has been discontinued in 1999. See "Note 2 -
Clinton Impairment and Quasi-Reorganization."
Amortization of Nuclear Fuel: IP leases nuclear fuel from the Fuel Company under
a capital lease. Amortization of nuclear fuel (including related financing
costs) is determined on a unit of production basis. A provision for spent fuel
disposal costs is charged to fuel expense based on kwh generated. See "Note 5 -
Commitments and Contingencies" for discussion of decommissioning and nuclear
fuel disposal costs. See "Note 2 - Clinton Impairment and Quasi-Reorganization"
for discussion of the effect of the Clinton impairment on nuclear fuel.
Unamortized Debt Discount, Premium, and Expense: Discount, premium, and expense
associated with long-term debt are amortized over the lives of the related
issues. Costs related to refunded debt for business segments applying the
provisions of FAS 71 are amortized over the lives of the related new debt issues
or the remaining life of the old debt if no new debt is issued. Costs related to
refunded debt for the generating segment are expensed when incurred.
Revenue and Energy Cost: To more closely match revenues with expenses, IP
records revenue for services provided but not yet billed. Unbilled revenues
represent the estimated amount customers will be billed for service delivered
from the time meters were last read to the end of the accounting period. Until
August 1998, operating revenues included related taxes that had been billed to
customers. In August 1998, the practice of including revenue-related taxes in
operating revenues was discontinued for the electric portion of the business.
Taxes included in operating revenues were $54 million in 1998, $71 million in
1997, and $68 million in 1996. The cost of gas purchased for resale is recovered
from customers pursuant to the UGAC. Accordingly, allowable gas costs that are
to be passed on to customers in a subsequent accounting period are deferred. The
recovery of costs deferred under this clause is subject to review and approval
by the ICC. Prior to March 1998, the costs of fuel for electric generation and
purchased power costs were deferred and recovered from customers pursuant to the
UFAC. On March 6, 1998, IP initiated an ICC proceeding to eliminate the UFAC in
accordance with P.A. 90-561. A new base fuel cost recoverable under IP's
electric tariffs was established, effective on the date of the filing. UFAC
elimination prevents IP from automatically passing cost increases through to its
customers and exposes IP to the risks and opportunities of cost fluctuations and
operating efficiencies.
Under UFAC, IP was subject to annual ICC audits of its actual allowable fuel
costs. Costs could be disallowed, resulting in negotiations and/or litigation
with the ICC. In 1998, IP agreed to settlements with the ICC which closed the
audits for all previously disputed years. As a result of the settlements, IP
electric customers are receiving refunds totaling $15.1 million in the first
quarter of 1999. These refunds complete the process of eliminating the UFAC at
IP.
Income Taxes: Deferred income taxes result from temporary differences between
book income and taxable income and the tax bases of assets and liabilities on
the balance sheet. The temporary differences relate principally to plant and
depreciation.
Prior to December 31, 1998, investment tax credits used to reduce federal
income taxes had been deferred and were being amortized to income over the
service life of the property that gave rise to the credits. As a result of
Illinova's decision to exit Clinton operations, all previously deferred
investment tax credits associated with nuclear property were recorded as a
credit to income at December 31, 1998. For further discussion of Clinton-related
investment tax credits, see "Note 2 - Clinton Impairment and
Quasi-Reorganization."
Illinova and its subsidiaries file a consolidated federal income tax
return. Income taxes are allocated to the individual companies based on their
respective taxable income or loss. See "Note 8 - Income Taxes" for additional
discussion.
Preferred Dividend Requirements of Subsidiary: Preferred dividend requirements
of IP reflected in the Consolidated Statements of Income are recorded on the
accrual basis.
Earnings Per Share: Reconciliations of the income (loss) and number of shares
for the basic and diluted EPS calculations are as follows:
(Millions of dollars) 1998 1997 1996
Net income (loss) before
extraordinary item
(basic and diluted) $(1,383.0) $ 104.6 $ 190.3
Extraordinary item
(basic and diluted) -- $ (195.0) --
Net income (loss) applicable
to common stock
(basic and diluted) $(1,383.0) $ (90.4) $ 190.3
Weighted average common
shares for basic EPS 71,666,864 73,991,651 75,681,937
Effect of dilutive securities
--stock options 33,807 6,161 32,272
Adjusted weighted average
common shares for
diluted EPS 71,700,671 73,997,812 75,714,209
Consolidated Statements of Cash Flows Cash and cash equivalents include cash on
hand and temporary investments purchased with an initial maturity of three
months or less. Capital lease obligations not affecting cash flows increased by
$5 million, $30 million, and $31 million during 1998, 1997, and 1996,
respectively. Income taxes and interest paid are as follows:
Years ended December 31,
(Millions of dollars) 1998 1997 1996
Income taxes $ 13.4 $ 78.3 $ 58.0
Interest $ 160.8 $ 145.3 $ 167.1
New Accounting Pronouncements: Implementation of a quasi-reorganization requires
the adoption of any accounting standards that had not yet been adopted because
their required implementation date had not occurred. All applicable accounting
standards were adopted as of December 1998. For additional information, see
"Note 2 - Clinton Impairment and Quasi-Reorganization."
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 was adopted early in connection with the requirements for
quasi-reorganization accounting. It did not have a significant impact on
Illinova's 1998 financial statements. For additional information, see "Note 16 -
Financial and Other Derivative Instruments."
The EITF reached a final consensus on Issue 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities" in November
1998, effective for fiscal years beginning after December 15, 1998. EITF Issue
98-10 creates a distinction between energy trading and non-trading activities
and establishes guidance for the accounting treatment of contracts used in
energy trading activities. The EITF concluded that contracts involved in energy
trading activities should be measured at fair value as of the balance sheet date
with gains and losses included in earnings. EITF Issue 98-10 was adopted early
in connection with the requirements for quasi-reorganization accounting. It did
not have a significant impact on Illinova's 1998 financial statements. For
additional information, see "Note 16 - Financial and Other Derivative
Instruments."
The Accounting Standards Executive Committee of the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in March 1998, effective for financial statements for fiscal years
beginning after December 15, 1998. SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use.
Specifically, the nature of the costs incurred, not the timing of their
occurrence, determines whether costs are capitalized or expensed. SOP 98-1 was
adopted early in connection with the requirements for quasi-reorganization
accounting. It did not have a significant impact on Illinova's 1998 financial
statements.
The Accounting Standards Executive Committee of the AICPA issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities" in April 1998, effective for
financial statements for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 was adopted early in connection with the
requirements for quasi-reorganization accounting. It did not have a significant
impact on Illinova's 1998 financial statements.
The FASB issued FAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in February 1998, effective for periods beginning after
December 15, 1997. FAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are not as useful as they were when they were originally
adopted. The statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures. Illinova has complied with the
requirements of FAS 132. See "Note 13 - Pension and Other Benefits Costs."
NOTE 2 -- CLINTON IMPAIRMENT
AND QUASI-REORGANIZATION
In December 1998, Illinova's and IP's Boards of Directors voted to exit Clinton
operations, resulting in an impairment of Clinton-related assets and accrual of
exit-related costs. The impairment and accrual of costs resulted in a $1,327.2
million, net of income taxes, charge against earnings. Concurrent with the
decision to exit Clinton, Illinova's and IP's Boards of Directors also voted to
effect a quasi-reorganization, in which Illinova's consolidated accumulated
deficit in retained earnings of $1,419.5 million was eliminated. A
quasi-reorganization is an accounting procedure whereby a company adjusts its
accounts to obtain a "fresh start." In a quasi-reorganization, a company
restates its assets and liabilities to their fair value, adopts accounting
pronouncements issued but not yet adopted, and eliminates any remaining deficit
in retained earnings by a transfer from other paid-in capital.
Background
IP owns one nuclear generating station, Clinton, a 930-megawatt unit that
represents approximately 20 percent of IP's generating capacity. Significant
Clinton write-offs have weakened earnings and led to a 10-year decline in
Illinova's and IP's retained earnings balances. Clinton has not operated since
September 1996. See "Note 4 - Clinton Power Station" for additional information.
In December 1997, the State of Illinois enacted P.A. 90-561, legislation
designed to introduce competition for electric generation service over a defined
transition period. P.A. 90-561 creates uncertainty regarding IP's ability to
recover electric generating costs and earn a reasonable rate of return on
generating assets. Uncertainties about deregulated generation pricing in
Illinois, coupled with IP's experience with nuclear operations, led management
to several conclusions:
- - Efficiency in nuclear operations can best be attained through scale,
including ownership of multiple plants over which to spread costs and
leverage talent and management systems.
- - Clinton requires disproportionate management attention.
- - Success in a deregulated generation market will require generation cost
efficiency.
Beginning in late 1997 and continuing through 1998, Illinova's and IP's
management prepared detailed evaluations of the expected shareholder value from
various options related to Clinton. These analyses ultimately identified that
either the sale or closure of Clinton would create more shareholder value than
its continued operation. Management determined that this strategic decision
would provide a fundamental change necessary for Illinova and IP to achieve
success in the new environment of deregulation and competition.
In anticipation of a possible decision to exit Clinton, IP submitted a letter
to the SEC describing IP's proposed accounting for an impairment loss under the
"assets to be disposed of" provisions of FAS 121. The letter also requested
concurrence with IP's proposed accounting for a quasi-reorganization, whereby
the fossil generation assets would be written up to their fair value
simultaneous with recording the impairment loss for Clinton. In November 1998,
the SEC confirmed that it would not object to IP's proposed accounting.
In December 1998, Illinova's and IP's Boards of Directors voted to exit
Clinton operations and proceed with the quasi-reorganization. The decision to
implement the quasi-reorganization did not require the approval of shareholders.
IP is pursuing potential opportunities to sell Clinton. However, substantial
uncertainty exists with regard to the ability to convert any tentative agreement
into an executable transaction. As a result, IP has accounted for the Clinton
exit based on the expectation of plant closure as of August 31, 1999. See "Note
4 - Clinton Power Station" for additional information.
Clinton Impairment and Accrual of Exit Costs
Prior to impairment, the book value of Clinton plant, including construction
work in progress, nuclear fuel, and material and supplies, net of accumulated
depreciation, was $2,594.4 million. FAS 121 requires that assets to be disposed
of be stated at the lower of their carrying amount or their fair value. The fair
value of Clinton is estimated to be zero. This estimate is consistent with
possible management decisions to sell or close Clinton. The adjustment of
Clinton plant, nuclear fuel, and materials and supplies to fair value resulted
in impairments of $1,385.6 million, $68.4 million, and $25.9 million,
respectively, for a total impairment loss of $1,479.9 million, net of
accumulated depreciation, income taxes, and ITC. Nuclear fuel and materials and
supplies of $23.2 million remain on IP's books after the impairment, given
management's expectation that such amounts will be consumed in 1999 prior to
Clinton's ultimate disposal. The impairment of Clinton plant, nuclear fuel, and
materials and supplies was recognized as a charge to earnings. Consistent with
Clinton's estimated fair value of zero and the provisions of FAS 121,
depreciation of Clinton has been discontinued. Clinton depreciation expense was
$94.4 million in 1998.
Concurrent with the decision to exit Clinton operations, IP accrued the
estimated cost to decommission the facility. Recognition of this liability, net
of previously accrued amounts, resulted in a $293.5 million, net of income
taxes, charge to earnings. This liability is based on the DECON method of
decommissioning. The DECON method requires the prompt removal of radioactive
materials from the site following the cessation of operations and results in
significant expenditures in the early years of the decommissioning process. IP
expects to complete decommissioning in 2028. The ultimate disposition of
Clinton, as well as the decommissioning method chosen, could have a material
impact on IP's ultimate decommissioning liability. See "Note 5 - Commitments
and Contingencies."
Also concurrent with the decision to exit Clinton operations, IP recorded
$4.3 million, net of income taxes, of contract termination fees for nuclear fuel
contracts and $46.5 million, net of income taxes, of costs to transition the
plant from an operating mode to a decommissioning mode. In addition, IP recorded
employee severance costs of $25.8 million, net of income taxes; pension
curtailment benefits of $(7.2) million, net of income taxes; and other
postretirement benefit costs of $.4 million, net of income taxes. See "Note 13
- - Pension and Other Benefits Costs" for additional information. These costs
were recognized as charges to earnings. Costs to transition the plant from an
operating mode to a decommissioning mode and employee severance costs would be
paid within 11 months of the expected plant closure date of August 31, 1999.
Regulatory Assets
P.A. 90-561 allows utilities to recover potentially non-competitive investment
costs ("stranded costs") from retail customers during the transition period,
which extends until December 31, 2006, with possible extension to December 31,
2008. During this period, IP is allowed to recover stranded costs through frozen
bundled rates and transition charges from customers who select other electric
suppliers.
P.A. 90-561 contains floor and ceiling provisions for utilities' allowed ROE.
During the transition period, a utility may request an increase in its base
rates if its ROE falls below a specified minimum based on a prescribed test.
Utilities are also subject to an overearnings test which requires sharing of
earnings in excess of specified levels with customers. See "Note 5 --
Commitments and Contingencies" for additional information.
In May 1998, the SEC staff issued interpretive guidance on the appropriate
accounting treatment during regulatory transition periods for asset impairments
and the related regulated cash flows designed to recover such impairments. The
staff's guidance established that an impaired portion of plant assets identified
in a state's legislation or rate order for recovery by means of a regulated cash
flow should be treated as a regulatory asset in the separable portion of the
enterprise from which the regulated cash flows are derived. Based on this
guidance and on provisions of P.A. 90-561, IP recorded a regulatory asset of
$472.4 million, net of income taxes, for the portion of its stranded costs
deemed probable of recovery during the transition period. The regulatory asset
was recognized as a credit to earnings, offsetting a portion of the Clinton
impairment. Under P.A. 90-561, amortization of the regulatory asset is included
in the overearnings test but is not included in the calculation for the floor
test.
IP also recorded a regulatory asset of $43.6 million, net of income taxes,
reflecting probable future collections from customers of decommissioning costs.
This regulatory asset was also recognized as a credit to earnings, offsetting a
portion of the Clinton impairment. This regulatory asset is also based on P.A.
90-561, which allows for continued recovery of decommissioning costs over the
originally anticipated 27-year remaining life of Clinton. See "Note 5 -
Commitments and Contingencies" for additional information.
Revaluation of Assets and Liabilities
In conjunction with effecting its quasi-reorganization, IP reviewed its assets
and liabilities to determine whether the book value of such items needed to be
adjusted to reflect their fair value. IP determined that its fossil generation
assets were not stated at fair value. With the help of a third-party consultant,
management conducted an economic assessment of its fossil generation assets to
determine their fair value. The assessment was based on projections of on-going
operating costs, future prices for fossil fuels, and market prices of
electricity in IP's service area.
Management concluded that IP's fossil generation assets have a fair value of
$2,867.0 million. This fair value was determined using the after-tax cash flows
of the fossil assets. Prior to the quasi-reorganization, the fossil generation
assets' book value, net of accumulated depreciation, was $631.7 million. The
adjustment to fair value resulted in a write-up of $1,348.6 million, net of
income taxes, which was recognized as an increase in retained earnings. The
estimated amortization of the adjustment to fair value is $71 million in 1999.
Illinova determined that the book value of its long-term debt required an
adjustment to fair value of $3.7 million, net of income taxes. IP determined
that the book value of its mandatorily redeemable preferred stock and long-term
debt attributable to the generation portion of the business required an
adjustment to fair value of $16.4 million, net of income taxes. These
adjustments to fair value were recognized as decreases in retained earnings. The
book value of current assets and liabilities equals fair value and therefore
required no adjustments. IP's electric transmission and distribution assets and
its gas distribution assets are still subject to cost-based rate regulation and
therefore required no adjustment.
In conjunction with effecting Illinova's quasi-reorganization, IGC and IEP
reviewed their assets and liabilities and adjusted the book value of certain
assets to fair value. These adjustments resulted in a net $5.7 million decrease
in retained earnings.
Early Adoption of Accounting Pronouncements
As part of the quasi-reorganization, Illinova and its subsidiaries were required
to adopt all existing accounting pronouncements. The following accounting
pronouncements, which have future mandatory adoption dates, were adopted in
connection with the quasi-reorganization:
- - FAS 133, "Accounting for Derivatives and Hedging Activities"
- - EITF 98-10, "Accounting for Energy Trading and Risk Management Activities"
- - SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use"
- - SOP 98-5, "Reporting on the Costs of Start-up Activities"
The effect of adopting the accounting pronouncements was $9.5 million, net
of income taxes, which was recognized as a direct charge to retained earnings.
See "Note 1 - Summary of Significant Accounting Policies" and "Note 16 -
Financial and Other Derivative Instruments."
Remaining Deficit in Retained Earnings
After the revaluation of other assets and liabilities to their fair value and
the early adoption of accounting pronouncements, the accumulated deficit in
retained earnings was $106.2 million, which was eliminated by a transfer from
other paid-in capital.
A summary of consolidated retained earnings and the effects of the Clinton
impairment and quasi-reorganization on the retained earnings balance follows:
(Millions of dollars)
Retained earnings at December 31, 1998,
prior to Clinton impairment and
quasi-reorganization $ (92.3)
Clinton impairment (charged)/credited to earnings:
Clinton plant, nuclear fuel, and materials
and supplies* (1,479.9)
Decommissioning costs, net of regulatory asset* (249.9)
Other exit costs* (69.8)
---------
(1,799.6)
Transition period cost recovery* 472.4
---------
Total Clinton impairment (1,327.2)
---------
Accumulated deficit in retained earnings (1,419.5)
---------
Quasi-reorganization (charged)/credited to retained earnings:
Generation assets fair value adjustment* 1,348.6
Mandatorily redeemable preferred stock and
long-term debt fair value adjustment* (20.1)
Fair value adjustment of IGC and IEP investments (5.7)
Early adoption of accounting pronouncements* (9.5)
---------
Total quasi-reorganization 1,313.3
---------
Retained earnings deficit at December 31, 1998 (106.2)
Transfer from other paid-in capital 106.2
---------
Retained earnings balance at December 31, 1998,
after quasi-reorganization $ 0.0
=========
*Amounts are net of income taxes.
See "Note 1 - Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
NOTE 3 -- ILLINOVA SUBSIDIARIES
Illinova, a holding company, is the parent of subsidiaries IP, IGC, IEP, IIC,
and IBE. IP has preferred shares outstanding, but its common stock is wholly
owned by Illinova, as is the common stock of the other subsidiaries. IP is
engaged in the generation, transmission, distribution, and sale of electric
energy and the distribution, transportation, and sale of natural gas in the
state of Illinois.
IGC competes in the independent power market and invests in energy supply
projects and power-producing facilities throughout the world, some operating and
some under construction. The following table summarizes its investments in
power-producing facilities:
Year of Fuel Total In-Service
Location Investment Type MW Date
Domestic & England
Teesside, England 1993 Natural Gas 1875 1993
Ferndale, Washington 1994 Natural Gas 245 1994
Paris, Texas 1994 Natural Gas 230 1989
Cleburne, Texas 1994 Natural Gas 258 1996
Long Beach, California 1995 Natural Gas 70 1989
Pepperell, Massachusetts 1995 Natural Gas 38 1995
Joppa, Illinois 1996 Coal 1015 1955
Grimes County, Texas 1998 Natural Gas 830 2000
Latin America
Puerto Cortez, Honduras 1994 Diesel 80 1994/95
Old Harbour, Jamaica 1995 Diesel 74 1995
Aguaytia, Peru 1995 Natural Gas 155 1998
Barranquilla, Colombia 1996 Natural Gas 400 1995/96/98
Teleran, Costa Rica 1998 Wind 20 1995
Asia
Zhejiang Province, China 1995 Coal 24 1996
Balochistan, Pakistan 1996 Natural Gas 586 1999
Hunan Province, China 1997 Coal 24 1999
IGC's ownership interest totals 600 MW for the domestic and English plants,
290 MW for the Latin American plants, and 130 MW for the Asian plants. As of
December 31, 1998, IGC has approximately $210 million invested in the 1,020 MW
it owns. IGC's investments are primarily accounted for under the equity method.
IGC has owned 50 percent of NAES since 1994, and in October 1998, IGC
purchased the remaining 50 percent. NAES supplies a broad range of operations,
maintenance, and support services to the worldwide independent power generation
industry.
At December 31, 1998, Illinova's net investment in IGC was $208 million.
IEP focuses on the development and sale of energy and energy-related services
primarily in the Midwestern and Western regions of North America. In the Western
United States, IEP is one of the largest power marketers, purchasing and selling
electricity in the wholesale market. In the Midwest, IEP has developed a retail
natural gas business, serving industrial and commercial customers.
IEP is aggressively growing its level of commercial and industrial (C&I)
sales activity. The C&I business commenced in 1996, with sales increasing 300%
in 1997 and increasing a further 500% in 1998.
IEP develops and sells energy-related services designed to assist target
customers in assessing current energy consumption patterns and to enable
customers to reduce energy usage through increased efficiency by changing
practices and upgrading equipment and facilities. IEP has also developed a
series of energy-related information collection and analysis tools, collectively
known as EQ services. These services include software that customers may utilize
to conduct their own energy analysis as well as a service bureau that will
perform these services along with bill consolidation for the customer. IEP is
also involved in the project management and engineered solutions business to
provide delivery capability for energy-related equipment and facilities
improvements.
IEP owns 50 percent of Tenaska Marketing Ventures, in partnership with
Tenaska Marketing, Inc. Tenaska Marketing Ventures focuses on natural gas
marketing in the Midwestern United States. IEP accounts for this investment
under the equity method. In October 1998, IEP acquired a 51 percent ownership
interest in EMC Gas Transmission Company, a retail gas marketer in Michigan. IEP
consolidates the accounts of EMC Gas Transmission Company.
During the period 1996 through 1998, IEP incurred total after-tax losses of
$22.5 million associated with the wholesale power marketing business, including
accrued after-tax losses of $7.7 million for contracts not settled. These losses
were primarily related to a single three-year transaction entered into prior to
1998, which is now fully hedged. See "Note 5 - Commitments and Contingencies"
for information about IEP contingencies.
IIC is a captive insurance company whose primary business is to insure the
risks of the subsidiaries of Illinova and risks related to or associated with
their business enterprises. In 1998, IIC insured certain risks of IP for
premiums of $5.3 million.
IBE was incorporated in 1998 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.
NOTE 4 -- CLINTON POWER STATION
Clinton Operations
Clinton was placed in service in 1987 and represents approximately 20% of IP's
installed generation capacity. Clinton has not operated since September 1996,
when a leak in a recirculation pump seal caused IP operations personnel to shut
down the plant.
In January 1997, the NRC named Clinton among plants having a trend of
declining performance and, in January 1998, placed Clinton on its "Watch List"
of nuclear plants that require additional regulatory oversight.
In late 1997, an independent team conducted an ISA to thoroughly assess
Clinton's performance, and an NRC team performed an evaluation to validate the
ISA results. Both teams concluded that the underlying reasons for Clinton's
performance problems were ineffective leadership throughout the organization in
providing standards of excellence, complacency throughout the organization,
barrier weaknesses, and weaknesses in teamwork.
In January 1998, IP and PECO announced an agreement under which PECO provides
management services for Clinton, with IP maintaining the operating license and
ultimate oversight for the plant. PECO employees have assumed senior positions
at Clinton but the plant remains staffed primarily by IP employees. IP selected
PECO because it believed that bringing in PECO's experienced management team
would be the fastest and most efficient way to return Clinton to service and to
a superior level of operation.
In February 1998, IP filed with the NRC Clinton's Summary Plan for
Excellence, a comprehensive set of strategies and associated actions necessary
to improve performance, permit safe restart of the plant, and achieve excellence
in operations. IP is implementing the actions required prior to plant restart.
The NRC is conducting a formal review process in parallel with IP's recovery and
restart program.
In November 1998, a resource-loaded integrated schedule was developed which
identified work to be completed prior to restart. This schedule indicated that
restart of the plant would occur in the spring of 1999. As of early March, work
on the schedule has generally occurred as planned with restart still expected in
the spring of 1999.
Public meetings with the NRC to review remaining restart issues are
occuring approximately every two or three weeks. Major on-site NRC inspections
to evaluate key plant areas were initiated in February and are still in
progress.
Transfer of Soyland's Ownership Share to IP
For discussion of the transfer of Soyland's ownership share to IP, see "Note 7
- - Facilities Agreements."
Clinton Cost and Risks
IP's Clinton-related costs represented 41% of Illinova's total 1998 other
operating and maintenance expenses. Clinton's equivalent availability was 0% for
1998 and 1997 and 66% for 1996.
Currently, commercial reprocessing of spent nuclear fuel is not allowed in
the United States. The NWPA was enacted to establish a government policy on
disposal of spent nuclear fuel and/or high-level radioactive waste. Although the
DOE has failed to comply with its obligation under the NWPA to provide spent
nuclear fuel retrieval and storage by 1998, IP has on-site underwater storage
capacity that will accommodate its spent fuel storage needs for approximately 10
years. IP is currently an equity partner with seven other utilities in an effort
to develop a private temporary repository. 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. Safe, dry, on-site storage is technologically feasible
but is subject to licensing and local permitting requirements, for which there
may be effective opposition. See "Note 5 - Commitments and Contingencies" for
additional information.
Ownership of a nuclear generating unit exposes IP to significant risks,
including increased and changing regulatory, safety and environmental
requirements, and the uncertain future cost of closing and dismantling the unit.
Exiting the Nuclear Business
In December 1998, Illinova's and IP's Boards of Directors voted to exit the
nuclear business by selling Clinton or closing it permanently. IP has entered
into discussions with parties interested in purchasing Clinton. Principal
concerns of interested parties are plant restart, funding the decommissioning
liability, terms of any purchase agreement for power generated by Clinton
including the length of the agreement and price of the electricity sold, market
price projections for electricity in the region, property tax obligations of the
purchaser, and income tax issues. These concerns create substantial uncertainty
with regard to the ability to convert any tentative agreement into an executable
transaction. In light of these significant uncertainties with respect to IP's
ability to sell Clinton, IP is preparing to permanently decommission the
facility. See "Note 5 - Commitments and Contingencies" and "Note 2 - Clinton
Impairment and Quasi-Reorganization" for additional information.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Commitments
Illinova estimates that it will spend approximately $370 million for
construction expenditures for IP in 1999. IP construction expenditures for the
period 1999 through 2003 are expected to total about $1.2 billion. With the
planned sale or shutdown of Clinton, no nuclear construction is included in the
above estimates. Nuclear construction will be expensed. In addition, in March
1999, IP will be required to deposit $62 million in cash with the Fuel Company
Trustee for noteholders and take title to the partially depleted nuclear fuel in
the reactor at Clinton. Additional expenditures may be required during this
period to accommodate transitional expenditures related to a competitive
environment, environmental compliance costs and system upgrades, which cannot be
determined at this time.
Illinova's capital expenditures for 1999 through 2003, in addition to IP
construction expenditures, are expected to include $592 million for mandatory
debt retirement and approximately $600 million target level for investment
opportunities by the non-regulated subsidiaries. In addition, IPSPT has
long-term debt maturities of $86.4 million in each of the above years.
In addition, IP has substantial commitments for the purchase of coal and
coal transportation under long-term contracts. Estimated coal contract
commitments for 1999 through 2003 are $664 million (excluding price escalation
provisions). Total coal purchases were $210 million in 1998, $181 million in
1997, and $184 million in 1996. IP has contracts with various natural gas
suppliers and interstate pipelines to provide natural gas supply,
transportation, and leased storage. Estimated committed natural gas,
transportation, and leased storage costs for 1999 through 2003 total $81
million. Total natural gas purchased was $157 million in 1998, $185 million in
1997, and $207 million in 1996. IP anticipates that all gas-related costs will
be recoverable under IP's UGAC. See the subcaption "Fuel Cost Recovery" below
for discussion of the UFAC. IP has accrued contract cancellation fees of $7.1
million to cover minimum purchase commitments under uranium procurement,
conversion, and enrichment contracts. For more information, see "Note 2 -
Clinton Impairment and Quasi-Reorganization." IP is committed to purchase
approximately $9 million of emission allowances in 1999 and has contingent
commitments for up to $5.5 million in additional 1999 emission allowances
purchases, depending on whether certain options are exercised.
Fuel Cost Recovery: On March 6, 1998, IP initiated an ICC proceeding for
elimination of the UFAC. This established a new base fuel cost recoverable under
IP's electric tariffs which includes a component for recovery of fuel costs, but
not a direct pass-through of such costs. Elimination of the UFAC exposes IP to
the risks and opportunities of market price volatility and operating
efficiencies. By eliminating the UFAC, IP eliminated exposure for potential
disallowed fuel and purchased power costs for the periods after December 31,
1996. Whether electric energy production costs will continue to be recovered
depends on a number of factors, including the number of customers served, demand
for electric service, and changes in fuel cost components. Furthermore, IP's
base electric rates to residential customers were reduced beginning in August
1998 and certain customers will be free to choose their electric generation
suppliers beginning in October 1999. These variables will be influenced, in
turn, by market conditions, availability of generating capacity, future
regulatory proceedings, and environmental protection costs, among other things.
IP's electric customers are receiving refunds totaling $15.1 million during the
first quarter of 1999 related to fuel cost disallowances as the final phase of
the elimination of the UFAC. These refunds close the ICC review process related
to the UFAC cost pass-through for the years 1989, 1994, 1995, and 1996.
Utility Earnings Cap: P.A. 90-561 also contains floor and ceiling provisions
regarding ROE. During the transition period ending in 2006 (or 2008 at the
option of the utility), a utility may request an increase in its base rates if
the two-year average of its earned ROE is below the two-year average for the
same two years of the monthly average yields of 30-year U.S. Treasury bonds.
Conversely, if during the transition period the two-year average of its earned
ROE exceeds the two-year average for the same two years of the monthly average
yields of the 30-year U.S. Treasury bonds for annual periods ending September
30, plus 5.5% in 1999 or 6.5% in 2000 through 2004, the utility must refund to
customers 50 percent of the "overearnings." Regulatory asset amortization is
included in the calculation of ROE for the ceiling, or overearnings, test but is
not included in the calculation for the floor test.
Insurance: IP maintains insurance for certain losses involving the operation of
Clinton. For physical damage to the plant, IP purchases $1.6 billion of
insurance coverage from an industry-owned mutual insurance company. In the event
of a major nuclear accident with an estimated cost of reactor stabilization and
site decontamination exceeding $100 million, NRC regulations require that
insurance proceeds be dedicated and used first to return the reactor to and
maintain it in a safe and stable condition and second to decontaminate the
reactor station site. Coverage is provided for a shortfall in the
Decommissioning Trust Fund if premature decommissioning of the reactor is
required due to an accident. If insurance limits are not exhausted by the above
coverages, the remaining coverage is applied to property damage and a portion of
the value of the undamaged property. If a major nuclear accident occurred at
Clinton, claims for property damage and other costs could exceed the limits of
current or available insurance coverage.
IP purchases business interruption coverage through the industry-owned mutual
insurance company. After a 17-week waiting period, the insurance provides
coverage if Clinton is out of service due to an accidental property damage loss.
Thereafter, the insurance provides weekly indemnity for up to 162 weeks. Total
coverage from this business interruption insurance, if Clinton were out of
service for the entire 162 weeks, would be $223.8 million. Multiple major losses
covered under the current property damage and business interruption insurance
coverages involving Clinton or other stations insured by the industry-owned
mutual insurance company could result in retrospective premium assessments up to
$11.6 million. IP is not collecting any business interruption insurance payments
for Clinton.
All U.S. nuclear reactor licensees are subject to the Price-Anderson Act
which currently limits public liability for a nuclear incident to $9.7 billion.
Private insurance covers the first $200 million. Retrospective premium
assessments against each licensed nuclear reactor in the United States provide
excess coverage. Currently, the liability to these nuclear reactor licensees for
such an assessment would be up to $88.1 million per incident, not including any
premium taxes assessed by the State of Illinois which may be applicable, payable
in annual installments of not more than $10 million.
As a licensee of a commercial nuclear power plant in the United States, IP is
required to maintain financial protection to cover claims of certain nuclear
workers. Prior to January 1998, IP met this requirement with insurance purchased
under a Master Worker Policy. On January 1, 1998, a new insurance policy was
issued that applies to claims first reported on or after January 1, 1998. This
policy has a limit of $200 million (reinstated annually if certain conditions
are met) for radiation injury claims against IP or other licensees who are
insured by this policy. If these claims exceed the $200 million limit of primary
coverage, the SFP provisions of the Price-Anderson Act would apply. Since
reserves for outstanding claims under former policies would be insufficient and
certain claims may still be made under former policies due to a discovery
period, IP could be assessed under these former policies along with the other
policyholders. IP's share could be up to $3.1 million in any one year.
IP may be subject to other risks that are not insurable, or its insurance
coverage to offset the various risks may be insufficient to meet potential
liabilities and losses. There is no assurance that IP will be able to maintain
insurance coverage at its present level. Under those circumstances, such losses
or liabilities could have a material adverse effect on Illinova's and IP's
financial positions.
If Clinton is sold, the purchaser will assume the decision-making
responsibilities for securing required insurance coverages.
If Clinton is decommissioned, IP will work jointly with the regulators to
modify its nuclear insurance program to reflect decommissioned plant status.
Nuclear property insurance will initially be reduced to the Property Rule's
minimum coverage limits of $1.06 billion. IP will proceed with filing a waiver
of the Property Rule's minimum insurance requirements which will reflect the
maximum probable decontamination event applicable to the decommissioned plant.
Regulations require any licensed plant to continue its purchase of full nuclear
liability limits and participation in the SFP program for a specified period
following shutdown or until decay heat removal capacity is reduced to acceptable
levels. IP will consider requesting a waiver to suspend participation in the SFP
program and reduce the level of liability insurance limits. Since business
interruption coverage is optional, IP will review the value of continuing this
coverage and adjust accordingly.
Decommissioning and Nuclear Fuel Disposal: IP is responsible for the costs of
decommissioning Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent with IP's assumption of all of Soyland's ownership obligations of
Clinton, Soyland's nuclear decommissioning trust assets of approximately $6
million were transferred to IP.
P.A. 90-561 provides for the continued recovery of decommissioning costs
through rates charged to IP's delivery service customers. An ICC approved
site-specific decommissioning study projected a cost of $538 million in 1996
dollars for decommissioning based on the assumption of the DECON method (prompt
removal and dismantlement of Clinton), which results in material expenditures in
the early years of decommissioning Clinton. The projected cost estimate in 2026
dollars, assuming a 2 percent annual inflation factor, is $988 million. This
estimate continues as the basis for assessing decommissioning costs to IP's
customers.
External decommissioning trusts, as prescribed by Illinois law and authorized
by the ICC, accumulate funds for the future decommissioning of Clinton based on
the expected service life of the plant. Decommissioning funds are recorded as
assets on the balance sheet. Beginning in 1999, IP will recognize earnings and
expenses of the trust on the income statement as they occur. The trust summary
is as follows:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Market value,
beginning of period $ 62.5 $ 41.4 $ 32.7
Company contributions 6.5 5.3 3.9
Appreciation in market value 15.1 15.8 4.8
Market value, end of period $ 84.1 $ 62.5 $ 41.4
In December 1998, Illinova's and IP's Boards of Directors voted to exit
Clinton operations which resulted in an impairment of Clinton-related assets and
accrual of exit-related costs. As a result of the decision to exit Clinton
operations, IP accrued the estimated cost to decommission the facility. IP
recognized the present value of the decommissioning liability for Clinton not
previously accrued, in the amount of $293.5 million, net of income taxes. IP
also recorded a regulatory asset for the present value of the estimated future
collections from customers for decommissioning costs in the amount of $43.6
million, net of taxes. A discount rate of 5.10%, the 30-year Treasury bond rate
at December 31, 1998, was used to calculate the regulatory asset and
decommissioning liability. The ultimate disposition of Clinton, as well as the
decommissioning method chosen, could have a material impact on the total
decommissioning liability.
If Clinton is closed, the estimated decommissioning expenditures under the
DECON method for the next five years are $376.2 million. IP currently has $84
million in decommissioning trust funds and would expect this amount to be used,
as well as $37 million in additional collections from customers, including
interest on the trust, during this time period. In addition, IP will need to
fund approximately $255 million from other sources. The estimated
decommissioning expenditures to be incurred as follows:
(Millions of dollars)
1999 $ 21.0
2000 63.9
2001 79.3
2002 105.0
2003 107.0
Thereafter 405.8
Total estimated liability 782.0
Discount at 5.10% 214.6
Total discounted liability $ 567.4
Under the NWPA, the DOE is responsible for the permanent storage and
disposal of spent nuclear fuel. The DOE currently charges one mill ($0.001) per
net kwh (one dollar per MWH) generated and sold for future disposal of spent
fuel. IP is recovering these charges through rates. In 1996, at the request of
nuclear-owning utilities and state regulatory agencies, the District of Columbia
Circuit Court of Appeals issued an order confirming DOE's unconditional
obligation to take responsibility for spent nuclear fuel commencing in 1998. The
DOE argued that it had no such obligation because of its inability to site and
license a permanent repository. Notwithstanding this decision, which the DOE did
not appeal, the DOE has indicated to all nuclear utilities that it will
experience delay in performance. The impact of any such delay on IP will depend
on many factors, including the duration of such delay and the cost and
feasibility of interim, on-site storage. Nuclear plant owners and others are
pursuing litigation against DOE at the D.C. Circuit Court of Appeals, the
Federal Court of Claims, federal district court, and in administrative
proceedings. These lawsuits are focused on establishing DOE liability for
damages caused by its failure to perform, the scope of those damages, and other
remedies. IP is participating in such litigation before the D.C. Circuit Court
of Appeals. To date, the unconditional nature of DOE's obligation has been
upheld but no court has yet quantified damages or ordered specific performance.
The outcome of these lawsuits is uncertain. See "Note 4 - Clinton Power Station"
for additional information.
Power Supply and Reliability: Electricity was in short supply during the 1998
summer cooling season because of an unusually high number of plant outages in
the Midwest region. IP bought generation and transmission capacity to prevent
firm load curtailment and took additional steps to avoid power outages,
including upgrading transmission lines and equipment, readying emergency
procedures, and returning to service five units that had been in cold shutdown.
Expenses incurred as a result of the shortage have had a material adverse impact
on Illinova and IP.
The electric energy market experienced unprecedented prices for power
purchases during the last week of June 1998. IP's power purchases for 1998 were
$517 million higher than 1997 due to summer price spikes resulting in a $274
million increase in power purchased, additional purchases of $215 million to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts as part of the wholesale
trading business. Income from interchange sales was $382 million higher than in
1997 due to increased sales volumes and higher prices. Although IP's margin on
volumes between 1998 and 1997 resulted in IP being a net seller, higher prices
resulted in a $135 million net purchase margin. For more information, see
subcaption below titled "IP Wholesale Energy Markets" and "Note 16 - Financial
and Other Derivative Instruments."
IP expects to have in excess of 400 MW of additional generation on line for
the summer of 1999. This includes approximately 235 MW from five oil-fired units
which were brought up from cold shutdown during the summer of 1998 and 176 MW
from four natural gas turbines that IP plans to install before the summer of
1999. Total cost for the two projects is estimated at $87 million. IP also plans
to refurbish nine gas turbines already in service at a cost of $13 million. At
an October 1998 public ICC proceeding on reliability, 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 assuming Clinton will not be
operating. However, IP expects to have sufficient generating capacity to serve
firm load during the periods of peak summer demand using demand-side and
supply-side initiatives taken in response to the 1998 regional supply crisis. If
generation is lost or demand is at unprecedented levels, firm load could be
curtailed. In addition, the restructuring of the Soyland PCA agreement is also
expected to free up an additional 287 MW of capacity. For more information, see
"Note 7 - Facilities Agreements" concerning the Soyland PCA.
IP Wholesale Energy Markets: IP buys and sells electricity in markets throughout
the United States. In the normal course of business, IP incurs price exposure on
the electricity bought or sold. Where the markets allow, IP will hedge such
exposure through the use of electricity futures, forward, and option contracts
with qualified counterparties. In 1998, market losses of approximately $33
million were recorded in connection with these agreements based on forward
market prices. Of this amount, approximately $28 million was charged to
purchased power. The remaining $5 million resulted from the early adoption of
FAS 133 and was accounted for as part of the quasi-reorganization. The ultimate
financial impact of these contracts will depend primarily on wholesale prices
and IP's system availability. If system availability is limited and market
conditions cause wholesale prices to rise to the levels seen in 1998, IP could
incur significant costs to meet its wholesale contract obligations. For more
information, see "Note 1 - Summary of Significant Accounting Policies,"
subcaption New Accounting Pronouncements and "Note 2 - Clinton Impairment and
Quasi-Reorganization."
Environmental Matters
Clean Air Act: IP continues to purchase emission allowances to comply with the
SO2 emission reduction requirements of Phase I (1995-1999) of the Acid Rain
Program (Title 4) of the 1990 Clean Air Act Amendments (CAAA). An emission
allowance is the authorization by the U.S. EPA to emit one ton of SO2. The ICC
approved IP's Phase I Acid Rain Compliance Plan in September 1993, and IP is
continuing to implement that plan. IP has acquired sufficient emission
allowances to cover more than 70 percent of its anticipated needs for 1999 and
expects to purchase the remainder on the spot market. Baldwin and Hennepin are
switching from high-sulfur Illinois coal to low-sulfur Wyoming coal to attain
compliance with Phase II (2000 and beyond) of the Acid Rain SO2 provisions of
the CAAA. The cost to convert Baldwin and Hennepin is estimated to be $125
million.
To comply with the Phase I NOx emission reduction requirements of the acid
rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin
Unit 3 and Vermilion Unit 2. On November 29, 1994, the Phase I NOx rules were
remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA reinstated, with some
modifications, the Phase I NOx rules effective January 1, 1996. IP was and
continues to be positioned to comply with these revised rules without additional
modifications to any of its generating plants.
The U.S. EPA issued revised Phase II NOx emission limits on December 10,
1996. IP has prepared a Phase II Compliance Plan. Capital expenditures for IP's
NOx Compliance Plan are expected to total $118 million when the project is
complete in early 2000. Approximately $58 million was spent through the end of
1998. The majority of this investment is for installation of SCR equipment on
Baldwin Units 1 and 2. This work is being done in conjunction with replacement
of the air heaters on these units.
In addition, regulators are continuing to finalize rulemaking to comply
with current federal air quality standards for ozone. On October 27, 1998, the
U.S. EPA finalized air pollution rules that will require substantial reductions
of NOx emissions in Illinois and 21 other states. This rule will require the
installation of NOx controls by May 2003, with each Illinois utility's exact
reduction requirement to be specified in 1999. Preliminary estimates of the
capital expenditures needed in 2000 through 2003 to comply with these new NOx
limitations are $90 million to $140 million. The legality of this proposal,
along with its technical feasibility, is being challenged by a number of states,
utility groups, and utilities, including IP.
Global Warming: In December 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
percent below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. Before it can take effect, this Protocol must be ratified
by the U.S. Senate. However, U.S. Senate Resolution 98, which passed 95-0 in
July 1997, says the Senate would not ratify an agreement that fails to involve
all countries or would damage the economy of the United States. Since the
Protocol does not contain key elements that Senate Resolution 98 specifies are
necessary, ratification will be a major political issue. It is anticipated that
a ratification vote will be delayed until the current administration decides
whether it can meet the provisions of Senate Resolution 98.
IP will face major changes in the way it generates electricity if the Kyoto
Protocol is ratified or if the Protocol's reduction goals are incorporated into
other environmental regulations. IP would have to repower some generating units
and change from coal to natural gas in other units to reduce greenhouse gas
emissions. IP estimates that compliance with these proposed regulations may
require significant capital outlays and annual operating expenses which could
have a material adverse impact on Illinova and IP.
Manufactured-Gas Plant: IP's estimated liability for MGP site remediation is $61
million. This amount represents IP's current estimate of the costs it will incur
to remediate the 24 MGP sites for which it is responsible. Because of the
unknown and unique characteristics at each site, IP cannot currently determine
its ultimate liability for remediation of the sites.
In October 1995, to offset some of the burden imposed on its customers, IP
initiated litigation against a number of its insurance carriers. As of June
1998, settlements or settlements in principle have been reached with all 30 of
the carriers. Settlement proceeds recovered from the carriers will offset a
significant portion of the MGP remediation costs and will be credited to
customers through the tariff rider mechanism which the ICC has previously
approved. Cleanup costs in excess of insurance proceeds will be fully recovered
from IP's transmission and distribution customers.
Electric and Magnetic Fields: The possibility that exposure to EMF emanating
from power lines, household appliances, and other electric sources may result in
adverse health effects continues to be the subject of litigation and
governmental, medical, and media attention. Litigants have also claimed that EMF
concerns justify recovery from utilities for the loss in value of real property
adjacent to power lines, substations, and other such sources of EMF. The number
of EMF cases has declined as national and international science commission
studies have failed to confirm EMF health risks. Additional research is being
conducted. On July 3, 1997, President Clinton signed legislation extending the
National EMF Research and Public Information Dissemination Program through 1998.
Research results, policy decisions, and public information developments will
continue into 1999. It is too soon to tell what impact, if any, these actions
may have on IP's and Illinova's consolidated financial positions.
Other
Legal Proceedings: IP is involved in legal or administrative proceedings before
various courts and agencies with respect to matters occurring in the ordinary
course of business, some of which involve substantial amounts of money.
Management believes that the final disposition of these proceedings will not
have a material adverse effect on the consolidated financial position or the
results of operations.
Accounts Receivable: IP sells electric energy and natural gas to residential,
commercial, and industrial customers throughout Illinois. At December 31, 1998,
59%, 24%, and 17% of "Accounts receivable -- Service" were from residential,
commercial, and industrial customers, respectively. IP maintains reserves for
potential credit losses and such losses have been within management's
expectations. The reserve for doubtful accounts remained at $5.5 million in
1998.
Contingencies
Soyland: For more information, see "Note 7 - Facilities Agreements" for
discussion of Soyland contingencies.
Nuclear Fuel Lease: For more information, see "Note 9 - Capital Leases" for
discussion of contingencies related to IP's nuclear fuel lease.
Internal Revenue Service Audit: The Internal Revenue Service is currently
auditing IP's federal income tax returns for the years 1994 through 1997. At
this time, the outcome of the audit cannot be determined. Management does not
expect that the results will have a material adverse effect on IP's and
Illinova's consolidated financial positions or results of operations. For a
detailed discussion of income taxes, see "Note 8 - Income Taxes."
Illinova Energy Partners, Inc.: IEP buys and sells electricity in the Western
United States. In the normal course of business, IEP incurs price exposure on
the electricity bought or sold. Where the market allows, IEP hedges such
exposure through the use of electricity futures contracts or through swaps with
qualified counterparties. The aggregate notional value, fair value, and
unrealized gain and losses related to futures contracts outstanding at December
31, 1998, are immaterial. In addition, IEP considers the risk of counterparty
non-performance to be remote.
At December 31, 1998, IEP had electricity sales and purchase contracts which
exposed the company to approximately $87,000 of financial risk as a result of
price volatility. For the year ended December 31, 1998, IEP has accrued losses
of $12.7 million (before taxes).
Illinova provides credit support for IEP, EMC Gas Transmission Company, and
Tenaska Marketing Ventures up to an aggregate limit of $80 million. The level of
credit support utilized at December 31, 1998, was $64.8 million. See "Note 3 -
Illinova Subsidiaries" for additional information about IEP.
NOTE 6 -- LINES OF CREDIT AND SHORT-TERM LOANS
IP has total lines of credit represented by bank commitments amounting to $354
million, all of which were unused at December 31, 1998. These lines of credit
are renewable in May 1999, November 1999, and May 2002. These bank commitments
support the amount of commercial paper outstanding at any time, limited only by
the amount of unused bank commitments, and are available to support IP
activities. At December 31, 1998, the level of IP short-term debt was
significantly lower than historical levels due to using the December
securitization proceeds to redeem commercial paper and short-term borrowings.
This level is expected to increase as funds are expended to redeem long-term
debt and equity. Illinova's total lines of credit represented by bank
commitments amount to $110 million, of which all was unused at December 31,
1998. Illinova's letters of credit total $32.9 million at December 31, 1998.
IP pays facility fees up to .10% per annum on $350 million of the total lines
of credit, regardless of usage. The interest rate on borrowings under these
agreements is, at IP's option, based upon the lending banks' reference rate,
their Certificate of Deposit rate, the borrowing rate of key banks in the London
interbank market, or competitive bid.
IP has letters of credit capacity totaling $201 million, all of which were
undrawn at December 31, 1998. IP pays fees up to .95% per annum on the undrawn
amount of credit. On February 12, 1999, IP acquired an additional letter of
credit for $30 million with a .425% per annum fee on the undrawn amount of
credit.
In addition, IP and the Fuel Company each have a short-term financing option
to obtain funds not to exceed $30 million. IP and the Fuel Company pay no fees
for this uncommitted facility and funding is subject to availability upon
request.
Illinova had no borrowings against its lines of credit at December 31, 1998.
For the years 1998, 1997, and 1996, Illinova (including IP) had short-term
borrowings consisting of bank loans, commercial paper, extendible floating rate
notes, and other short-term debt outstanding at various times as follows:
(Millions of dollars, except rates) 1998 1997 1996
Short-term borrowings
at December 31, $ 147.6 $ 415.3 $ 387.0
Weighted average interest
rate at December 31, 6.0% 6.1% 5.8%
Maximum amount outstanding
at any month end $ 370.9 $ 415.3 $ 387.0
Average daily borrowings
outstanding during
the year $ 321.0 $ 298.5 $ 261.9
Weighted average interest
rate during the year 5.7% 5.8% 5.7%
NOTE 7 -- FACILITIES AGREEMENTS
On March 13, 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership obligations in
connection with the transfer from Soyland to IP of all of Soyland's interest in
Clinton pursuant to an agreement reached in 1996. Soyland's title to the plant
and directly related assets such as nuclear fuel were transferred to IP on May
1, 1997. Soyland's nuclear decommissioning trust assets were transferred to IP
on May 19, 1997, consistent with IP's assumption of all of Soyland's ownership
obligations, including those related to decommissioning.
FERC approved an amended PCA between Soyland and IP in July 1997. The amended
PCA obligates Soyland to purchase all of its capacity and energy needs from IP
for at least 10 years. The amended PCA provides that a contract cancellation fee
will be paid by Soyland to IP in the event that a Soyland member terminates its
membership in Soyland. In May 1997, three distribution cooperative members
terminated their membership by buying out of their respective long-term
wholesale power contracts with Soyland. This action resulted in Soyland paying a
fee of $20.8 million to IP in June 1997 to reduce its future base capacity
charges. Fee proceeds of $2.9 million were used to offset IP's costs of
acquiring Soyland's share of Clinton, and the remaining $17.9 million was
recorded as interchange revenue. In December 1997, Soyland signed a letter of
intent to pay in advance the remainder of its base capacity charges in the PCA,
approximately $70 million. Soyland received the necessary financing and
regulatory approvals in the second quarter of 1998. IP received $30 million and
$40 million from Soyland during the first and second quarter of 1998,
respectively. The prepayment was deferred and is being recognized as interchange
revenue evenly over the initial term of the PCA, September 1, 1996, through
August 31, 2006. In December 1998, Soyland and IP signed an agreement to
restructure the PCA in which IP acts as an agent for Soyland in obtaining and
scheduling power and energy and related transmission from other parties. The two
parties intend to establish a final agreement in March 1999.
NOTE 8 -- INCOME TAXES
Deferred tax assets and liabilities were comprised of the following:
Balances as of December 31,
(Millions of dollars) 1998 1997
Deferred tax assets:
Current:
Misc. book/tax recognition differences $ 9.2 $ 11.2
Noncurrent:
Depreciation and other property related 150.4 46.2
Alternative minimum tax 140.5 156.8
Unamortized investment tax credit 18.1 116.9
Misc. book/tax recognition differences 389.7 51.9
698.7 371.8
Total deferred tax assets $ 707.9 $ 383.0
Deferred tax liabilities:
Current:
Misc. book/tax recognition differences $ .1 $ .9
Noncurrent:
Depreciation and other property related 1,292.8 1,348.0
Misc. book/tax recognition differences 369.9 (7.1)
1,662.7 1,340.9
Total deferred tax liabilities $1,662.8 $1,341.8
Income taxes included in the Consolidated Statements of Income consist of
the following components:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Current taxes $ 3.4 $ 70.3 $ 64.7
Deferred taxes--
Property related differences (30.0) 8.8 70.6
Alternative minimum tax 16.4 41.7 1.1
Gain/loss on reacquired debt 3.4 .4 (1.6)
Clinton plant impairment (853.6) -- --
Enhanced retirement
and severance -- .5 2.6
Misc. book/tax recognition
differences (27.2) (34.1) (2.2)
Investment tax credit (8.3) (7.3) (7.3)
Investment tax credit --
Clinton plant impairment (160.4) -- --
Total deferred taxes (1,059.7) 10.0 63.2
Total income taxes from
continuing operations $(1,056.3) $ 80.3 $ 127.9
Income tax--
Extraordinary item
Current tax expense -- (17.8) --
Deferred tax expense -- (100.2) --
Total extraordinary item -- (118.0) --
Total income taxes $(1,056.3) $ (37.7) $ 127.9
The reconciliations of income tax expense to amounts computed by applying
the statutory tax rate to reported pretax income from continuing operations for
the period are set out below:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Income tax expense at the
federal statutory tax rate $ (792.5) $ 64.7 $ 111.4
Increases/(decreases) in taxes
resulting from--
State taxes,
net of federal effect (175.1) 8.7 11.4
Investment tax credit
amortization (8.3) (7.3) (7.3)
Clinton plant impairment (85.4) -- --
Depreciation not normalized 4.4 11.3 9.4
Preferred dividend
requirement of subsidiary 1.0 1.7 2.5
Other--net (.4) 1.2 .5
Total income taxes from
continuing operations $(1,056.3) $ 80.3 $ 127.9
Combined federal and state effective income tax rates were 43.3%, 43.4%,
and 40.2% for the years 1998, 1997, and 1996, respectively.
Illinova is subject to the provisions of the Alternative Minimum Tax System.
As a result, Illinova has an Alternative Minimum Tax credit carryforward at
December 31, 1998, of approximately $140.5 million. This credit can be carried
forward indefinitely to offset future regular income tax liabilities in excess
of the tentative minimum tax.
The Internal Revenue Service is currently auditing Illinova's consolidated
federal income tax returns for the years 1994 through 1997. At this time, the
outcome of the audit cannot be determined; however, the results of the audit are
not expected to have a material adverse effect on Illinova's consolidated
financial position or results of operations.
The tax effect of the Clinton impairment and quasi-reorganization are
included in the above amounts. See "Note 2 - Clinton Impairment and
Quasi-Reorganization" for additional information.
Because of the passage of P.A. 90-561 in 1997, IP's electric generation
business no longer meets the criteria for application of FAS 71. As required by
FAS 101, "Regulated Enterprises -- Accounting for the Discontinuation of
Application of FASB Statement No. 71," the income tax effects of the write-off
of regulatory assets and liabilities related to electric generation are
reflected in the extraordinary item for the cumulative effect of a change in
accounting principle.
NOTE 9 -- CAPITAL LEASES
The Fuel Company, which is 50 percent owned by IP, was formed in 1981 for the
purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to
the Fuel Company's cost of fuel as consumed (including related financing and
administrative costs). Billings under the lease agreement were $4 million in
1998, $4 million in 1997, and $35 million in 1996, including financing costs of
$4 million, $4 million, and $5 million, respectively. IP is required to pay
financing costs whether or not fuel is consumed. IP is obligated to make
subordinated loans to the Fuel Company at any time the obligations of the Fuel
Company that are due and payable exceed the funds available to the Fuel Company.
Lease terms stipulate that, in the event Clinton is out of service for 24
consecutive months, IP is obligated to purchase Clinton's in-core nuclear fuel
from the Fuel Company. In accordance with this provision, IP will purchase the
fuel for $62.1 million in the first quarter of 1999. IP has an obligation for
nuclear fuel disposal costs of leased nuclear fuel. See "Note 5 - Commitments
and Contingencies" for discussion of decommissioning and nuclear fuel disposal
costs. Nuclear fuel lease payments are included with "Fuel for electric plants"
on Illinova's Consolidated Statements of Income.
Current obligations under capital lease for nuclear fuel were $62.1 million
at December 31, 1998, and $18.7 million at December 31, 1997.
<TABLE>
<CAPTION>
NOTE 10 - LONG-TERM DEBT
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
First mortgage bonds of subsidiary--
<S> <C> <C> <C> <C>
6 1/2% series due 1999 $72.0 $72.0
6.60% series due 2004 (Pollution Control Series A) - 6.3
7.95% series due 2004 39.0 72.0
6.0% series due 2007 (Pollution Control Series B) - 18.7
8.30% series due 2017 (Pollution Control Series I) - 33.8
7 3/8% series due 2021 (Pollution Control Series J) 84.7 84.7
8 3/4% series due 2021 57.1 57.1
5.70% series due 2024 (Pollution Control Series K) 35.6 35.6
7.40% series due 2024 (Pollution Control Series L) 84.1 84.1
- -------------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds of subsidiary 372.5 464.3
- -------------------------------------------------------------------------------------------------------------------------------
New mortgage bonds of subsidiary--
6 1/8% series due 2000 40.0 40.0
5.625% series due 2000 110.0 110.0
6.25% series due 2002 100.0 -
6.0% series due 2003 100.0 -
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
8.0% series due 2023 229.0 229.0
7 1/2% series due 2025 148.5 177.0
5.40% series due 2028 (Pollution Control Series A) 18.7 -
5.40% series due 2028 (Pollution Control Series B) 33.8 -
Adjustable rate series due 2028 (Pollution Control Series M, N, and O) 111.8 111.8
Adjustable rate series due 2032 (Pollution Control Series P, Q, and R) 150.0 150.0
- -------------------------------------------------------------------------------------------------------------------------------
Total new mortgage bonds of subsidiary 1,211.8 987.8
- -------------------------------------------------------------------------------------------------------------------------------
Total mortgage bonds of subsidiary 1,584.3 1,452.1
- -------------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes of subsidiary--
5.39% due 2000 110.0 -
5.26% due 2001 100.0 -
5.31% due 2002 80.0 -
5.34% due 2003 85.0 -
5.38% due 2005 175.0 -
5.54% due 2007 175.0 -
5.65% due 2008 139.0 -
- -------------------------------------------------------------------------------------------------------------------------------
Total transitional funding trust notes of subsidiary 864.0 -
- -------------------------------------------------------------------------------------------------------------------------------
Medium-term notes of subsidiary, series A - 68.0
Variable rate long-term debt of subsidiary due 2017 75.0 75.0
Illinova 6.15% Senior Notes due 2001 30.0 -
Illinova 6.46% Senior Notes due 2002 40.0 -
Illinova 7 1/8% Senior Notes due 2004 100.0 100.0
- -------------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 245.0 243.0
- -------------------------------------------------------------------------------------------------------------------------------
2,693.3 1,695.1
Adjustment to Fair Value 31.4 -
Unamortized discount on debt (15.5) (16.8)
- -------------------------------------------------------------------------------------------------------------------------------
Total long-term debt excluding capital lease obligations 2,709.2 1,678.3
Obligations under capital leases of subsidiary 132.0 126.7
- -------------------------------------------------------------------------------------------------------------------------------
2,841.2 1,805.0
Long-term debt and lease obligations of subsidiary maturing within one year (506.6) (87.5)
- -------------------------------------------------------------------------------------------------------------------------------
Total long-term debt $2,334.6 $1,717.5
</TABLE>
In the above table, the "adjustment to fair value" is the total adjustments of
debt to fair value in the quasi-reorganization. The adjustments to the fair
value of each debt series will be amortized over its remaining life to interest
expense. See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for more
information.
In January 1998, Illinova issued $40 million of 6.46% Medium-term Notes due
2002. In September 1998, Illinova issued $30 million of 6.15% Medium-term Notes
due 2001.
In March 1998, IP issued $18.7 million of 5.4% Pollution Control Bonds Series
A due 2028 and used the proceeds to redeem $18.7 million of 6.0% Pollution
Control Bonds Series B due 2007 in April 1998. In March 1998, IP issued $33.8
million of 5.4% Pollution Control Bonds Series B due 2028 to refinance $33.8
million of 8.3% Pollution Control Bond Series I due 2017 in April 1998. $100
million of 6.25% New Mortgage Bonds due 2002 were issued in July 1998, and $100
million of 6% New Mortgage Bonds due 2003 were issued in September 1998.
In December 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes as allowed under the Illinois Electric Utility Transition Funding Law in
P.A. 90-561. The proceeds of the notes were used by IP to retire debt and equity
securities. These notes have maturity dates ranging from one to 10 years, with
an average interest rate of 5.41%.
In November 1998, IP called $6.3 million of 6.6% Pollution Control Bonds
Series A due 2004. In December 1998, $28.5 million of 7.50% New Mortgage Bonds
due 2025 and $33.0 million of 7.95% First Mortgage Bonds were purchased on the
open market.
In January 1999, $57.1 million of 8.75% First Mortgage Bonds due 2021 and
$229 million of 8% New Mortgage Bonds due 2023 were purchased through a
redemption notice. IP also redeemed $5.4 million of 7.95% First Mortgage Bonds
due 2004 in January 1999. In February 1999, IP redeemed $36.8 million of 6.5%
First Mortgage Bonds due 1999 and $5 million of 7.95% First Mortgage Bonds due
2004.
In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At
December 31, 1998, all these notes have matured and been retired. Interest rates
on variable rate long-term debt due 2017 are adjusted weekly and ranged from
3.75% to 4.20% at December 31, 1998.
For the years 1999, 2000, 2001, 2002, and 2003, IP has long-term debt
maturities in the aggregate of (in millions) $72, $150, $0, $100, and $200,
respectively. In addition, IPSPT has long-term debt maturities of $86.4 million
in each of the above years. These amounts exclude capital lease requirements.
See "Note 9 - Capital Leases."
At December 31, 1998, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $66.1 million.
In 1992, IP executed a new general obligation mortgage (New Mortgage) to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both
mortgages are secured by liens on substantially all of IP's properties. A
corresponding issue of First Mortgage Bonds, under the First Mortgage, secures
any bonds issued under the New Mortgage. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The remaining balance of net bondable
additions at December 31, 1998, was approximately $1.9 billion.
NOTE 11 -- PREFERRED STOCK OF SUBSIDIARY
<TABLE>
<CAPTION>
(Millions of dollars)
December 31, 1998 1997
Serial Preferred Stock of Subsidiary, cumulative, $50 par value-- Authorized
5,000,000 shares; 1,139,110 shares outstanding
<S> <C> <C> <C> <C> <C>
Series Shares Redemption Prices
4.08% 283,290 $ 51.50 $ 14.1 $ 14.1
4.26% 136,000 51.50 6.8 6.8
4.70% 176,000 51.50 8.8 8.8
4.42% 134,400 51.50 6.7 6.7
4.20% 167,720 52.00 8.4 8.4
7.75% 241,700 50.00 after July 1, 2003 12.1 12.1
Net premium on preferred stock .2 .2
Total Preferred Stock of Subsidiary, $50 par value $ 57.1 $ 57.1
Serial Preferred Stock of Subsidiary, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding -- --
Preference Stock of Subsidiary, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding -- --
Total Serial Preferred Stock, Preference Stock and Preferred Securities of Subsidiary $ 57.1 $ 57.1
Company Obligated Mandatorily Redeemable Preferred Securities of:
Illinois Power Capital, L.P.
Monthly Income Preferred Securities, cumulative, $25 liquidation preference--
3,880,000 shares authorized and outstanding $ 97.0 $ 97.0
Illinois Power Financing I
Trust Originated Preferred Securities, cumulative, $25 liquidation preference--
4,000,000 shares authorized and outstanding 100.0 100.0
Adjustment to Fair Value 2.0 --
Total Mandatorily Redeemable Preferred Stock of Subsidiary $ 199.0 $ 197.0
</TABLE>
In the above table, only the MIPS and TOPrS were restated to their fair value in
the quasi-reorganization. The serial preferred stock was not restated because it
is equity rather than an asset or a liability. The increase in the value of the
MIPS and the TOPrS will be amortized to interest expense over the remaining life
of these securities. See "Note 2 - Clinton Impairment and Quasi-Reorganization"
for more information.
Serial Preferred Stock ($50 par value) is redeemable at the option of IP in
whole or in part at any time with not less than 30 days and not more than 60
days notice by publication. The MIPS are redeemable at the option in whole or in
part on or after October 6, 1999, with not less than 30 days and not more than
60 days notice by publication. The TOPrS mature on January 31, 2045, and may be
redeemed in whole or in part at any time on or after January 31, 2001.
Illinois Power Capital, L.P., is a limited partnership in which IP serves
as a general partner. Illinois Power Capital issued (1994) $97 million of
tax-advantaged MIPS at 9.45% (5.67% after-tax rate) with a liquidation
preference of $25 per share. IP consolidates the accounts of Illinois Power
Capital, L.P.
IPFI is a statutory business trust in which IP serves as sponsor. IPFI
issued (1996) $100 million of TOPrS at 8% (4.8% after-tax rate). IP consolidates
the accounts of IPFI.
NOTE 12 -- COMMON STOCK AND RETAINED EARNINGS
As of December 31, 1998, Illinova and its subsidiaries effected a
quasi-reorganization in which Illinova's consolidated accumulated deficit in
retained earnings of $1,419.5 million was eliminated by a $1,313.3 million
restatement of other assets and liabilities to their fair value and a transfer
of $106.2 million from additional paid-in capital. See "Note 2 -- Clinton
Impairment and Quasi-Reorganization" for additional information regarding the
effects upon retained earnings.
On December 22, 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes, with IP as servicer. As of December 31, 1998, IP used $49.3 million of
the funds to repurchase 2.3 million of its common shares from Illinova, which in
turn used the $49.3 million to repurchase 1.8 million shares of Illinova common
shares via open market repurchases. Illinova holds the common stock as treasury
stock and deducts it from common equity at the cost of the shares repurchased.
In 1996, Illinova amended the Automatic Reinvestment and Stock Purchase Plan
and the ESOP. These plans were replaced with the Illinova Investment Plus Plan
for which 5,000,000 shares of common stock were designated for issuance.
Illinova administers the Illinova Investment Plus Plan. The Illinova Investment
Plus Plan provides investors a convenient way to purchase shares of common stock
and reinvest all or a portion of the cash dividends paid on eligible securities
in additional shares of common stock. It allows purchases of common stock on the
open market, as well as purchases of new issue shares directly from Illinova.
Under this plan, 4,403,142 shares of common stock were designated for issuance
at December 31, 1998. All accounts, elections, notices, instructions, and
authorizations under the Automatic Reinvestment and Stock Purchase Plan and the
ESOP automatically continue under the Illinova Investment Plus Plan, and
participants in the Automatic Reinvestment and Stock Purchase Plan and the ESOP
continue as participants in the Illinova Investment Plus Plan.
The ESOP includes an incentive compensation feature which is tied to employee
achievement of specified corporate performance goals. This arrangement began in
1991 when IP loaned $35 million to the Trustee of the Plans, which used the loan
proceeds to purchase 2,031,445 shares of IP's common stock on the open market.
The loan and common shares were converted to Illinova instruments with the
formation of Illinova in May 1994. These shares are held in a suspense account
under the Plans and are being distributed to the accounts of participating
employees as the loan is repaid by the Trustee with funds contributed by IP,
together with dividends on the shares acquired with the loan proceeds. IP
financed the loan with funds borrowed under its bank credit agreements.
For the year ended December 31, 1998, 86,020 common shares were allocated to
salaried employees and 77,019 shares to employees covered under the Collective
Bargaining Agreement through the matching contribution feature of the ESOP
arrangement. Under the incentive compensation feature, 56,315 common shares were
allocated to employees for the year ended December 31, 1998. During 1998, IP
contributed $4.7 million to the ESOP and, using the shares allocated method,
recognized $5.2 million of expense. Interest paid on the ESOP debt was
approximately $.9 million in 1998 and dividends used for debt service were
approximately $2.2 million.
In 1992, the Board of Directors adopted and the shareholders approved a
Long-Term Incentive Compensation Plan (the Plan) for officers or employee
members of the Board, but excluding directors who are not officers or employees.
Restricted stock, incentive stock options, non-qualified stock options, stock
appreciation rights, dividend equivalents, and other stock-based awards may be
granted under the Plan for up to 1,500,000 shares of Illinova's common stock.
The following table outlines the activity under this Plan at December 31, 1998.
No options were exercised through February 1999.
Year Options Grant Year Expiration Options Options
Granted Granted Price Exercisable Date Exercised Forfeited
1992 62,000 $23.375 1996 6/10/02 20,000 10,500
1993 73,500 $24.250 1997 6/09/03 22,000 10,500
1994 82,650 $20.875 1997 6/08/04 29,450 4,400
1995 69,300 $24.875 1998 6/14/05 3,900 11,000
1996 80,500 $29.750 1999 2/07/06 -- 6,500
1997 82,000 $26.125 2000 2/12/07 -- 6,000
1998 120,500 $29.094 2001 2/11/08 -- --
1998 165,000 $30.250 2001 6/24/08 -- --
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current period and is not envisioned to be material in
any future period. As permitted by FAS 123, Illinova continues to account for
its stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
The provisions of Supplemental Indentures to IP's General Mortgage Indenture
and Deed of Trust contain certain restrictions with respect to the declaration
and payment of dividends. IP was not limited by any of these restrictions at
December 31, 1998. Under the Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock.
NOTE 13 -- PENSION AND OTHER BENEFITS COSTS
Illinova offers certain benefit plans to employees of Illinova and its principal
subsidiaries. IP is sponsor and administrator of the benefit plans disclosed
below.
IP is reimbursed by the other Illinova subsidiaries for their share of the
expenses of the benefit plans. The values and discussion below represent the
plans in total, including the amounts attributable to the other subsidiaries.
<TABLE>
<CAPTION>
(Millions of dollars)
Pension Benefits Other Benefits
1998 1997 1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 417.6 $ 361.6 $ 89.4 $ 81.7
Service cost 12.8 10.2 2.6 1.9
Interest cost 30.4 28.2 6.3 5.9
Plan participants' contributions -- -- .4 .4
Amendments 2.0 -- -- --
Actuarial (gain)/loss 45.2 43.1 3.8 5.4
Benefits paid (32.8) (25.5) (7.0) (5.9)
Benefit obligation at end of year $ 475.2 $ 417.6 $ 95.5 $ 89.4
Change in plan assets
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year $ 432.1 $ 357.2 $ 49.7 $ 34.3
Actual return on plan assets 73.7 95.6 9.2 8.0
Employer contribution 4.5 4.8 11.4 12.9
Plan participants' contributions -- -- .4 .4
Benefits paid (32.8) (25.5) (7.0) (5.9)
Fair value of plan assets at end of year $ 477.5 $ 432.1 $ 63.7 $ 49.7
Fair value of plan assets greater/(less) than benefit obligation $ 2.3 $ 14.5 $ (31.8) $ (39.7)
Unrecognized net actuarial (gain)/loss (32.1) (38.9) (7.3) (6.3)
Unrecognized prior service cost 17.6 17.4 -- --
Unrecognized net asset/liability at transition (21.9) (26.1) 36.0 38.7
Net amounts recognized $ (34.1) $ (33.1) $ (3.1) $ (7.3)
Net amounts recognized consist of:
Prepaid benefit cost $ 1.9 $ 1.9 $ -- $ --
Accrued benefit liability (36.0) (35.0) (3.1) (7.3)
Net amounts recognized $ (34.1) $ (33.1) $ (3.1) $ (7.3)
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
1998 1997 1998 1997
Weighted-average assumptions as of December 31
<S> <C> <C> <C> <C>
Discount rate 7.0% 7.5% 7.0% 7.0%
Expected return on plan assets 9.5% 9.5% 9.5% 9.0%
Rate of compensation increase 4.5% 4.5% 5.5% 5.5%
</TABLE>
<TABLE>
<CAPTION>
(Millions of dollars)
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
Components of net periodic benefit cost
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 12.8 $ 10.2 $ 10.1 $ 2.6 $ 1.9 $ 2.2
Interest cost 30.4 28.2 26.8 6.3 5.9 6.1
Expected return on plan assets (35.3) (31.7) (30.4) (4.4) (3.0) (2.2)
Amortization of prior service cost 1.9 1.9 1.9 -- -- --
Amortization of transitional liability/(asset) (4.2) (4.2) (4.2) 2.7 2.7 2.7
Recognized net actuarial (gain)/loss -- 4.2 -- -- (.3) --
Net periodic benefit cost $ 5.6 $ 8.6 $ 4.2 $ 7.2 $ 7.2 $ 8.8
</TABLE>
For measurement purposes, a 6.9% health care trend rate was used for 1999.
Trend rates were assumed to decrease gradually to 5.5% in 2005 and remain at
this level going forward. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan.
A one percentage point change in assumed health care cost trend rates would
have the following effects for 1998:
1 Percentage 1 Percentage
(Millions of dollars) Point Increase Point Decrease
Effect on total of service and
interest cost components $ 1.2 $ (1.0)
Effect on postretirement
benefit obligation 11.3 (9.5)
IP changed the measurement date for the pension obligation of the plan from
September 30 to December 31 which is reflected in the 1998 fiscal year. As a
result, the time frame for the 1998 reporting period is October 1, 1997, through
December 31, 1998. The unrecognized prior service cost is amortized on a
straight-line basis over the average remaining service period of employees who
are expected to receive benefits under the plan.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets, specifically the nonqualified supplemental retirement
plan for management employees, were $6.3 million, $5.6 million, and $0 as of
December 31, 1998, and $4.8 million, $3.9 million, and $0 as of December 31,
1997.
On December 9, 1998, Illinova's and IP's Boards of Directors voted to exit
Clinton operations. Concurrent with the decision to exit Clinton operations, IP
accrued estimated employee severance and retention costs of $25.8 million, net
of income taxes; pension curtailment benefits of $(7.2) million, net of income
taxes; and other postretirement benefit costs of $.4 million, net of income
taxes. These amounts are not reflected in the above tables. If the decision is
made to permanently close Clinton, the number of Clinton employees would
decrease from 950 to 240 over an 11-month transition period as the plant moves
from an operating to a decommissioning mode. Employees expected to be released
include engineering, plant technical and operational, office administration, and
maintenance employees. See "Note 2 - Clinton Impairment and
Quasi-Reorganization" for additional information.
NOTE 14 -- SEGMENTS OF BUSINESS
In 1997, the FASB issued FAS 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement supersedes FAS 14, "Financial Reporting
for Segments of a Business Enterprise," and establishes new standards for
defining a company's segments and disclosing information about them.
The new statement requires that segments be based on the internal structure
and reporting of a company's operations. Because of the realignment of Illinova
into eight operating segments during 1998, Illinova has determined that it is
not practicable to present the new segment information for 1997 and 1996 because
it is not available and the cost to develop it is excessive. Therefore, the
information for 1998 is presented under the format specified by FAS 131; the
comparative information for 1998, 1997, and 1996 is presented in accordance with
FAS 14.
1998
Illinova is comprised of eight business groups. The business groups and their
principal services are as follows:
- - IP Customer Service Business Group -- transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas.
- - IP Wholesale Energy Business Group -- fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities.
- - IP Nuclear Generation Business Group -- nuclear-fueled electric generation.
- - Illinova Energy Partners -- develops and markets energy-related services
throughout the United States and Canada.
- - Illinova Generating -- invests in, develops, and operates independent power
projects throughout the world.
- - IP Financial Business Group -- provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - IP Support Services Business Group -- provides specialized support
functions, including information technology, human resources, environmental
resources, purchasing and materials management, and public affairs.
- - Corporate -- includes Illinova Insurance Company and Illinova Business
Enterprises.
Of the above-listed segments, the IP Financial Business Group, the IP
Support Services Business Group, and Corporate did not individually meet the
minimum threshold requirements for separate disclosure and are combined in the
Other category.
Three measures were used to judge segment performance: contribution margin,
cash flow, and return on net invested capital.
<TABLE>
<CAPTION>
(Millions of dollars)
Illinova
Customer Wholesale Energy Illinova
1998 Service Energy Nuclear Partners Generating Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 1,505.7 $ 557.2 $ 6.3 $ -- $ -- $ -- $ 2,069.2
Diversified enterprise revenue -- -- -- 339.8 15.9 5.7 361.4
Intersegment revenue(1) -- 482.3 (2.4) -- -- -- 479.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total Revenue 1,505.7 1,039.5 3.9 339.8 15.9 5.7 2,910.5
Depreciation and
amortization expense 68.3 30.3 99.1 -- -- 5.9 203.6
Other operating expenses(1) 894.4 999.0 379.2 354.5 28.7 12.2 2,668.0
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 543.0 10.2 (474.4) (14.7) (12.8) (12.4) 38.9
Interest expense 70.4 13.8 59.3 -- -- 2.5 146.0
AFUDC (0.1) (0.9) (2.5) -- -- 0.3 (3.2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before taxes 472.7 (2.7) (531.2) (14.7) (12.8) (15.2) (103.9)
Income tax expense (benefit) 194.4 (1.9) (232.3) (4.2) 2.4 (0.7) (42.3)
Miscellaneous-net 0.5 (1.0) 0.1 -- (4.7) 3.5 (1.6)
Equity earnings in subsidiaries -- -- -- (4.0) (18.6) 0.1 (22.5)
Interest revenue -- -- -- -- -- (1.5) (1.5)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) after taxes 277.8 0.2 (299.0) (6.5) 8.1 (16.6) (36.0)
Preferred dividend requirement 9.7 2.2 7.9 -- -- -- 19.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss(2) $ 268.1 $ (2.0) $ (306.9) $ (6.5) $ 8.1 $ (16.6) $ (55.8)
Clinton plant impairment loss 1,327.2 1,327.2
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
available to common $ 268.1 $ (2.0) $ (1,634.1) $ (6.5) $ 8.1 $ (16.6) $ (1,383.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Other information --
Total assets(3) $ 1,831.8 $ 3,039.0 $ 1,010.2 $ 74.3 $ 222.4 $ 623.6 $ 6,801.3
Subsidiary's investment in
equity method investees -- -- -- 9.2 166.4 -- 175.6
Total expenditures for additions
to long-lived assets 124.4 116.0 62.5 -- -- 8.6 311.5
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Measures --
Contribution margin(4) $ 315.7 $ 7.0 $ (268.5) $ (6.5) $ 8.1 $ (16.3) $ 39.5
Cash flow(5) 237.4 27.2 (280.8) (18.7) 26.0 (27.9) (36.8)
Return on net
invested capital(6) 24.28% 0.33% N/A (33.50)% 4.06% (2.93)% 0.92%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Intersegment revenue priced at 2.5 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service.
Nuclear reflects a replacement power expense for the increment of market
price over the intersegment price.
(2) Net income (loss) before Clinton plant impairment loss.
(3) Primary assets for Nuclear include transition period cost recovery,
decommissioning assets, shared general and intangible plant, and nuclear
fuel.
(4) Contribution margin represented by net income before financing costs (net
of tax), preferred dividend requirement, and Clinton plant impairment loss.
(5) Cash flow before financing activities.
(6) Return on net invested capital calculated as contribution margin divided by
net invested capital (includes Clinton plant impairment loss and
quasi-reorganization).
GEOGRAPHIC INFORMATION
(Millions of dollars)
For the Years Ended December 31, 1998 1997 1996
Revenues: (1)
United States $ 2,425.8 $ 2,509.5 $ 1,739.0
Foreign countries (Seven) 4.8 -- 7.3
$ 2,430.6 $ 2,509.5 $ 1,746.3
(Millions of dollars)
December 31, 1998 1997 1996
Long-lived assets: (2)
United States $ 4,513.9 $ 4,590.4 $ 4,596.6
Foreign countries (Nine) 135.8 120.8 80.7
$ 4,649.7 $ 4,711.2 $ 4,677.3
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
<TABLE>
<CAPTION>
1998, 1997, and 1996
(Millions of dollars)
1998 1997 1996
Diversified Total Diversified Total Diversified Total
Electric Gas Enterprises Corp. Electric Gas Enterprises Corp. Electric Gas Enterprises Corp.
Operation information-
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $1,781.4 $287.8 $ 361.4 $2,430.6 $1,420.0 $353.9 $ 735.6 $2,509.5 $1,340.5 $348.2 $ 57.6 1,746.3
Operating expenses,
excluding provision
for income taxes 1,747.6 252.1 392.0 2,391.7 1,081.3 311.5 792.3 2,185.1 886.2 300.5 87.5 1,274.2
Clinton plant
impairment loss 2,341.2 - - 2,341.2 - - - - - - - -
Pre-tax
operating income (2,307.4) 35.7 (30.6) (2,302.3) 338.7 42.4 (56.7) 324.4 454.3 47.7 (29.9) 472.1
AFUDC 3.1 .1 - 3.2 4.9 .1 - 5.0 6.3 .2 - 6.5
Pre-tax operating
income, including
AFUDC ($2,304.3) $35.8 ($30.6) ($2,299.1) $343.6 $42.5 ($56.7) $ 329.4 $460.6 $ 47.9 $ (29.9) $ 478.6
Other deductions, net (25.6) (21.0) (5.2)
Interest charges 146.0 144.2 142.5
Income tax - Clinton
impairment (1,014.0) - -
Provision for
income taxes (42.3) 80.3 128.0
Preferred dividend
requirements
of subsidiary 19.8 21.5 22.3
Net income (1,383.0) 104.4 191.0
Extraordinary item
(net of taxes) - (195.0) -
Carrying value over
(under) consideration
paid for redeemed
preferred stock
of subsidiary - .2 (.7)
Net income (loss)
applicable
to common stock $(1,383.0) $ (90.4) $190.3
Other information-
Depreciation $177.9 $ 25.7 $ - $203.6 $171.5 $ 24.1 $ - $ 195.6 $164.0 $22.5 $ - $186.5
Capital expenditures $285.6 $ 25.9 $ - $311.5 $201.3 $ 22.6 $ - $ 223.9 $164.0 $23.3 $ - $187.3
Investment information-
Identifiable assets* $5,169.0 $457.9 $ 25.8 $5,652.7 $4,508.1 $453.8 $ 1.2 $4,963.1 $4,578.1 $481.9 $ - $5,060.0
Nonutility plant and
other investments 228.6 184.0 132.4
Assets utilized for
overall operations 920.0 435.9 520.4
Total assets $6,801.3 $5,583.0 $5,712.8
</TABLE>
* 1998: Utility plant, nuclear fuel, materials and supplies, prepaid and
deferred energy costs, and transition period cost recovery.
1997 and 1996: Utility plant, nuclear fuel, materials and supplies, deferred
Clinton costs, and prepaid and deferred energy costs.
NOTE 15 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
presented in accordance with the requirements of FAS 107, "Disclosures about the
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and valuation
methodologies discussed below.
Illinova and its subsidiaries have early-adopted FAS 133 due to the
quasi-reorganization. Accordingly, assets and liabilities were adjusted to
reflect current fair value. See "Note 2 - Clinton Impairment and
Quasi-Reorganization" for more information.
1998 1997
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
Nuclear decommissioning
trust funds $ 84.1 $ 84.1 $ 62.5 $ 62.5
Cash and cash equivalents 518.1 518.1 33.0 33.0
Mandatorily redeemable
preferred stock
of subsidiary* 199.0 200.0 197.0 202.7
Long-term debt* 2,709.2 2,721.3 1,678.3 1,730.1
Notes payable 147.6 147.6 415.3 415.3
Other Financial Instruments:
Trading/Energy
Futures and forward contracts
IEP 12.7 12.7 -- --
IP 28.0 28.0 -- --
Non-trading/Energy
Futures and forward contracts
IP 5.4 5.4 -- --
Non-trading/Emission Allowances
Forward Contracts-- IP 2.0 2.0 -- --
Option Contracts-- IP .2 .2 -- --
* In the above table, the 1998 carrying value of mandatorily redeemable
preferred stock and long-term debt reflect an adjustment in carrying value
to fair value due to the quasi-reorganization. The portion of these items
which relate to electric generation has been adjusted to fair value. The
remainder is attributed to the regulated part of the business in which
return on assets is based on book value of debt. Therefore no adjustment to
fair value was made for the portion of mandatorily redeemable preferred
stock and long-term debt relating to Illinois Power's regulated business.
The fair values in the above table represent 100 percent of the current
fair value for mandatorily redeemable preferred stock and long-term debt.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments listed in the table above:
Nuclear Decommissioning Trust Funds: The fair values of available-for-sale
marketable debt securities and equity investments held by the Nuclear
Decommissioning Trust are based on quoted market prices at the reporting date
for those or similar investments.
Cash and Cash Equivalents: The carrying amount of cash and cash equivalents
approximates fair value due to the short maturity of these instruments.
Mandatorily Redeemable Preferred Stock of Subsidiary and Long-Term Debt: The
fair value of IP mandatorily redeemable preferred stock and Illinova (including
IP) long-term debt is estimated based on the quoted market prices for similar
issues or by discounting expected cash flows at the rates currently offered to
Illinova for debt of the same remaining maturities, as advised by Illinova's
bankers.
Notes Payable: The carrying amount of notes payable approximates fair value due
to the short maturity of these instruments.
Other Financial Instruments: Other financial instruments are comprised of
derivative instruments which have been restated to market value according to FAS
133. See "Note 16 - Financial and Other Derivative Instruments" for more
information. Fair value is determined using quoted market prices or indices.
NOTE 16 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
Trading Activities: Illinova, through its subsidiaries, IP and IEP, engages in
the brokering and marketing of electricity and natural gas. IP and IEP use a
variety of instruments, including fixed-price swap agreements, variable-price
swap agreements, exchange-traded energy futures and options contracts, and
over-the-counter forwards, swaps, and options. At December 31, 1998, there were
no natural gas derivative instruments in use.
As of December 31, 1998, Illinova and its subsidiaries adopted EITF 98-10.
IP and IEP have recorded their trading instruments at fair value in accordance
with EITF 98-10's application criteria. For more information regarding
Illinova's adoption of new accounting pronouncements, see "Note 1 - Summary of
Significant Accounting Policies." At December 31, 1998, IP's and IEP's
derivative assets and liabilities were recorded in the Consolidated Balance
Sheets at fair value with unrealized gains and losses shown net in the
Consolidated Statements of Income. IP and IEP record realized gains and losses
as components of operating revenues and operating expenses in the Consolidated
Statements of Income.
The notional quantities and maximum terms of commodity instruments held for
trading purposes at December 31, 1998, are presented below:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 5,174 MW 5,524 MW 1 yr
IEP 10,394 MW 10,305 MW 1 yr
All notional amounts reflect the volume of transactions but do not represent
the dollar amounts or actual megawatts exchanged by the parties to the
contracts. Accordingly, notional amounts do not accurately measure Illinova's
exposure to market or credit risk.
The estimated fair value of commodity instruments held for trading purposes
at December 31, 1998, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $ 21.8 $ 49.8
IEP 25.5 38.2
$ 47.3 $ 88.0
The fair value was estimated using quoted prices and indices where available
and considering the liquidity of the market for the instrument. The fair values
are subject to volatility based on changing market conditions.
The weighted average term of the trading portfolio, based on volume, is less
than one year. The maximum and average terms disclosed herein are not indicative
of likely future cash flows as these positions may be modified by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and Illinova's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Non-Trading Activities: To reduce the risk from market fluctuations in the price
of electricity and related transmission, Illinova, through its subsidiary IP,
enters into forward transactions, swaps, and options (energy derivatives). These
instruments are used to hedge expected purchases, sales, and transmission of
electricity (a portion of which are firm commitments at the inception of the
hedge). The weighted average maturity of these instruments is less than one
year.
Periodically, IP has utilized interest rate derivatives (principally interest
rate swaps and caps) to adjust the portion of its overall borrowings subject to
interest rate risk. As of December 31, 1998, there were no interest rate
derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP has entered
into swap agreements, forward contracts, and written put options with other
utilities to mitigate the risk from market fluctuations in the price of the
allowances. At December 31, 1998, the notional amount of two emission allowance
swaps was 126,925 units, with a recorded liability of $15.6 million, based on
fair value at delivery date. The maximum maturity of the swap agreements is 10
years. These agreements do not fall under the scope of FAS 133. The notional
amount of the two forward contracts is 32,000 emission allowances with fair
value of $2 million. The maximum term of the forward contracts is five years,
commencing in 1993. Both contracts expired in January 1999. Due to the remote
probability of exercise, three put options written by IP are considered to be
immaterial.
As of December 31, 1998, Illinova and its subsidiaries adopted FAS 133. For
more information regarding Illinova's adoption of new accounting pronouncements,
see "Note 1 - Summary of Significant Accounting Policies." At December 31,
1998, IP's derivative assets and liabilities were recorded in the Consolidated
Balance Sheets at fair value with unrealized gains and losses shown net in the
equity section of the Consolidated Balance Sheets as a part of the
quasi-reorganization. See "Note 2 - Clinton Impairment and
Quasi-Reorganization" for more information. In the future, unless hedge
accounting is applied, unrealized gains and losses will be shown net in the
Consolidated Statements of Income. IP records realized gains and losses as
components of operating revenues and operating expenses in the Consolidated
Statements of Income.
Hedge accounting is appropriate only if the derivative is effective at
offsetting cash flows from or changes in the fair value of the underlying hedged
item and is designated as a hedge at its inception. Additionally, changes in the
market value of the hedge must move in an inverse direction or limit an adverse
result from changes in the market value of the item being hedged, (the
effectiveness of the hedge). This effectiveness is measured both at the
inception of the hedge and on an ongoing basis, with an acceptable level of
effectiveness being at least 80 percent and not more than 125 percent for hedge
designation. If and when effectiveness ceases to exist at an acceptable level,
hedge accounting ceases and mark-to-market accounting is applied. As of December
31, 1998, all non-trading derivative instruments were accounted for using
mark-to-market accounting.
The notional quantities and the average term of the energy derivative
commodity instruments held for other than trading purposes at December 31, 1998,
follows:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 1,450 MW 1,050 MW 1 yr
In addition to the fixed-price notional volumes above, IP has also recorded
a $25 million liability in 1998 for two "commodity for commodity" energy swap
agreements totaling 350 MW. However, these swap agreements do not meet the
definition of a derivative under FAS 133.
The notional amount is intended to be indicative of the level of activity
in such derivatives, although the amounts at risk are significantly smaller
because changes in the market value of these derivatives generally are offset by
changes in the value associated with the underlying physical transactions or in
other derivatives. When energy derivatives are closed out in advance of the
underlying commitment or anticipated transaction, the market value changes may
not be offset because price movement correlation ceases to exist when the
positions are closed.
The estimated fair values of energy derivative commodity instruments, held
for non-trading purposes at December 31, 1998, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $ 4.2 $ 9.6
The fair value was estimated using quoted prices and indices where
available, and considering the liquidity of the market for the instrument. The
fair values are subject to significant volatility based on changing market
conditions.
The average maturity and fair values discussed above are not necessarily
indicative of likely future cash flows. These positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions, market liquidity, and Illinova's risk management portfolio
needs and strategies. Terms regarding cash settlements of these contracts vary
with respect to the actual timing of cash receipts and payments.
Trading and Non-trading -- General Policy: In addition to the risk associated
with price movements, credit risk is also a part of Illinova's and its
subsidiaries' risk management activities. Credit risk relates to the risk of
loss resulting from non-performance of contractual obligations by a
counterparty. While Illinova and its subsidiaries have experienced no
significant losses due to credit risk, off-balance-sheet risk exists to the
extent that counterparties to these transactions may fail to perform as required
by the terms of each contract. In order to minimize this risk, Illinova and/or
its subsidiaries enter into such contracts with those counterparties only after
an appropriate credit review has been performed. Illinova and its subsidiaries
periodically review the effectiveness of these financial contracts in achieving
corporate objectives. Should the counterparties to these contracts fail to
perform, Illinova could be forced to acquire alternative hedging arrangements or
be required to honor the underlying commitment at then current market prices. In
such an event, Illinova might incur additional loss to the extent of amounts, if
any, already paid to the counterparties. In view of its criteria for selecting
counterparties and its experience to date in successfully completing these
transactions, Illinova believes that the risk of incurring a significant
financial statement loss due to the non-performance of counterparties to these
transactions is remote.
Illinova has established an Executive Risk Management Committee to oversee
all corporate risk management. The Executive Risk Management Committee's
responsibilities include reviewing Illinova's and its subsidiaries' overall risk
management strategies, as well as monitoring and assessing risk exposure and
risk management activities to ensure compliance with all applicable risk
management limitations, policies, and procedures.
<TABLE>
<CAPTION>
Illinova Corporation
N O T E 1 7 QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA (UNAUDITED)
(Millions of dollars except per common share amounts)
- --------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 575.4 $ 547.3 $ 823.3 $ 484.6
Operating income (loss) 63.7 (51.1) 90.1 (2,405.0)
Net income (loss) 23.0 (47.0) 26.6 (1,385.6)
Net income (loss) applicable to common stock 23.0 (47.0) 26.6 (1,385.6)
Earnings (loss) per common share
(basic and diluted) $.32 ($0.66) $.37 ($19.38)
Common stock prices and dividends
High 30 1/2 31 31 30 3/16
Low 26 5/8 27 3/16 23 1/2 23 3/8
Dividends declared $.31 $.31 $.31 $.31
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 570.4 $ 542.9 $ 841.8 $ 554.4
Operating income (loss) 114.4 95.1 144.2 (29.3)
Net income (loss) before extraordinary item 44.0 31.4 63.3 (34.3)
Net income (loss) after extraordinary item 44.0 31.4 63.3 (229.3)
Net income (loss) applicable to common stock 44.0 31.4 64.4 (230.2)
Earnings (loss) per common share before
extraordinary item (basic and diluted) $.58 $.42 $.87 ($0.49)
Earnings (loss) per common share after
extraordinary item (basic and diluted) $.58 $.42 $.87 ($3.21)
Common stock prices and dividends
High 27 1/2 23 3/4 23 3/4 27 3/16
Low 22 3/4 20 1/8 21 1/2 20 3/8
Dividends declared $.31 $.31 $.31 $.31
</TABLE>
Illinova common stock is listed on the New York Stock Exchange and the Chicago
Stock Exchange. The stock prices above are the prices reported on the Composite
Tape. There were 31,945 registered holders of common stock at January 11, 1999.
<TABLE>
<CAPTION>
Illinova Corporation
Selected Consolidated Financial Data*
(Millions of dollars)
1998 1997 1996 1995 1994 1988
- ----------------------------------------------------------------------------------------------------------------------------
Operating revenues
<S> <C> <C> <C> <C> <C> <C>
Electric $ 1,224.2 $ 1,244.4 $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 949.9
Electric interchange 557.2 175.6 137.6 116.3 110.0 109.7
Gas 287.8 353.9 348.2 272.5 302.0 334.8
Diversified enterprises 361.4 735.6 57.6 1.9 -- --
Total operating revenues $ 2,430.6 2,509.5 1,746.3 1,643.3 1,589.5 1,394.4
Extraordinary item net of income tax benefit $ -- (195.0) -- -- -- --
Cumulative effect of change in
accounting principle net of income taxes $ -- -- -- -- -- 34.0
Net income (loss) after extraordinary item and
change in accounting principle $(1,383.0) (90.6) 191.0 151.6 151.8 151.9
Effective income tax rate 43.3% 43.4% 40.2% 42.9% 42.0% 34.2%
Net income (loss) applicable
to common stock $(1,383.0) (90.4) 190.3 148.1 158.2 151.9
Earnings (loss) per common share (basic and diluted) $ (19.30) (1.22) 2.51 1.96 2.09 2.14
Cash dividends declared per common share $ 1.24 1.24 1.15 1.03 0.65 2.64
Dividend payout ratio (declared) N/A N/A 45.5% 52.3% 30.7% 124.3%
Book value per common share $ 16.28 19.11 21.62 20.19 19.17 25.80
Price range of common shares
High $ 31 27 1/2 30 3/8 30 22 5/8 22 1/8
Low $ 23 3/8 20 1/8 24 5/8 21 1/4 18 1/8 16 1/2
Weighted average number of common shares
outstanding during the period (thousands) 71,667 73,992 75,682 75,644 75,644 70,901
Total assets $ 6,801.3 5,583.0 5,712.8 5,609.8 5,576.7 6,053.1
Capitalization
Common stock equity $ 1,166.9 1,369.5 1,636.2 1,527.0 1,450.2 1,895.6
Preferred stock of subsidiary 57.1 57.1 96.2 125.6 224.7 315.2
Mandatorily redeemable preferred
stock of subsidiary 199.0 197.0 197.0 97.0 133.0 160.0
Long-term debt 2,334.6 1,717.5 1,636.4 1,739.3 1,946.1 2,341.2
Total capitalization $ 3,757.6 3,341.1 3,565.8 3,488.9 3,754.0 4,712.0
Retained earnings $ -- 51.7 233.0 129.6 58.8 517.9
Capital expenditures $ 311.5 223.9 187.3 209.3 193.7 115.5
Cash flows from operations $ 268.0 368.3 407.4 413.2 268.6 225.2
AFUDC as a percent of earnings
applicable to common stock N/A N/A 3.4% 4.1% 5.9% 40.3%
Return on average common equity N/A (6.0%) 12.0% 9.9% 11.4% 8.1%
Ratio of earnings to fixed charges N/A 0.30 3.21 2.70 2.71 1.83
* Millions of dollars except earnings (loss) per common share, cash dividends
declared per common share, book value per common share ,and price range of
common shares.
</TABLE>
<TABLE>
<CAPTION>
Illinova Corporation
Selected Illinois Power Company Statistics
1998 1997 1996 1995 1994 1988
- --------------------------------------------------------------------------------------------------------------------------
Electric Sales in kwh (Millions)
<S> <C> <C> <C> <C> <C> <C>
Residential 4,893 4,734 4,782 4,754 4,537 4,411
Commercial 4,053 3,943 3,894 3,804 3,517 2,939
Industrial 8,701 8,403 8,493 8,670 8,685 7,415
Other 375 426 367 367 536 964
Sales to ultimate consumers 18,022 17,506 17,536 17,595 17,275 15,729
Interchange 16,199 7,230 5,454 4,444 4,837 4,903
Wheeling 2,710 3,253 928 642 622 -
Total electric sales 36,931 27,989 23,918 22,681 22,734 20,632
Electric Revenues (Millions of dollars)
Residential $ 469 $ 489 $ 483 $ 500 $ 471 $ 373
Commercial 329 325 318 321 295 215
Industrial 374 376 360 392 378 312
Other 39 40 38 37 30 50
Revenues from ultimate consumers 1,211 1,230 1,199 1,250 1,174 950
Interchange 557 176 138 116 110 110
Wheeling 13 14 4 3 3 -
Total electric revenues $ 1,781 $ 1,420 $ 1,341 $ 1,369 $ 1,287 $ 1,060
Gas Sales in Therms (Millions)
Residential 305 343 427 356 359 367
Commercial 131 147 177 144 144 148
Industrial 67 47 99 88 81 155
Sales to ultimate consumers 503 537 703 588 584 670
Transportation of customer-owned gas 267 309 251 273 262 235
Total gas sold and transported 770 846 954 861 846 905
Interdepartmental sales 26 19 9 21 5 9
Total gas delivered 796 865 963 882 851 914
Gas Revenues (Millions of dollars)
Residential $ 183 $ 238 $ 216 $ 173 $ 192 $ 207
Commercial 65 77 79 60 66 71
Industrial 24 20 40 24 31 48
Revenues from ultimate consumers 272 335 335 257 289 326
Transportation of customer-owned gas 7 9 7 8 9 13
Miscellaneous 9 10 6 7 4 (4)
Total gas revenues $ 288 $ 354 $ 348 $ 272 $ 302 $ 335
System peak demand (native load) in kw (thousands) 3,694 3,532 3,492 3,667 3,395 3,508
Firm peak demand (native load) in kw (thousands) 3,617 3,469 3,381 3,576 3,232 3,077
Net generating capability in kw (thousands) 3,838 3,289 4,148 3,862 4,121 3,938
Electric customers (end of year) 580,356 580,257 549,957 529,966 553,869 546,443
Gas customers (end of year) 408,428 405,710 389,223 374,299 388,170 385,336
Employees (end of year) 3,965 3,655 3,635 3,559 4,350 4,663
</TABLE>
1998 INFORMATION STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
Notice of Annual Meeting of Shareholders
Information Statement Table of Contents
Notice of Annual Meeting............................. 2
Information Statement................................ 3
Appendix: 1998 Annual Report to Shareholders.........a-1
TO THE SHAREHOLDERS OF ILLINOIS POWER:
Notice is hereby given that the Annual Meeting of Shareholders of Illinois Power
Company ("Illinois Power") will be at 10 a.m. Wednesday, May 5, 1999, at
Shilling Community Education Center, Richland Community College, One College
Park, Decatur, Illinois 62521, for the following purposes:
1) To elect the Board of Directors for the ensuing year.
2) To transact any other business that may properly come before the
meeting or any adjournment.
Shareholders of record at the close of business on March 8, 1999, will be
entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice President, General Counsel
and Corporate Secretary
Decatur, Illinois
March 31, 1999
IMPORTANT
Only shareholders of Illinois Power are entitled to attend the Annual Meeting.
Shareholders will be admitted on verification of record share ownership at the
admission desk. Shareholders who own shares through banks, brokerage firms,
nominees or other account custodians must present proof of beneficial share
ownership (such as a brokerage account statement) at the admission desk.
Information Statement
FIRST SENT OR GIVEN TO SECURITY HOLDERS ON OR ABOUT MARCH 31, 1999.
We are not asking you for a proxy and you are requested not to send us a proxy.
This Information Statement is furnished in connection with the Annual Meeting of
Shareholders of Illinois Power. The Annual Meeting will be held at 10 a.m.
Wednesday, May 5, 1999, at Shilling Community Education Center, Richland
Community College, One College Park, Decatur, Illinois 62521, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.
On March 8, 1999 ("Record Date"), Illinova Corporation ("Illinova")
beneficially owned all of the 62,892,213 shares of Illinois Power Common Stock
then outstanding and there were 1,139,110 shares of Illinois Power Preferred
Stock then outstanding, none of which was held by Illinova.
VOTING RIGHTS
Shareholders of record at the close of business on the Record Date will be
entitled to receive notice of and to vote at the Annual Meeting. Shareholders
who are present at the Annual Meeting will be entitled to one vote for each
share of Illinois Power Preferred Stock which they held of record at the close
of business on the Record Date.
All shareholders will be entitled to 10 votes (the number of directors to be
elected) for each of their shares for candidates nominated to serve as
directors. Shareholders may cast all of their votes for any one candidate whose
name has been placed in nomination prior to the voting, or distribute their
votes among two or more such candidates. Shareholders will be entitled to one
vote for each share of Preferred Stock held of record at the close of business
on the Record Date when voting on other matters presented for consideration at
the Annual Meeting.
ANNUAL REPORT AND INFORMATION STATEMENT
Accompanying this Information Statement, which includes Consolidated Financial
Statements, is a Notice of Annual Meeting of Shareholders and the Summary Annual
Report to Shareholders covering operations of Illinova for the year 1998. This
Information Statement and accompanying documents are first being mailed to
shareholders on or about March 31, 1999.
BOARD OF DIRECTORS
Information Regarding the Board of Directors
The Board of Directors held six Board meetings in 1998. All directors attended
at least 75 percent of the aggregate meetings of the Board and Committees of
which they were members during 1998. The Board has four standing committees: the
Audit Committee, the Finance Committee, the Compensation and Nominating
Committee, and the Nuclear Operations Committee.
The duties and members of the standing committees are:
Audit Committee
1) Review with the Chairman, President and Chief Executive Officer and
the independent accountants the scope and adequacy of Illinois Power's
system of internal controls;
2) Review the scope and results of the annual examination performed by
the independent accountants;
3) Review the activities of Illinois Power's internal auditors;
4) Report its findings to the Board and provide a line of communication
between the Board and both the internal auditors and the independent
accountants;
5) Recommend to the Board the appointment of the independent accountants;
6) Approve the services performed by the independent accountants.
The Audit Committee met three times during 1998.
This Committee consists of the following directors who are not employees of
the Company ("Outside Directors"): Robert M. Powers (Chairman), C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel, and John D. Zeglis.
Finance Committee
1) Review management's cash flow forecasts, financial forecasts and
financing program, and make recommendations to the Board regarding the
approval of such plans;
2) Review Illinois Power's banking relationships, short-term borrowing
arrangements, dividend policies, arrangements with the transfer agent
and registrar, and investment objectives;
3) Review the performance of Illinois Power's pension and other trust
funds, evaluate fund managers, and make recommendations to the Board
concerning such matters;
4) Review Illinois Power's risk management programs, including insurance
coverage, and make recommendations to the Board; and
5) Act in an advisory capacity to management, the Board of Directors, and
the Chairman, President and Chief Executive Officer on other financial
matters as they may arise.
The Finance Committee met five times during 1998.
This Committee consists of the following members of the Board: Walter D.
Scott (Chairman), Charles E. Bayless, C. Steven McMillan, Sheli Z. Rosenberg,
Joe J. Stewart, and Walter M. Vannoy.
Compensation and Nominating Committee
1) Review performance of and recommend salaries plus other forms of
compensation for elected Illinois Power officers and the Board of
Directors;
2) Review Illinois Power's benefit plans for elected Illinova officers
and make recommendations to the Board;
3) Review with the Chairman, President and Chief Executive Officer any
organizational or other personnel matters; and
4) Recommend to the Board candidates for election as director to fill
vacancies on the Board of Directors as they occur.
The Compensation and Nominating Committee will consider shareholders'
recommendations for candidates for director made in writing and addressed to the
Chairman of the Committee at the executive offices of Illinois Power. The
recommendation should include a full description of the qualifications and
business and professional experience of the candidates and a statement of the
candidates' willingness to serve. The notice must be delivered to or mailed and
received at the executive offices of Illinois Power not less than 90 nor more
than 120 days prior to the Annual Meeting.
The Compensation and Nominating Committee met three times during 1998.
This Committee consists of the following Outside Directors: Ronald L.
Thompson (Chairman), J. Joe Adorjan, Robert M. Powers, Marilou von Ferstel, and
John D. Zeglis.
Nuclear Operations Committee
1) Review the safety, reliability and quality of nuclear operations;
2) Review the effectiveness of the management of nuclear operations;
3) Review the strategic plan for nuclear operations;
4) Review various nuclear reports; and
5) Report its findings to the Board.
The Nuclear Operations Committee met six times during 1998.
This Committee consists of the following members of the Board: Joe J.
Stewart (Chairman), J. Joe Adorjan, Charles E. Bayless, Walter D. Scott, Ronald
L. Thompson, and Walter M. Vannoy.
Board Compensation
The Outside Directors of Illinois Power, all of whom also serve on the Board of
Illinova, receive a total retainer fee of $18,000 per year for their service on
these boards. Outside Directors who also chair Board Committees receive an
additional $2,500 per year. Outside Directors receive a grant of 650 shares of
Illinova Common Stock on the date of each Annual Shareholders Meeting. Outside
Directors elected to the Board between Annual Shareholders Meetings are paid
$850 for each Board and Committee meeting attended prior to the first Annual
Shareholders Meeting after their election to the Board. Other than the
foregoing, there are no attendance-based fees.
Illinova had a Retirement Plan for Outside Directors. Under this plan, each
Outside Director who attained age 65 and served on the Board for a period of 60
or more consecutive months was eligible for annual retirement benefits at the
rate of the annual retainer fee in effect when the director retired. Each former
Outside Director whose right to receive the retirement benefit had vested
continues to receive such benefits in accordance with the terms of the
Retirement Plan.
In 1996, the Board of Directors adopted a Comprehensive Deferred Stock Plan
for Outside Directors, replacing the Retirement Plan. All Outside Directors
serving at the time this new plan was adopted were granted a lump sum amount
based on the net present value of these benefits to them, were they to have
retired under the Retirement Plan, based on the number of years they served on
the Board but not to exceed 10. This dollar amount was converted into stock
units, based on the then market value of Illinova Common Stock, and placed into
an account. The value of these stock units is to be paid to the director in
cash, in a lump sum or installments, on termination of service, based on the
then market value of Illinova Common Stock, plus dividend equivalents.
In addition, each Outside Director receives an annual award of stock units
having a value of $6,000. This award is paid to the Outside Director in cash on
retirement, at once or in installments as the Director may elect. The amount of
such payment is determined by multiplying the number of stock units in the
account times the then market value of Illinova Common Stock, and adding the
dividend equivalents attributable to such stock units.
Illinova has a Deferred Compensation Plan for Certain Directors. Outside
Directors of Illinois Power may elect to defer all or any portion of their fees
and stock grants until termination of their services as directors. Deferred fees
and grants are converted into stock units representing shares of Illinova Common
Stock with the value of each stock unit based on the last reported sales price
of such stock. Additional credits are made to the participating director's
account in dollar amounts equal to the dividends paid on the Common Stock which
the director would have received if the director had been the record owner of
the shares represented by stock units, and these amounts are converted into
additional stock units. On termination of the participating directors' services
as directors, payment of deferred fees and stock grants is made in shares of
Illinova Common Stock in an amount equal to the aggregate number of stock units
credited to their accounts.
Illinova amended the plan in 1997 to provide for a payout in cash instead of
shares of Common Stock. Deferred amounts are still converted into stock units
representing shares of Common Stock with the value of each stock unit based on
the last reported sales price of such stock. Payment is made in cash, in a lump
sum or installments, as soon as practical following a director's termination.
The cash paid on termination equals the number of stock units times the share
price at the close of market on the last business day of the month preceding
termination. Directors receive no other payments after their service on the
Board ceases.
ELECTION OF DIRECTORS
Illinois Power's entire Board of Directors is elected at each Annual Meeting of
Shareholders. Directors hold office until the next Annual Meeting of
Shareholders or until their successors are elected and qualified. At the Annual
Meeting a vote will be taken on a proposal to elect the 10 directors nominated
by Illinois Power's Board of Directors. Their names and certain additional
information are set forth on the following pages. If any nominee should become
unable to serve as a director, another nominee may be selected by the current
Board of Directors.
Name of Director Nominee, Age, Year in Which First
Business Experience and Elected a Director
Other Information of Illinois Power
J. Joe Adorjan, 60 1997
Chairman of Borg-Warner Security Corporation, Chicago, Ill., a security systems
services firm, since 1995. He was President of Emerson Electric Company from
1993 to 1995. Prior to that, he was Chairman and Chief Executive Officer of ESCO
Electronics Corporation. He is a director of The Earthgrains Company, ESCO
Electronics Corporation, Hussmann Corporation and Goss Graphics
Systems, Inc.
Charles E. Bayless, 56 1998
Chairman of Illinova and Illinois Power since August 1998, and President and
Chief Executive Officer since July 1998. He was Chairman, President and Chief
Executive Officer of Tucson Electric Power from 1992 to 1998, President and
Chief Executive Officer from 1990 to 1992, and Senior Vice President and Chief
Financial Officer from 1989 to 1990. He is a director of Trigen Energy
Corporation.
C. Steven McMillan, 53 1996
President, Chief Operating Officer, and Director of Sara Lee Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was Executive Vice President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy Development from 1986 to 1993. He is a director of Pharmacia
and Upjohn.
Robert M. Powers, 67 1984
From 1980 until retirement in December 1988, President and Chief Executive
Officer of A. E. Staley Manufacturing Company, Decatur, Ill., a processor of
grain and oil seeds. He is a director of A. E. Staley Manufacturing Company.
Sheli Z. Rosenberg, 57 1997
President and Chief Executive Officer since 1994 and General Counsel 1980 to
1994 of Equity Group Investments, LLC, Chicago, Ill., a privately held business
conglomerate holding controlling interests in seven publicly traded corporations
involved in basic manufacturing, radio stations, retail, insurance, and real
estate. She is a director of Jacor Communications, Inc.; Capitol Trust; Anixter
International, Inc.; Equity Office Properties Trust; Equity Residential
Properties Trust; CVS Corporation; and Manufactured Home Communities, Inc.
Walter D. Scott, 67 1990
Professor of Management and Senior Austin Fellow, J. L. Kellogg Graduate School
of Management, Northwestern University, Evanston, Ill., since 1988. He was
Chairman of GrandMet USA from 1984 to 1986 and President and Chief Executive
Officer of IDS Financial Services from 1980 to 1984. He is a director of
Neodesic Corporation and Intermatic Incorporated.
Joe J. Stewart, 60 1998
From 1995 until retirement in 1998, President of BWX Technologies, Inc.,
formerly The Babcock & Wilcox Government Group, Lynchburg, Va., a diversified
energy equipment and services company, and Executive Vice President of McDermott
International, Inc. (parent of BWX Technologies, Inc. and The Babcock & Wilcox
Company). He was President and Chief Operating Officer of The Babcock and Wilcox
Company and Executive Vice President of McDermott International, Inc., from 1993
to 1995 and Executive Vice President of the Power Generation Group of The
Babcock and Wilcox Company from 1987 to 1993.
Ronald L. Thompson, 49 1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing Co.,
Bowling Green, Ohio, a manufacturer of automotive parts, since 1993. He was
President and Chief Executive Officer and a director of The GR Group, Inc., St.
Louis, Mo., from 1980 to 1993. He is a director of Teachers Insurance and
Annuity Association, and Ryerson Tull.
Marilou von Ferstel, 61 1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. She was Managing Director and Senior Vice President of Hill and Knowlton,
Chicago, Ill., from 1981 to 1990. She is a director of Walgreen Company.
John D. Zeglis, 51 1993
President and Director of AT&T, Basking Ridge, N.J., a diversified
communications company, since October 1997. He was Vice Chairman from June 1997
to October 1997, Senior Executive Vice President and General Counsel, from 1995
to June 1997 and Senior Vice President -- General Counsel and Government Affairs
from 1989 to 1995. He is a director of the Helmerich & Payne Corporation, and
Sara Lee Corporation.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below shows shares of Illinova Common Stock beneficially owned as of
December 31, 1998, by each director nominee and the executive officers named in
the Summary Compensation Table. All of Illinois Power's Common Stock is owned by
Illinova. To the best of Illinois Power's knowledge, no owner holds more than 5
percent of Illinois Power Preferred Stock.
Number Number of Stock
of Shares Units in Deferred
Name of Beneficially Compensation Percent
Beneficial Owner Owned (1)(2) Plans of Class
J. Joe Adorjan 1,650 205 (3)
Charles E. Bayless 2,501 2,000 (3)
Larry D. Haab 88,822 5,420 (3)
C. Steven McMillan 1,950 777 (3)
Robert M. Powers 9,200 4,937 (3)
Sheli Z. Rosenberg 1,000 3,704 (3)
Walter D. Scott 6,125 3,664 (3)
Joe J. Stewart 1,500 851 (3)
Ronald L. Thompson 3,806 6,091 (3)
Marilou von Ferstel 4,579 4,620 (3)
John D. Zeglis 2,714 3,170 (3)
Larry F. Altenbaumer 30,092 2,157 (3)
David W. Butts (4) 13,944 1,742 (3)
Alec G. Dreyer 13,673 3,035 (3)
Paul L. Lang (5) 27,991 2,402 (3)
(1) With sole voting and/or investment power.
(2) Includes the following shares issuable pursuant to stock options
exercisable June 30, 1998: Mr. Haab, 76,900; Mr. Altenbaumer, 24,300;
Mr. Butts, 12,900; Mr. Dreyer, 11,250; and Mr. Lang, 24,300.
(3) No director or executive officer owns any other equity securities of
Illinova or as much as 1 percent of the Common Stock. As a group,
directors and executive officers of Illinova and Illinois Power own
244,324 shares of Common Stock (less than 1 percent).
(4) Includes 135 shares owned by family members.
(5) Includes 910 shares owned by spouse.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the Chief
Executive Officer, the retired Chief Executive Officer, and the four other most
highly compensated executive officers of Illinois Power for the years indicated.
The compensation shown includes all compensation paid for service to Illinois
Power, its parent and subsidiaries.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (4)
<S> <C> <C> <C> <C> <C> <C> <C>
LARRY D. HAAB 1998 $ 338,625 $16,931 $ 46,025 $ 0 27,000 shs. $2,660
Retired Chairman, President 1997 514,952 41,840 16,557 41,840 20,000 shs. 2,614
and Chief Executive Officer 1996 493,709 69,267 15,973 69,267 22,000 shs. 2,615
of Illinova and Illinois Power
CHARLES E. BAYLESS 1998 $ 272,372 $137,500 $ 2,868 $309,625(3) 165,000 shs. $ 0
Chairman, President and
Chief Executive Officer of
Illinova and Illinois Power
PAUL L. LANG 1998 $ 250,875 $ 24,304 $ 7,705 $ 24,304 8,000 shs. $2,697
Senior Vice President 1997 242,325 10,602 8,305 10,601 6,500 shs. 2,615
of Illinois Power 1996 233,450 19,747 8,863 19,747 6,500 shs. 2,595
LARRY F. ALTENBAUMER 1998 $ 244,375 $ 19,855 $ 7,010 $ 19,855 10,000 shs. $2,500
Chief Financial Officer, 1997 232,048 8,992 9,521 8,992 6,500 shs. 1,985
Treasurer and Controller 1996 222,374 19,832 8,459 19,832 7,500 shs. 1,976
of Illinova, and Senior
Vice President and Chief
Financial Officer of
Illinois Power
LEAH MANNING STETZNER 1998 $ 191,375 $ 15,310 $ 6,083 $ 15,310 5,000 shs. $2,100
General Counsel and 1997 175,862 5,276 7,277 5,276 4,000 shs. 2,006
Corporate Secretary of 1996 168,674 11,880 7,080 11,879 4,500 shs. 1,996
Illinova, and Vice President,
General Counsel and
Corporate Secretary of
Illinois Power
ROBERT A. SCHULTZ 1998 $ 187,395 $ 14,956 $ 7,002 $ 14,956 5,000 shs. $2,700
Vice President of 1997 185,560 0 8,480 0 6,000 shs. 2,214
Illinois Power 1996 176,170 23,604 6,957 23,604 6,500 shs. 2,114
</TABLE>
(1) The amounts shown in this column are the cash award portion of grants
made to these individuals under the Executive Incentive Compensation
Plan ("Compensation Plan") for 1998, including amounts deferred under
the Executive Deferred Compensation Plan. See the Compensation Plan
description in footnote (2) below.
(2) This table sets forth stock unit awards for 1998 under the
Compensation Plan. One-half of each year's award under this plan is
converted into stock units representing shares of Illinova Common
Stock based on the closing price of Common Stock on the last trading
day of the award year. The other one-half of the award is cash and is
included under Bonus in the Summary Compensation Table. Stock units
awarded in a given year, together with cash representing the
accumulated dividend equivalents on those stock units, become fully
vested after a three-year holding period. Stock units are converted
into cash based on the closing price of Common Stock on the first
trading day of the distribution year. Participants (or beneficiaries
of deceased participants) whose employment is terminated by retirement
on or after age 55, disability, or death receive the present value of
all unpaid awards on the date of such termination. Participants whose
employment is terminated for reasons other than retirement,
disability, or death forfeit all unvested awards. In the event of a
termination of employment within two years after a change in control
of Illinova, without good cause or by any participant with good
reason, all awards of the participant become fully vested and payable.
As of December 31, 1998, named executive officers were credited with
the following total aggregate number of unvested stock units under the
Compensation Plan since its inception, valued on the basis of the
closing price of Common Stock on December 31, 1998: Mr. Haab, 5,420
units valued at $135,513; Mr. Lang, 2,402 units valued at $60,069; Mr.
Altenbaumer, 2,157 units valued at $53,927; Ms. Stetzner, 1,826 units
valued at $45,663; Mr. Schultz, 1,390 units valued at $34,740.
Although stock units have been rounded, valuation is based on total
stock units, including partial shares.
(3) In December the Company granted Mr. Bayless an award of 6,000 share
units which vest in three equal annual installments of 2,000 share
units and may be deferred by Mr. Bayless at his option. These units
are converted into Illinova Common Stock when paid.
(4) The amounts shown in this column are Illinois Power's contributions
under the Incentive Savings Plan (including the market value of shares
of Illinova Common Stock at the time of allocation).
The following tables summarize grants during 1998 of stock options under
Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards
outstanding at year end for the individuals named in the Summary Compensation
Table.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Grant Date
Granted (1) in 1998 Price Per Share (1) Expiration Date Present Value (2)
<S> <C> <C> <C> <C> <C> <C>
Larry D. Haab 27,000 9.5% $29.094 2/11/2008 $129,600
Charles E. Bayless 50,000(3) 17.5% 30.25 6/23/2008 261,500
115,000(4) 40.3% 30.25 6/23/2008 478,400
Paul L. Lang 8,000 2.8% 29.094 2/11/2008 38,400
Larry F. Altenbaumer 10,000 3.5% 29.094 2/11/2008 48,000
Leah Manning stetzner 5,000 1.7% 29.094 2/11/2008 24,000
Robert A. Schultz 5,000 1.7% 29.094 2/11/2008 24,000
</TABLE>
(1) Each option becomes exercisable on February 11, 2001. In addition to the
specified expiration date, the grant expires on the first anniversary of
the recipient's death and/or 5 years following date of retirement, and is
not exercisable in the event a recipient's employment terminates. In the
event of certain change-in-control circumstances, the Compensation and
Nominating Committee may declare the option immediately exercisable. The
exercise price of each option is equal to the fair market value of the
Common Stock on the date of the grant. Recipients shall also receive, on or
shortly after February 11, 2001, a target performance award, determined by
calculating the difference between the return earned by Illinova on its
invested capital and its cost of capital (the "spread"), then comparing
this spread to that of a peer group and reducing or increasing the target
award depending on Illinova's relative performance, but not reducing the
payment below zero. The target award is equal to one-half of the mid-point
of compensation for each officer's salary grade (a market-based number)
times a percentage, determined by the Compensation and Nominating
Committee. In 1998 those percentages ranged between 20 and 45 percent. This
range does not apply to Mr. Bayless's stock options as described in his
employment agreement on page 10. At the discretion of the Board of
Directors, the foregoing payment may be made in the form of Illinova Common
Stock of equivalent value based on the average New York Stock Exchange
price of the stock during February 2001, or in cash.
(2) The Grant Date Present Value has been calculated using the Black-Scholes
option pricing model. Disclosure of the Grant Date Present Value, or the
potential realizable value of option grants assuming 5% and 10% annualized
growth rates, is mandated by regulation; however, Illinova does not
necessarily view the Black-Scholes pricing methodology, or any other
present methodology, as a valid or accurate means of valuing stock option
grants. The calculation was based on the following assumptions: (i) As of
the grant date, Illinova's calculated Black-Scholes ratio was .1808. After
discounting for risk of forfeiture at three percent per year over
Illinova's three-year vesting schedule, the ratio is reduced to .1650; (ii)
An annual dividend yield on Illinova Common Stock of 4.48%; (iii) A
risk-free interest rate of 5.76%, based on the yield of a zero-coupon
government bond maturing at the end of the option term; and (iv) Stock
volatility of 18.65%.
(3) The Grant Date Present Value for Mr. Bayless's 50,000 time-vesting options
was calculated based on the following assumptions: (i) As of the grant
date, Illinova's calculated Black-Scholes ratio was .1836. After
discounting for risk of forfeiture by three percent per year over the
option vesting schedule, the ratio is reduced to .1728; (ii) An annual
dividend yield on Illinova Common Stock of 4.46%; (iii) a risk-free
interest rate of 5.64%, based on the yield of a zero-coupon government bond
maturing at the end of the option term; and (iv) Stock Volatility of
19.30%.
(4) Mr. Bayless has 115,000 options which will vest based on the satisfaction
of certain performance criteria -- specifically, when Illinova's stock
price appreciates to specified levels above the market price on the date of
grant. As a result, The Grant Date Present Value for Mr. Bayless's 115,000
performance-vesting options was calculated based on the same assumptions as
were used for the time-vesting options, with the exception of risk of
forfeiture which was assumed to be somewhat greater since the options will
vest sooner than 9.5 years only if the performance restrictions are
satisfied. As a result, the Black-Scholes ratio used for the
performance-vesting options was reduced to .1375.
<TABLE>
<CAPTION>
AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year-End Options at Fiscal Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
<S> <C> <C> <C> <C>
Larry D. Haab 76,900 shs./69,000 shs. $129,712/$0
Charles E. Bayless 0 shs./165,000 shs. $0/$0
Paul L. Lang 24,300 shs./21,000 shs. $ 41,487/$0
Larry F. Altenbaumer 24,300 shs./24,000 shs. $ 41,487/$0
Leah Manning stetzner 13,300 shs./13,500 shs. $ 24,047/$0
Robert A. Schultz 10,750 shs./17,500 shs. $ 16,594/$0
</TABLE>
(1) None of the unexercisable options were in the money at fiscal year-end 1998.
PENSION BENEFITS
Illinois Power maintains a Retirement Income Plan for Salaried Employees (the
"Retirement Plan") providing pension benefits for all eligible salaried
employees. In addition to the Retirement Plan, Illinois Power also maintains a
nonqualified Supplemental Retirement Income Plan for Salaried Employees (the
"Supplemental Plan") that covers certain officers eligible to participate in the
Retirement Plan and provides for payments from general funds of Illinois Power
of any monthly retirement income not payable under the Retirement Plan because
of benefit limits imposed by law or because of certain Retirement Plan rules
limiting the amount of credited service accrued by a participant.
The following table shows the estimated annual pension benefits on a straight
life annuity basis payable upon retirement based on specified annual average
earnings and years of credited service classifications, assuming continuation of
the Retirement Plan and Supplemental Plan and employment until age 65. This
table does not show the Social Security offset, but any actual pension benefit
payments would be subject to this offset.
Estimated Annual Benefits (rounded)
Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Average Credited Credited Credited Credited Credited
Earnings Service Service Service Service Service
$ 125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
350,000 105,000 140,000 175,000 210,000 245,000
400,000 120,000 160,000 200,000 240,000 280,000
450,000 135,000 180,000 225,000 270,000 315,000
500,000 150,000 200,000 250,000 300,000 350,000
550,000 165,000 220,000 275,000 330,000 385,000
600,000 180,000 240,000 300,000 360,000 420,000
650,000 195,000 260,000 325,000 390,000 455,000
700,000 210,000 280,000 350,000 420,000 490,000
750,000 225,000 300,000 375,000 450,000 525,000
800,000 240,000 320,000 400,000 480,000 560,000
The earnings used in determining pension benefits under the Retirement Plan
are the participants' regular base compensation, as set forth under Salary in
the Summary Compensation Table.
See Employment Agreement for information relating to Mr. Bayless's pension
agreement.
At December 31, 1998, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Bayless, Lang, Altenbaumer, Ms. Stetzner and Mr.
Schultz had completed 0, 17, 26, 9 and 17 years of credited service,
respectively. As of the date of his retirement, Mr. Haab had completed 33 years
of credited service.
EMPLOYMENT AGREEMENT
Charles Bayless was hired in July 1998 and elected Chairman, President and CEO
in August 1998. Mr. Bayless received a base salary of $560,000, which will be
subject to periodic review. The 1998 bonus opportunity for Mr. Bayless had a
minimum guarantee of $232,000 with an opportunity for payment of up to $302,000.
Mr. Bayless has an option to purchase 165,000 shares of Illinova stock based on
the following vesting schedule:
If employed through Options available
the following date to Exercise
One-year anniversary of grant date 16,667 shares
Two-year anniversary of grant date 16,667 shares
Three-year anniversary of grant date 16,667 shares
The first date on which the stock
price is $35.00 57,500 shares
The first date on which the stock
price is $40.00 57,500 shares
An additional grant of 6,000 share units of Illinova stock was awarded Mr.
Bayless in December 1998. Mr. Bayless has a right to receive these shares in
2,000-share blocks in calendar years 1998, 1999, and 2000. These share units may
be deferred by Mr. Bayless at his option.
For future years, Mr. Bayless will participate in the Executive Incentive
Compensation Plan and the Long-Term Incentive Compensation Plan. Mr. Bayless was
provided with a Retention Agreement comparable to those issued to other named
Executives. Mr. Bayless will be entitled to a supplemental pension which fully
vests on December 31, 2004. Supplemental pension will pay an equivalent of 40
percent of his highest 36 consecutive months of his final 60 months of base pay
and bonus, less any payment made through the qualified pension plan. To
compensate for benefits or payments he was entitled to from his previous
employer but will not receive because of his departure, a $500,000 loan was made
to Mr. Bayless. This loan, plus all applicable taxes resulting from its receipt,
will be forgiven in 20 percent increments over a period of five years.
RETIREMENT AND CONSULTING AGREEMENT
Larry Haab became Chairman, President and Chief Executive Officer ("CEO") of
Illinois Power on June 12, 1991, and Chairman, President and Chief Executive
Officer of Illinova in December 1993. Mr. Haab retired from Illinova on August
12, 1998. Following his retirement, Illinova entered into a two-year retirement
and consulting agreement with Mr. Haab. Consulting services are to be provided
on request and Mr. Haab is compensated with a fee of $25,000 per month. Mr. Haab
is also entitled to office space and secretarial assistance for the period of
his consulting term. Financial consulting and tax preparation services are
provided to Mr. Haab for the five years following the year of his retirement.
Mr. Haab is also provided with certain personal property previously provided for
his business use. Additionally, the Board of Directors at its discretion may
elect to make a pro rata incentive compensation payment to Mr. Haab for the
period he was actually employed in 1998. As part of his retirement and
consulting agreement, Mr. Haab agrees to assist with any claims for a period of
48 months; will keep all non-public information regarding the company
confidential; will not make any disclosure or disparaging remarks about the
company; or solicit, employ, or offer to employ any person who was an employee
of the company in the previous year.
EMPLOYEE RETENTION AGREEMENTS
Illinova has entered into Employee Retention Agreements with each of its
executive officers and with officers of its subsidiaries. Under each agreement,
the officer would be entitled to receive a lump sum cash payment if his or her
employment were terminated without good cause or voluntarily by the officer for
good reason within two years following a change in control of Illinova (as
defined in the Agreement) or terminated prior to a change of control at the
request of a potential acquiror. The amount of the lump sum payment would be
equal to
1) 36 months' salary at the greater of the officer's salary rate in effect on
the date the change in control occurred or the salary rate in effect on the
date the officer's employment with Illinova terminated; plus
2) three times the latest bonus earned by the officer during the three
calendar years preceding termination of employment.
Under the agreement, the officer would continue, after any such termination
of employment, to participate in and receive benefits under other benefit plans
of Illinova. Such coverage would continue for 36 months following termination of
employment, or, if earlier, until the officer reached age 65 or was employed by
another employer; provided that, if the officer was 50 years of age or older at
the time of such termination, then coverage under health, life insurance and
similar welfare plans would continue until the officer became 55 years of age,
at which time he or she would be eligible to receive the benefits extended to
the employees of Illinova who elect early retirement.
COMPENSATION AND NOMINATING COMMITTEE REPORT ON OFFICER COMPENSATION
The five-member Compensation and Nominating Committee of the Board of Directors
(the "Committee") is composed entirely of Outside Directors. The Committee's
role includes an assessment of the Company's Compensation Strategy, a review of
the performance of the elected officers and the establishment of specific
officer salaries subject to Board approval. The Committee established
performance goals for the officers and approves payments to officers made
pursuant to the Annual Incentive Compensation Plan and recommends grants under
the Long-Term Incentive Compensation Plan approved by the shareholders in 1992.
The Committee also reviews other forms of compensation and benefits, making
recommendations to the Board on changes whenever appropriate. The Committee
carries out these responsibilities with assistance from an executive
compensation consulting firm and with input from the Chief Executive Officer and
management as it deems appropriate.
OFFICER COMPENSATION PHILOSOPHY
Illinova's compensation philosophy reflects a commitment to compensate officers
competitively with other companies while rewarding executives for achieving
levels of operational and financial excellence consistent with continuous
improvement.
In 1998 it was determined that the company would broaden its competitive
reference beyond the regulated utility industry in order to compete sufficiently
for talent in the changing industry. Illinova's current compensation policy is
to provide a total compensation opportunity targeted to the median of the
appropriate comparable markets in which it competes for executive talent. Thus
the comparison markets will consist of Utility Industry, Independent Power
Producers, Energy Marketing and Trading Companies, and General Industry
companies. The S&P Utilities Index covers the utility industry widely and
includes electric and gas utilities.
The compensation program for officers consists of base salary, annual
incentive, and long-term incentive components. The Committee believes that the
combination of these three elements balances short and long-term business
performance goals and aligns officer financial rewards with those of Illinova's
shareholders. The compensation program is structured so that, depending on the
salary level, between approximately 30 percent and 60 percent of an officer's
total compensation target is composed of incentive compensation.
BASE SALARY PLAN
The Committee determines base salary ranges for executive officers based on
competitive pay practices for similarly sized companies in both the energy
specific and general industries. Officer salaries correspond to approximately
the median of the companies in the appropriate comparison market. Individual
increases are based on several factors, including the officer's performance
during the year, the relationship of the officer's salary to the market salary
level for the position, and competitive industry salary increase practices.
ANNUAL INCENTIVE COMPENSATION PLAN
Annual incentive awards are earned based on the achievement of specific annual
financial and operational goals by the Illinova officer group as a whole and
consideration of each officer's individual contribution. If payment is earned
under this Plan, one-half of the bonus is payable in cash during the year
following the performance year, and one-half is credited to the participants in
the form of Common Stock units, the number of which is determined by dividing
half of the earned bonus amount by the closing price of the Common Stock on the
last trading day of the performance year. The officer's interest in the stock
units vests at the end of the three-year period, which begins the year after the
performance year. The officer receives this award in cash equal to
1) the closing stock price on the first trading day of the distribution year
times the number of units held; plus
2) dividend equivalents that would have been received if the stock had
actually been issued.
Maximum awards under the plan may be up to 150 percent of target; threshold
awards are 50 percent of target.
For Illinois Power officers, 1998 awards under the Compensation Plan were
based on achievement in the following performance areas where applicable: cash
flow, earnings per share, return on invested capital, sales, customer
satisfaction, safety, employee teamwork, and cost management. Up to 20 percent
of the awarded amount is based on an assessment of the individual officer's
performance during the year.
Awards shown under Bonus in the Summary Compensation Table for performance
during 1998 were based on achievement of Business Unit Operational Goals and
Individual Goals for the Officer. Corporate Financial Goals were not satisfied
in 1998.
LONG-TERM INCENTIVE COMPENSATION (LTIC) PLAN
Awards under the LTIC Plan are calibrated to median utility industry and the
general industry and are based on corporate performance as well as individual
officer's contributions to corporate performance subject to the review of this
Committee. The LTIC value granted to the officers for 1998 represent an award
based on market levels as well as on Illinova, Illinois Power, and individual
performance as evaluated by the Chairman and reviewed by the Committee. In 1998,
it was determined that awards under the LTIC plan be delivered in two
components. One-half of each officer's LTIC plan award is delivered in the form
of stock options granted at fair market value on the date of the award. The
other half of the LTIC plan award is distributed to officers in cash based on
Illinova's Shareholder Value-Added (SVA) performance relative to a peer group of
utility companies, as measured in overlapping three-year periods. SVA measures
Illinova's return on the Company's weighted average cost of capital. SVA
performance at the median of the peer group will result in target award levels.
Performance above the median will result in payouts greater than target to a
maximum of two times target; performance significantly below the median results
in no payouts. Since 1996 represented the first year of the SVA plan's first
three-year measurement cycle, no awards are due to be paid out under the plan
until 1999. Based on performance, no award was earned in 1998 for payment in
1999. No future payments will be made as a result of the SVA program.
In 1998 the Board elected to eliminate SVA as a criteria for the cash
portion of the LTIC. The rationale for this change was a desire for the
component to have a closer alignment to shareholder return. The SVA Plan was
replaced with a Total Shareholder-Return Performance Plan (TSR Plan). Awards
from the TSR Plan will be based on Illinova's stock price appreciation plus
dividends compared to a broad peer group of publicly traded utility companies.
The plan has been changed for 1999 to be awarded in restricted stock.
CEO COMPENSATION
Charles E. Bayless became Chairman, President and Chief Executive Officer (CEO)
of Illinova and Illinois Power on August 13, 1998. Illinova and the Board based
Mr. Bayless's contract on the competitive market for CEOs in both the Utility
Industry as well as the broader competitive market for executive talent. The
Committee involves all outside Directors in reviewing Mr. Bayless's performance
before it makes recommendations regarding his compensation. The Committee is
responsible for administering the processes for completing this review. The
annual process begins the first of each year when the Board of Directors and Mr.
Bayless establish his personal goals and short- and long-term strategic goals
for Illinova. Mr. Bayless was hired in July 1998 and interim goals were
developed. At the conclusion of the year, Mr. Bayless reviews his performance
with the outside Directors. The Committee then recommends appropriate
compensation adjustments to the Board. The Committee with the participation of
all outside Directors developed a contract with Mr. Bayless that recognizes his
experience and ability to lead Illinova into the future. Progress has been made
to advance strategic objectives of the Company.
The 1998 Annual Incentive Compensation Plan award for the Chief Executive
Officer was consistent with the terms of the contract between Mr. Bayless and
the Board.
The option shares granted to the CEO reflect the Committee's recognition of
Mr. Bayless's work in directing Illinova toward its long-term objectives and
provide a strong incentive to maximize the creation of shareholder value.
COMPENSATION AND NOMINATING COMMITTEE
Ronald L. Thompson, Chairman
J. Joe Adorjan
Robert M. Powers
Marilou von Ferstel
John D. Zeglis
INDEPENDENT AUDITORS
The Board of Directors of Illinois Power has selected PricewaterhouseCoopers as
independent auditors for 1999. A representative of that firm will be present at
the Annual Meeting and available to make a statement and to respond to
questions.
OTHER MATTERS
Illinova's 1998 Summary Annual Report to Shareholders was mailed to Illinois
Power's shareholders on or about March 31, 1999. Copies of Illinois Power's
Annual Report on Form 10-K will be available to shareholders, after its filing
with the Securities and Exchange Commission on or before March 31, 1999.
Requests should be addressed to Investor Relations, G-21, IIllinois Power, 500
South 27th Street, Decatur, Illinois 62521-2202.
Under the Securities and Exchange Commission rules, a shareholder proposal
submitted for inclusion in next year's proxy statement must be received at
Illinois Power's executive offices not later than November 10, 1999.
A shareholder proposal submitted for presentation at the Annual Meeting in
2000 will be considered untimely if notice of the proposal is received by
Illinois Power after January 24, 2000.
OTHER BUSINESS
Management does not know of any matter which will be presented for consideration
at the Annual Meeting other than the matters described in the accompanying
Notice of Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice President, General Counsel and Corporate Secretary
Decatur, Illinois
March 31, 1999
Appendix: 1998 Annual Report to Shareholders
TABLE OF CONTENTS
Management's Discussion and Analysis................... a-2
Responsibility for Information......................... a-17
Report of Independent Accountants...................... a-18
Consolidated Statements of Income...................... a-19
Consolidated Balance Sheets............................ a-20
Consolidated Statements of Cash Flows.................. a-21
Consolidated Statements of Retained Earnings........... a-21
Notes to Consolidated Financial Statements............. a-22
Selected Consolidated Financial Data................... a-48
Selected Illinois Power Company Statistics............. a-49
ABBREVIATIONS USED THROUGHOUT THIS REPORT
AICPA American Institute of Certified Public Accountants
AFUDC Allowance for Funds Used During Construction
Baldwin Baldwin Power Station
Clinton Clinton Power Station
DOE U.S. Department of Energy
EITF Emerging Issues Task Force of the
Financial Accounting Standards Board
EMF Electric and Magnetic Fields
EPS Earnings Per Share
ESOP Employees' Stock Ownership Plan
FAS Statement of Financial Accounting Standards
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fuel Company Illinois Power Fuel Company
Hennepin Hennepin Power Station
ICC Illinois Commerce Commission
Illinova Illinova Corporation
IP Illinois Power Company
IPFI Illinois Power Financing I
IPSPT Illinois Power Special Purpose Trust
ISA Integrated Safety Assessment
ISO Independent System Operator
IT Information Technology
ITC Investment Tax Credits
kw Kilowatt
kwh Kilowatt-Hour
MAIN Mid-America Interconnected Network
MGP Manufactured-Gas Plant
MIPS Monthly Income Preferred Securities
MISO Midwest Independent Transmission System Operator, Inc.
MW Megawatt
MWH Megawatt-Hour
NAES North American Energy Services Company
NERC North American Electric Reliability Council
NOPR Notice of Proposed Rulemaking
NOx Nitrogen Oxide
NRC U.S. Nuclear Regulatory Commission
NWPA Nuclear Waste Policy Act of 1992
P.A. 90-561 Electric Service Customer Choice
and Rate Relief Law of 1997
PCA Power Coordination Agreement
PECO PECO Energy Company
ROE Return on Equity
S&P Standard & Poor's
SCR Selective Catalytic Reduction
SEC U.S. Securities and Exchange Commission
SFP Secondary Financial Protection
SO2 Sulfur Dioxide
SOP Statement of Position
Soyland Soyland Power Cooperative, Inc.
TOPrS Trust Originated Preferred Securities
UFAC Uniform Fuel Adjustment Clause
UGAC Uniform Gas Adjustment Clause
U.S. EPA U.S. Environmental Protection Agency
VaR Value-at-Risk
Vermilion Vermilion Power Station
Wood River Wood River Power Station
Management's Discussion and Analysis
In this report, we refer to the Consolidated Financial Statements, related Notes
to Consolidated Financial Statements, Selected Consolidated Financial Data, and
Selected Illinois Power Company Statistics for information concerning
consolidated financial position and results of operations. Below is discussion
of the factors having significant impact on consolidated financial position and
results of operations since January 1, 1996.
Illinois Power Company is a subsidiary of Illinova Corporation, a holding
company. Illinova Generating Company, Illinova Energy Partners, Inc., Illinova
Insurance Company, and Illinova Business Enterprises, Inc. are wholly owned
subsidiaries of Illinova. IP is engaged in the generation, transmission,
distribution and sale of electric energy and the distribution, transportation
and sale of natural gas in the State of Illinois.
OPEN ACCESS AND WHEELING
On March 29, 1995, FERC issued a NOPR initiating the process of mandating
non-discriminatory open access to public utility transmission facilities at
cost-based rates. Transmission of electricity for a reseller or redistributor of
energy is called wholesale wheeling. Transmission of electricity for end-use
customers is known as retail wheeling.
On April 24, 1996, FERC issued Orders 888 and 889 which established the Final
Rule resulting from the NOPR. The Orders became effective July 9, 1996. The Rule
requires all public utilities under FERC jurisdiction that own transmission
facilities to file transmission service tariffs that comply with Pro Forma
Tariffs attached to the Orders. FERC also requires that all wholesale sales made
by a utility provide for transmission of the power under the prescribed terms
and conditions. IP made a compliance filing as required on July 9, 1996, which
was accepted by FERC.
FERC currently does not exercise jurisdiction over public utilities serving
customers at retail and FERC does not require public utilities to give retail
customers access to alternate energy suppliers or direct transmission service.
In 1996, IP received approval from both the ICC and FERC to conduct an open
access experiment beginning in 1996 and ending on September 30, 1999. The
experiment allows certain industrial customers to purchase electricity and
related services from other sources. Currently, 15 customers are participating
in the experiment. Since inception, the experiment has cost IP approximately
$19.2 million in lost revenue, net of avoided fuel cost and variable operating
expenses. This loss was partially offset by selling the surplus energy and
capacity on the open market and by $4.8 million in transmission service charges.
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with FERC for all approvals necessary to create and implement
the MISO. On September 16, 1998, FERC issued an order authorizing the creation
of a MISO. The MISO is governed by a seven-person independent board of
directors. The goals of the MISO 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 independent of any transmission owner(s)
or other market participants, thus furthering competition in the wholesale
generation market consistent with the objectives of FERC's Order 888.
Since January 1998, four other transmission-owning entities joined the MISO.
Participation in an ISO is a requirement of P.A. 90-561. The MISO has a stated
goal to begin limited operation in 1999 and to be fully operational in 2000.
COMPETITION
P.A. 90-561, Illinois electric utility restructuring legislation, was enacted in
December 1997. P.A. 90-561 gives IP's residential customers a 15 percent
decrease in base electric rates beginning August 1, 1998, and an additional 5
percent decrease effective May 1, 2002. The rate decreases resulted in revenue
reductions of approximately $35 million in 1998 and expected revenue reductions
of approximately $70 million in each of the years 1999 through 2001,
approximately $90 million in 2002, and approximately $100 million in 2003, based
on current consumption.
Under P.A. 90-561, customers with demand greater than 4 MW at a single site,
and customers with at least 10 sites which aggregate at least 9.5 MW in total
demand are allowed to choose electric generation suppliers ("direct access")
starting in 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 customers
at regulated rates. In 1999, rates for delivery services for non-residential
customers will be established in proceedings mandated by P.A. 90-561. The
transition charges departing customers must pay to IP are not designed to hold
IP completely harmless from resulting revenue loss, because of the mitigation
factor described below. IP will be able to estimate the revenue impact of
customer choice more accurately when its delivery service charges are
established.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
ICC. The transition charges are calculated by subtracting from a customer's
fully bundled rate an amount equal to a) delivery charges the utility will
continue to receive from the customer, b) the market value of freed-up
energy, and c) a mitigation factor, which is the higher of a fixed rate per
kwh or a percentage of the customer's bundled base rate. The mitigation
factor increases during the transition period and is designed to provide
incentive for utilities 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 the change in law
leads to their ROE 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. See "Note 4 -- Commitments and Contingencies" for a more detailed
description of the earnings floor and ceiling.
The extent to which revenues are affected by P.A. 90-561 will depend on a
number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's existing service territory. The
impact on net income will depend on, among other things, the amount of revenues
earned and the cost of doing business.
CLINTON POWER STATION
See "Note 3 -- Clinton Power Station" for a discussion of Clinton.
Due to uncertainties of deregulated generation pricing in Illinois and to
various operation and management factors, IP's Board of Directors voted in
December 1998 to sell or close Clinton. This decision resulted in an impairment
of Clinton-related assets and accrual of exit-related costs. The impairment and
accrual of related charges resulted in a $1,327.2 million, net of income taxes,
charge against earnings.
IP has entered into discussions with parties interested in purchasing
Clinton. Principal concerns of interested parties are plant restart, funding the
decommissioning liability, terms of any purchase agreement for power generated
by Clinton, including the length of any agreement and price of electricity,
market price projections for electricity in the region, property tax obligations
of the purchaser, and income tax issues. These concerns create substantial
uncertainty with regard to the ability to convert any tentative agreement into
an executable transaction. Therefore, IP has accounted for the Clinton exit
based on the expectation of plant closure as of August 31, 1999. An August 31,
1999, closure allows IP to pursue opportunities to sell Clinton, which has the
potential economic benefit of reducing IP's financial exposure to
decommissioning. An August 31, 1999, closure also allows IP to refine its plans
to close and decommission Clinton if a tentative agreement cannot be converted
into an executable transaction. In addition, Clinton would be available for the
summer cooling season. The estimated Clinton other operating and maintenance
expense, including expensed capital expenditures, is $151 million for January
through August 1999.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for additional
information.
ACCOUNTING MATTERS
1998: Concurrent with the decision to exit Clinton operations, as discussed
above, IP's Board of Directors also voted to effect a quasi-reorganization in
which IP's consolidated accumulated deficit in retained earnings of $1,369.4
million was eliminated. A quasi-reorganization is an accounting procedure
whereby a company adjusts its accounts to obtain a "fresh start." In a
quasi-reorganization, a company restates its assets and liabilities to their
fair value, adopts accounting pronouncements issued but not yet adopted, and
eliminates any remaining deficit in retained earnings by a transfer from other
paid-in capital.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for additional
information.
See "Note 4 -- Commitments and Contingencies" for a discussion of
decommissioning.
1997: Prior to the enactment of P.A. 90-561, IP prepared its consolidated
financial statements in accordance with FAS 71, "Accounting for the Effects of
Certain Types of Regulation." Reporting under FAS 71 allows companies whose
service obligations and prices are regulated to maintain balance sheet assets
representing costs they expect to recover from customers through inclusion of
such costs in future rates. In July 1997, the EITF concluded that, for business
segments for which a plan of deregulation has been established, accounting under
FAS 71 should be discontinued when such deregulation legislation is enacted. The
EITF further concluded that regulatory assets and liabilities originating in the
business segment being deregulated should be written off, unless their recovery
is specifically provided for through future cash flows from the regulated
portion of the business.
Based on this conclusion and 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 the 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 had been expected to be
collected through future revenues, including deferred costs for Clinton,
unamortized losses on reacquired debt, previously recoverable income taxes, and
other generation-related regulatory assets. At December 31, 1998, IP's net
investment in generation facilities was $2.9 billion.
See "Note 1 -- Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
REGULATORY MATTERS
In accordance with P.A. 90-561, ICC rulemakings are completed or in progress
covering issues such as limits on affiliate interaction and reliability. These
regulatory proceedings, alone or in combination, could significantly impact the
way IP operates and is organized, but they are not likely to have a material
impact on financial results.
Under the new reliability 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 their
service and explaining their plans for reliability improvements. In addition,
each utility must also report the number and causes of service interruptions
that were within the utility's control. Outage targets were established for
service to individual customers and for system performance.
In March 1999, IP submitted a filing to the ICC to determine:
1) The rates and terms associated with the provision of unbundled delivery
services for select customer classes;
2) The methodology, terms, and conditions associated with billing competitive
transition charges; and
3) Terms and conditions associated with accepting service under IP's Market
Value Power Purchase Option tariff, a service option mandated by P.A.
90-561 which allows customers to purchase electricity from IP at current
market prices.
ICC orders on the foregoing rulemakings and filing are expected by September
1999.
Additionally, the ICC has initiated a proceeding to investigate the
feasibility of breaking out and unbundling various components of delivery
service, such as meter reading.
Delivery tariff revenues approved by the ICC are to be set at a level that
allows IP to recover all just and reasonable costs associated with providing
delivery services to those customers who choose to acquire power from alternate
retail electric suppliers.
P.A. 90-561 includes provisions allowing utilities to unbundle or segregate
assets. Illinova and IP are evaluating the benefits of creating a separate
Illinova subsidiary to which the IP fossil generation assets would be
transferred. IP would be required to demonstrate to the ICC that it will
continue to be able to serve its retail customers reliably and that the transfer
is not likely to cause IP to seek a rate increase during the mandatory
transition period, which extends through 2004. The new subsidiary, if formed,
will be regulated by FERC.
See "Note 4 -- Commitments and Contingencies" for a discussion of Fuel Cost
Recovery.
See "Note 6 -- Facilities Agreements" for a discussion of Soyland and the
Soyland PCA.
POWER SUPPLY AND RELIABILITY
See "Note 4 -- Commitments and Contingencies" for a discussion of Power Supply
and Reliability.
YEAR 2000
Passing from 1999 into 2000 creates a risk that computer-dependent processes
will fail because the date will be read as "1900." IP began its Year 2000
project in November 1996. A central organization is providing overall guidance
and coordination among the business groups, meeting monthly to share
information, conducting internal project reviews, and producing monthly status
reports to all levels of IP management. Bi-monthly Year 2000 readiness reports
are provided to IP's Board of Directors.
The Year 2000 project involves evaluation and testing of software,
hardware, and business processes, including mainframe and personal computer
software and hardware, process computer software and hardware, end-user
computing, telecommunications and networks, vendor-purchased packages, embedded
systems, facility control systems, vendors/suppliers, financial institutions,
and electronic interfaces with outside agencies.
The Year 2000 efforts are focused on those systems and processes necessary
to provide safe, reliable service and essential administrative support. Priority
is given to "mission critical" and "important to operations" systems,
components, and processes, including generation facilities (e.g. power plants
and fuel suppliers), transmission and distribution facilities (e.g. power lines,
transformers, gas lines, and meters), building systems (e.g. climate control and
security), and administrative systems (e.g. billing, payroll, and accounts
payable).
The project is divided into two focus areas. The first deals with IT
software, hardware, and infrastructure. This includes the billing system,
payroll system, accounts payable system, personal computers, telecommunications,
networks, and mainframes.
The second focus area targets non-IT operational systems and processes,
which encompass most of the systems and business processes actually used to
deliver electricity and gas to customers. This is also the area where embedded
systems and microprocessors are found. Included in this focus area are power
plant facilities, transportation systems such as railways and barges, fuel
suppliers, electric and gas transmission and distribution facilities,
substations and transformers, meters, building systems such as HVAC and
security, and financial institutions.
The project has six phases: awareness, inventory, process analysis,
assessment, implementation, and contingency planning. The awareness phase
focuses on raising visibility of the Year 2000 issue with employees, top
management, customers, suppliers, and other business partners. This is an
on-going activity. The inventory and process analysis phases identify systems,
hardware, and business processes that may be affected by the Year 2000 problem.
In the assessment phase, an analysis is performed on each inventoried item to
determine how it will be affected by Year 2000 and how critical the item may be.
In this phase, implementation plans and budgets are developed and documented.
The implementation phase consists of upgrading, replacing, or repairing "mission
critical" and "important to operations" items affected by Year 2000. Testing and
production implementation occur in this phase. In the contingency planning
phase, plans are developed and documented to ensure business continuity. These
plans address various ways of handling unusual and unexpected circumstances that
may occur due to Year 2000 problems.
Internal project reviews are performed to help ensure consistency of
project tasks and documentation and to identify weaknesses that need to be
addressed. In addition, these reviews help identify any issues that overlap
business groups which may need project sponsorship for resolution.
IP has completed its awareness, inventory, assessment, and process analysis
phases. The table below provides further details differentiating between IT and
non-IT.
IP Status -- February 1999
IT Non-IT
% Completion % Completion
Complete Date * Complete Date *
Awareness 100 02/01/97 a 100 04/29/98 a
Inventory 100 01/20/97 a 100 07/31/98 a
Assessment 100 05/09/97 a 100 09/30/98 a
Process Analysis 100 11/30/98 a 100 02/28/99 a
Implementation --
(Mission Critical) 69 06/30/99 e 52 11/30/99 e**
Implementation --
(Important to
Operations) 78 06/30/99 e 58 06/30/99 e
Contingency Planning 10 06/30/99 e 27 06/30/99 e
* "a" = Actual "e" = Estimated
** With the exception of four process computing systems at Clinton, it is
projected that all IP Year 2000 implementation activities will be completed by
June 30, 1999. However, Clinton still plans to be Year 2000 ready, per NRC
requirements, by developing contingency plans that will allow operation.
IT systems and infrastructure are approximately 74% complete, with 100%
completion projected by June 30, 1999. The customer billing system, materials
management system, accounts payable system, and power plant maintenance planning
system have been remediated and are now Year 2000 compliant. The payroll system
and shareholder system remediation will be completed during first quarter 1999.
Year 2000 work has not caused any IT projects to be delayed, and thus no
maintenance costs have been deferred.
The DOE has charged the NERC with taking the lead in facilitating North
America-wide coordination of electric utilities' Year 2000 efforts. The
collective efforts of the industry will minimize risks imposed by Year 2000 to
the reliable supply of electricity. NERC has in turn assigned the regional
reliability councils the responsibility of assessing their respective networks
to ensure reliable electric supply. IP is taking an active role within its
regional council (MAIN) in assessment and renovation of the grid and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.
NERC's second status report presented to the DOE on January 11, 1999,
stated that "with more than 44% of mission-critical components tested through
November 30, 1998, findings continue to indicate that transition through
critical Year 2000 (Y2k) rollover dates is expected to have minimal impact on
electric system operations in North America." IP's electric system operations
Year 2000 completion status through November 30, 1998 is at 57%, which compares
favorably to the average status of all utilities reported to NERC.
NERC has recommended that all "mission critical" systems needed to meet
demand and reliability obligations be Year 2000 ready by June 30, 1999. IP is
working diligently to meet the June 30, 1999, deadline. It is currently
projected that all IP fossil power plants and field transmission and
distribution items will be fully Year 2000 ready by that date. With the
exception of four process computing systems at Clinton, it is projected that all
IP Year 2000 implementation activities will be completed by June 30, 1999.
However, Clinton still plans to be Year 2000 ready, per NRC requirements, by
developing contingency plans that will allow operation.
IP is participating in the Year 2000 activities of other utility
organizations, such as Electric Power Research Institute, Nuclear Energy
Institute, American Gas Association, and Edison Electric Institute. Through
involvement in these organizations, IP is leveraging the combined knowledge and
expertise of all utilities to accelerate progress in resolving Year 2000 issues.
The total cost for achieving Year 2000 readiness for IP is estimated to be
approximately $20.6 million through 1999. Through the end of 1998, $8.4 million,
or 41%, of the total $20.6 million had been spent. Expenditures in 1999 are
expected to be higher than in 1998 due to $9.1 million yet to be spent for
Clinton.
IP has recently initiated contingency planning efforts. This work is planned
for completion by June 30, 1999. The majority of the work already completed
involves IP's role in MAIN's contingency planning efforts for electric systems
operations in accordance with NERC's guidelines.
The primary contingency planning activities in 1999 involve IP's "mission
critical" business processes. Contingency plans will be developed in accordance
with industry guidelines such as those of NERC and the General Accounting Office
and will require senior management review and approval. These plans will address
business continuity and the ability to maintain and deliver essential products
and services to customers in the event of unexpected Year 2000 problems.
IP is currently assessing potential worst-case scenarios. Such a scenario
might include one or both of the following events: winter storms coupled with a
significant Year 2000 system problem that compounds emergency response efforts
and/or loss of a major telecommunications carrier that causes disruptions in
dispatching generation, dispatching emergency response crews, and communicating
with financial institutions.
Contingency plans will address the above scenarios as well as any other
potential scenarios that could affect the ability to serve customers and
maintain the financial viability of IP.
IP is taking a proactive role in working with vendors and suppliers with
respect to Year 2000 issues. Each business group within IP has taken
responsibility for contacting vendors for each of the "mission critical" and
"important to operations" items supplied by them. Each vendor is requested to
provide detailed information on Year 2000 functionality and operability on
products supplied by them. In addition, the Purchasing and Material Control
Group has sent letters to more than 3,600 IP vendors used in recent years. These
letters provide an overview of the Year 2000 problem and ask the vendors to
provide a summary of their Year 2000 efforts so that IP can gain a better
understanding of their ability to provide products and services beyond January
1, 2000.
In addition to letters, face-to-face discussions were conducted with IP's 16
alliance suppliers. Alliance suppliers are key suppliers with which IP has
worked to establish a business relationship based on mutual expectations and
trust. Both parties work together to achieve a single set of objectives which
result in reduced costs to IP. IP's alliance suppliers currently account for
roughly 80% of IP's purchasing volume. Because of this high percentage, a
dialogue was established with each supplier to assess its approach to Year 2000
compliance. Based on these discussions, IP believes each of these 16 suppliers
has adequately addressed Year 2000 concerns.
IP is also taking numerous steps to keep customers informed of the status of
the Year 2000 efforts. IP can best address customers' concerns by providing
open, forthright communications on a timely basis. Year 2000 communication
efforts are multi-faceted to deal with all classes of customers, from
residential to major industries.
CONSOLIDATED RESULTS OF OPERATIONS
1998
IP is comprised of five business groups. The business groups and their principal
services are as follows:
- - IP Customer Service Business Group -- transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas.
- - IP Wholesale Energy Business Group -- fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities.
- - IP Nuclear Generation Business Group -- nuclear-fueled electric generation.
- - IP Financial Business Group -- provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - IP Support Services Business Group -provides specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
These business groups review information monthly that provides contribution
margin, cash flow, and return on net invested capital measures. These measures
for Customer Service were favorable. Generally, the other business groups
reflected unfavorable results as the Clinton restart activity and the summer
supply situation negatively impacted their outcomes.
Customer Service
Transmission, Distribution and Sale of Electric Energy: The Customer Service
Business Group derives its revenues through regulated tariffs. Its source of
electricity is the Wholesale Energy Business Group; electricity was provided to
the Customer Service Business Group at a fixed 2.5 cents per kwh.
Retail electric revenues, excluding interchange sales, decreased 1.6% due to
decreased sales to residential and commercial customers and the 15% residential
rate decrease mandated by P.A. 90-561, which became effective August 1, 1998.
Also contributing to the decrease in revenue was a voluntary one-time August
rate reduction of 7.5% for residential and small commercial customers.
Transmission, Distribution and Sale of Natural Gas: Revenues are derived through
regulated tariffs. Revenues from gas sales and transportation were down 18.6%,
while therms sold and transported were down 8.9%. The decrease in therm sales
was caused by milder than usual weather. The margin on gas sales and
transportation decreased 5.5%, resulting from decreases in both therms sold and
therms transported, partially offset by decreased gas costs.
Wholesale Energy
Contracts for increased interchange sales were entered into with the expectation
that the Clinton nuclear generating station would operate during 1998. When the
station did not operate, it was necessary to purchase replacement power on the
market. This replacement power was much more expensive than normal, causing
electric margin to decrease.
Wholesale Energy provided interchange power to the Customer Service Business
Group at 2.5 cents per kwh.
Nuclear
IP's only nuclear generating station, Clinton, did not generate electricity
during 1998. Its only revenues were those paid by customers under tariff riders
to fund the decommissioning trust. Nuclear's results were unfavorably affected
by higher operating and maintenance expenses and capital expenditures associated
with the Clinton outage. Additionally, Nuclear was assessed a cost of 1.43 cents
(which represents a higher level of costs over internal pricing due to market
conditions) times its actual historical average generation to simulate the cost
of replacement power.
Other
Included in this category are the Financial Business Group and the Support
Services Business Group. These segments did not individually meet the minimum
threshold requirements for separate disclosure.
See "Note 13 -- Segments of Business" for additional information regarding
IP's segments.
Overview
(Millions of dollars) 1998 1997 1996
Net income (loss) applicable
to common stock $ (1,376) $ (65) $ 206
Net income (loss) applicable
to common stock excluding
Clinton plant impairment
loss in 1998, extraordinary
item in 1997 and carrying
amount over (under)
consideration paid for
redeemed preferred stock
in 1997 and 1996 $ (49) $ 129 $ 206
1998: The decrease in 1998 earnings compared to 1997 was due primarily to the
Clinton impairment, an increase in power purchased cost due to unprecedented
summer price spikes, additional power purchases to serve increased volumes of
interchange sales, market losses recorded on forward power purchase and sales
contracts as part of the wholesale trading business, and higher operation and
maintenance expenses due to the extended outage at Clinton.
1997: The decrease in 1997 earnings compared to 1996 was due primarily to the
extraordinary item related to discontinued application of FAS 71 for the
generation segment, higher operation and maintenance expenses due to the
extended outage at Clinton, higher power purchased costs due to outages at
Clinton and Wood River, and an increase in uncollectible accounts expense.
1996: The increase in 1996 earnings per share over 1995 was due primarily to the
one-time charge in 1995 for the enhanced retirement and severance programs,
lower operations expense due to the reduction in number of employees, and lower
financing costs.
Regulators historically have determined IP's rates for electric service: the
ICC at the retail level and FERC at the wholesale level. The ICC determines IP's
rates for gas service. These rates have been designed to recover the cost of
service and allow shareholders the opportunity to earn a reasonable rate of
return. As described under "Competition" above, P.A. 90-561 phases in a
competitive marketplace for electric generation while maintaining cost-based
regulation for electric delivery services and gas service, protecting the
financial integrity of the company during the transition period. Future electric
and natural gas sales, including interchange sales, will continue to be affected
by an increasingly competitive marketplace, changes in the regulatory
environment, transmission access, weather conditions, competing fuel sources,
interchange market conditions, plant availability, fuel cost recoveries,
customer conservation efforts, and the overall economy.
Electric Operations: For the years 1996 through 1998, electric revenues,
including interchange, increased 32.9% and the gross electric margin decreased
22.5% as follows:
(Millions of dollars) 1998 1997 1996
Electric revenues $1,224.2 $1,244.4 $1,202.9
Interchange revenues 557.2 175.6 137.6
Fuel cost & power
purchased (985.4) (450.3) (313.3)
Electric margin $ 796.0 $ 969.7 $1,027.2
The components of annual changes in electric revenues were:
(Millions of dollars) 1998 1997 1996
Price $ (65.5) $ (11.5) $ (7.2)
Volume and other 35.1 9.7 6.4
Fuel cost recoveries 10.2 43.3 (48.9)
Revenue increase
(decrease) $ (20.2) $ 41.5 $(49.7)
1998: Electric revenues excluding interchange sales decreased 1.6% due to the
15% residential rate decrease mandated by P.A. 90-561 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
and the discontinuance of certain revenue related taxes, in accordance with P.A.
90-561. Interchange revenues increased 217.4% primarily due to increased
activity on the interchange market. Electric margin decreased primarily due to
higher power purchased costs and the elimination of the UFAC.
1997: Electric revenues excluding interchange sales increased 3.4%, primarily
due to an increase in revenues under the UFAC and increased wheeling revenues.
Interchange revenues increased 27.6% due to the receipt of an opt-out fee from
Soyland under the amended PCA and increased interchange activity. Electric
margin decreased primarily due to increased power purchased costs as a result of
outages at Clinton and the fossil stations.
1996: Electric revenues excluding interchange sales decreased 4%, primarily due
to a reduction in revenues under the UFAC. Volume changes by customer class were
insignificant, as kwh sales to ultimate consumers (excluding interchange sales
and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of
higher plant availability in the first half of the year.
The cost of meeting IP's system requirements was reflected in fuel costs for
electric plants and power purchased. Changes in these costs are detailed below:
(Millions of dollars) 1998 1997 1996
Fuel for electric plants
Volume and other $ 28.3 $ (37.7) $ 15.4
Price 5.7 (8.5) (12.0)
Emission allowances (7.5) 12.3 .8
Fuel cost recoveries (8.7) 18.2 (30.0)
17.8 (15.7) (25.8)
Power purchased 517.3 152.7 5.7
Total increase (decrease) $ 535.1 $ 137.0 $(20.1)
Weighted average system
generating fuel cost
($/MWH) $ 12.79 $ 12.06 $ 11.01
System load requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities, emission allowance
costs, and fuel cost recovery through UFAC caused changes in these costs.
Changes in factors affecting the cost of fuel for electric generation are
detailed below:
1998 1997 1996
Increase (decrease)
in generation 10.9% (25.4)% 5.4%
Generation mix
Coal and other 100% 100% 78%
Nuclear 0% 0% 22%
1998: The cost of fuel increased 7.6% and electric generation increased 10.9%.
The increase in fuel cost was primarily a result of running peaking units and
reactivation of oil-fired plants from cold shutdown. These factors were
partially offset by effects of the 1997 UFAC and decreased emission allowance
costs.
Power purchased increased $517.3 million. This amount consisted of higher
prices resulting in an increase of $274 million, a $215 million increase to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts. Income from interchange
sales was $382 million higher than in 1997 due to increased sales volumes and
higher prices. Although IP's margin on volumes between 1998 and 1997 resulted in
IP being a net seller, higher prices resulted in a $135 million net purchase
margin. See "Note 4 -- Commitments and Contingencies" for additional
information.
1997: The cost of fuel decreased 6.3% and electric generation decreased 25.4%.
The decrease in fuel cost was primarily attributable to decreased generation and
a favorable price variance. These factors were partially offset by effects of
the UFAC and increased emission allowance costs. Power purchased increased
$152.7 million primarily due to Clinton and Wood River being out of service.
1996: The cost of fuel decreased 9.4% and electric generation increased 5.4%.
The decrease in fuel cost was primarily attributable to the effects of the UFAC,
as well as a favorable price variance. These factors were partially offset by an
increase in fuel cost due to the increase in generation. Power purchased
increased $5.7 million primarily due to the Clinton outage. Clinton's equivalent
availability and generation were lower than in 1995 due to that outage.
Gas Operations: For the years 1996 through 1998, gas revenues, including
transportation, decreased 17.3%, while the gross margin on gas revenues
decreased 5.1% as follows:
(Millions of dollars) 1998 1997 1996
Gas revenues $ 281.1 $ 345.2 $ 341.4
Gas cost (149.6) (207.7) (202.6)
Transportation revenues 6.7 8.7 6.8
Gas margin $ 138.2 $ 146.2 $ 145.6
(Millions of therms)
Therms sold 503 537 703
Therms transported 267 309 251
Total consumption 770 846 954
Changes in the cost of gas purchased for resale were:
(Millions of dollars) 1998 1997 1996
Gas purchased for resale
Cost $ (5.3) $ 8.0 $ 49.0
Volume (23.2) (30.0) 8.5
Gas cost recoveries (29.6) 27.1 6.3
Total increase (decrease) $ (58.1) $ 5.1 $ 63.8
Average cost per therm
delivered 27.1(cents) 28.0(cents) 26.7(cents)
The 1998 decrease in gas costs was due to low gas prices and a decrease in
therm sales caused by mild weather. The 1997 increase in gas costs was due to
slightly higher prices from suppliers and effects of the UGAC, offset by a
decrease in volume. The 1996 increase in gas costs was primarily due to higher
prices from suppliers and the effects of the UGAC.
Other Expenses: A comparison of significant increases (decreases) in other
operating expenses, maintenance, and depreciation for the last three years is
presented in the following table:
(Millions of dollars) 1998 1997 1996
Other operating expenses $ 91.1 $ 40.6 $ (9.8)
Maintenance 44.6 12.0 (.3)
Depreciation and amortization 4.8 8.8 3.5
The increase in operating and maintenance expenses for 1998 is primarily due
to the outage at Clinton. Other increases include outside consulting fees,
customer marketing activities, and employee benefits.
The increase in operating and maintenance expenses for 1997 is primarily due
to increased company and contractor labor at Clinton and the fossil plants. An
increase in uncollectible accounts expense and disposal of surplus inventory
also contributed to the increase.
The decrease in operating expenses for 1996 is due primarily to the savings
from the 1995 enhanced retirement and severance program, partially offset by the
costs of the Clinton outage and increased amortization of MGP site expenses. The
ICC approved tariff riders in March 1996 that resulted in the current
recognition of MGP site remediation costs in operating expenses. The 1996
increase amounted to $5.5 million. This increase is offset by increased revenues
collected under the riders.
The increases in depreciation and amortization for each of the three years
were due to increases in utility plant balances.
General Taxes: The decrease in general taxes of $10.6 million in 1998 is
primarily the result of P.A. 90-561, which shifted the revenue tax burden from
IP to its customers. The decrease was partially offset by costs to fund a
program, provided for in P.A. 90-561, that helps low-income customers avoid
shutoffs. The 1997 and 1996 changes in general taxes were negligible.
Clinton Plant Impairment Loss: See "Note 2 -- Clinton Impairment and
Quasi-Reorganization " for additional information.
Miscellaneous--Net: The 1996 through 1998 changes in miscellaneous-net were
negligible.
Interest Charges: Total interest charges, including AFUDC and preferred dividend
requirements, increased $.8 million in 1998, decreased $3.4 million in 1997, and
decreased $20.8 million in 1996. The increase in 1998 was negligible. The
decrease in 1997 is primarily due to the continued benefits of IP refinancing
efforts and capitalization reductions, partially offset by increased IP
short-term borrowings and lower AFUDC. The 1996 decrease was due to lower
short-term interest rates and the impact of IP refinancing efforts and
capitalization reduction during 1996.
Inflation: Inflation, as measured by the Consumer Price Index, was 1.6%, 2.3%,
and 3.0% in 1998, 1997, and 1996, respectively. IP recovers historical rather
than current plant costs in its regulated rates.
FINANCIAL CONDITION
Liquidity and Capital Resources
IP's financial condition is a product of its historical capital structure, the
terms of its existing indebtedness, various regulatory considerations, and the
cash flow generated by its businesses. In general, IP historically has been able
to either generate sufficient funds or raise sufficient funds at investment
grade credit quality to meet all of its financial needs. IP's sources of funds
and primary non-operating uses of funds are described below. See "Note 9 --
Long-Term Debt" and "Note 10 -- Preferred Stock" for additional information
regarding IP's outstanding indebtedness.
Mortgages: Historically, a substantial portion of the funds needed by IP have
been provided by indebtedness issued pursuant to its general obligation
mortgages. These include a 1943 mortgage (First Mortgage) and a 1992 mortgage
(New Mortgage) that is intended, over time, to replace the First Mortgage. Both
mortgages are secured by liens on substantially all of IP's properties. In
general, IP is able to issue debt secured by the mortgages provided that (i) its
"adjusted net earnings" are at least two times its "annual interest
requirements," and (ii) the aggregate amount of indebtedness secured by the
mortgages does not exceed three-quarters of the original cost of the property
subjected to the lien of the mortgages, reduced to reflect property that has
been retired or sold. It also generally can issue indebtedness in exchange for
repurchased and retired indebtedness independent of whether these two tests are
met.
At December 31, 1998, IP had outstanding approximately $1.6 billion in
indebtedness pursuant to the mortgages and could have issued approximately $550
million in additional indebtedness based on its property levels. In addition, IP
could have issued approximately $334 million in exchange for previously issued
indebtedness that had been repurchased by IP. The sale or shutdown of Clinton or
IP's fossil plants, or both, would eliminate IP's capacity to issue indebtedness
under these mortgages based on property additions. As a consequence, IP is
exploring various strategies under which the mortgages may be amended to permit
further issuances or means to release the indebtedness from the mortgage.
Regardless of the status of Clinton, IP is still able to issue new indebtedness
pursuant to the mortgage based on repurchased and retired indebtedness. Also, IP
had unsecured non-mortgage borrowing capacity totaling approximately $450
million at December 31, 1998. This capacity is higher than normal as a result of
securitization proceeds received in December 1998.
Cash Requirements and Cash Flow: IP needs cash for operating expenses, interest
and dividend payments, debt and certain IP preferred stock retirements,
construction programs, and decommissioning. IP has met these needs with
internally generated funds and external financings, including debt and revolving
lines of credit. The timing and amount of external financings depend primarily
on cash needs, economic conditions, financial market conditions, and
capitalization ratio objectives.
Cash flows from operations during 1998 were supplemented by external
financings to meet ongoing operating requirements and to service existing common
and preferred stock dividends, debt requirements, and IP's construction
requirements. Liquidity at IP has decreased in 1998 as a result of higher than
expected costs for purchased power and for Clinton expenditures, coupled with
lower electric revenues resulting from the rate decrease mandated by P.A.
90-561.
IP expects that future cash flows, supplemented by external financing, will
continue to be adequate to meet operating requirements and to service existing
debt, preferred dividends, anticipated construction requirements, and
decommissioning costs.
Dividends: Illinova is a holding company and depends upon its subsidiaries for
its non-financing cash flow. IP, as the provider of substantially all of this
cash flow, typically pays dividends on its common stock to provide Illinova cash
for operations. Contingent on IP meeting a free cash flow test, the ICC has
authorized IP to periodically repurchase its common stock from Illinova. IP did
not satisfy the test at year-end 1998 and does not anticipate satisfying the
test in 1999.
The provisions of Supplemental Indentures to IP's General Mortgage Indenture
and Deed of Trust contain certain restrictions with respect to the declaration
and payment of dividends. IP was not limited by any of these restrictions at
December 31, 1998. Under the Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock.
IP is also limited in its payment of dividends by the Illinois Public
Utilities Act, which requires retained earnings equal to or greater than the
amount of any proposed dividend declaration or payment and by the Federal Power
Act, which precludes declaration or payment of dividends by electric utilities
"out of money properly stated in a capital account." At December 31, 1998, IP
had a zero balance in retained earnings and was thus unable to declare a
dividend on its common or preferred stock. Payment of preferred dividends on
February 1, 1999, was made out of a trust created in November 1998 for this
purpose. IP's retained earnings balance is expected to grow sufficiently during
1999 to support payment of IP common and scheduled preferred dividends. Illinova
will secure payment of IP preferred dividends through 1999.
IP periodically reviews its dividend policies based on several factors,
including its present and anticipated future use of cash, level of retained
earnings, and business strategy.
Debt Ratings: The availability and cost of external financing depend to a
significant degree on the financial health of the company seeking those funds.
Security ratings are an indication of a company's financial position and may
affect the cost and the willingness of investors to invest in these securities.
IP's securities are currently rated by four principal rating agencies as
follows:
Standard Duff & Fitch
Moody's & Poor's Phelps IBCA
First/New mortgage
bonds Baa1 BBB BBB+ BBB+
Preferred stock baa2 BB+ BBB- BBB-
Commercial paper P-2 A-2 D-2 F2
Transitional funding
trust notes Aaa AAA AAA AAA
Under current market conditions, these ratings would afford IP the ability to
issue additional securities through external financing. IP has adequate
short-term and intermediate-term bank borrowing capacity.
In April 1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. In
July 1996, Moody's upgraded IP's securities, raising mortgage bond ratings from
Baa2 to Baa1 and preferred stock ratings from baa3 to baa2. In July 1998, both
Moody's and S&P revised their ratings outlook for IP. Moody's rating went from
stable to negative and S&P from positive to stable, reflecting effects of the
extended Clinton outage and unprecedented prices for purchased power during late
June 1998. In November 1998, Fitch IBCA affirmed the ratings of IP's first and
new mortgage bonds at BBB+ and IP's preferred stock at BBB-. Fitch IBCA also
established a new commercial paper rating of F2 for IP.
In February 1999, S&P announced it had implemented a new single credit rating
scale for both debt and preferred stock. As a result, S&P rerated all the
preferred stock issues and similar debt/equity issues that carry ratings from
S&P to conform to the new scale. As a result of this change, the rating on IP's
preferred stock was changed to BB+ from BBB-. On March 4, 1999, Moody's placed
all of the securities of Illinova and IP under review for possible downgrade,
citing erosion of cash flow and an expected increase in leverage caused by the
extended Clinton outage. Moody's also acknowledged the positive impact of the
decision to exit Clinton and the progress made in bringing Clinton back to
on-line status. This review does not include the $864 million of Transitional
Funding Trust Notes issued by IPSPT, which are expected to remain rated Aaa.
In December 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes as allowed under the Illinois Electric Utility Transition Funding Law in
P.A. 90-561. All four agencies rated this debt triple A. See discussion of
"Securitization."
Recent Financing: Changes in principal amounts of capital sources for 1998,
1997, and 1996, including normal maturities and elective redemptions, were as
follows:
(Millions of dollars) 1998 1997 1996
Long-term debt 64 (11) (154)
Preferred stock -- (39) 71
Transitional funding
trust notes* 864 -- --
Total increase (decrease) $ 928 $ (50) $ (83)
*See discussion of "Securitization."
The amounts shown in the preceding table for debt retirements do not include
all mortgage sinking fund requirements. IP has generally met these requirements
by pledging property additions as permitted under IP's 1943 Mortgage and Deed of
Trust and the 1992 New Mortgage. For additional information, see "Note 9 --
Long-Term Debt" and "Note 10 -- Preferred Stock."
In March 1998, IP issued $18.7 million principal amount and $33.8 million
principal amount of 5.40% Pollution Control New Mortgage Bonds due 2028. In
April 1998, IP redeemed all principal amounts outstanding 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). In May 1998, a $200
million debt shelf registration for IP debt securities became effective. In July
1998, IP issued $100 million principal amount of 6.25% New Mortgage Bonds due
2002 against this registration. In September 1998, IP issued $100 million
principal amount of 6.00% New Mortgage Bonds due 2003 against this same shelf
registration. In September 1998, IP issued a call notice on the principal amount
outstanding of its 6.60% Series A Pollution Control First Mortgage Bonds due
2004 ($6.0 million). The bonds were called at par in November 1998. All of the
remaining $68 million principal amount IP medium-term notes matured and were
retired in 1998.
Securitization: In December 1998, IPSPT issued $864 million of Transitional
Funding Trust Notes, with IP as servicer. This debt, secured by collections of
future electric energy deliveries, represents 25% of IP's total capitalization
at December 31, 1996, as allowed by the 1997 Electric Utility Transition Funding
Law and approved by the ICC. The law allows IP to use this lower cost debt to
repurchase debt and equity, which lowers IP's overall cost of capital. IP has to
have at least a 40% common equity ratio, exclusive of securitized debt, when the
process is completed.
On September 16, 1998, IP filed a SEC Form S-3 shelf registration statement
for this $864 million offering. On September 30, 1998, the Internal Revenue
Service issued to IP a private letter ruling 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.
IP has used funds from this offering to redeem all principal amounts
outstanding of its 6.60% Pollution Control First Mortgage Bonds due 2004 ($6.0
million), its 8.75% First Mortgage Bonds due 2021 ($57.1 million), and its 8.00%
New Mortgage Bonds due 2023 ($229 million). A redemption notice was issued in
December 1998, and the 8.75% First Mortgage Bonds and the 8.00% New Mortgage
Bonds were called January 11, 1999. Through March 9, 1999, IP has also used
funds from the IPSPT issuance to repurchase in the open market $36.8 million
principal amount of its 6.5% First Mortgage Bonds due 1999, $55.9 million
principal amount of its 7.95% First Mortgage Bonds due 2004, and $28.5 million
principal amount of its 7.50% New Mortgage Bonds due 2025. In addition, IP
repurchased $6.6 million, net of premiums and discounts, of various series of
preferred stock and MIPS. IP has used another $49.3 million from the IPSPT to
repurchase approximately 2.3 million of its shares from Illinova.
Preferred Stock: At a special meeting in May 1998, IP preferred shareholders
voted on a proposal to amend the Articles of Incorporation to remove a
limitation on the amount of unsecured debt IP can issue. A majority of votes
cast favored the proposal, but not the two-thirds majority required.
Capital Expenditures: Construction expenditures for 1996 through 1998 were
approximately $723 million, including $14.7 million of AFUDC. IP estimates that
it will spend approximately $370 million for construction expenditures in 1999.
IP construction expenditures for 1999 through 2003 are expected to total
approximately $1.2 billion. In light of the December 1998 decision to exit
Clinton and resulting Clinton impairment entries, no nuclear construction is
included in the above estimates.
Due to the failure of Clinton to restart by January 31, 1999, a provision in
the lease agreement between IP and the Fuel Company requires IP to deposit $62
million cash, in March 1999, with the Fuel Company Trustee for the benefit of
investors in secured notes of the Fuel Company. These notes mature December 1,
1999, at which time these funds will be used to pay principal and interest on
the notes' principal amount of $60 million.
Additional expenditures may be required during this period to accommodate the
transition to a competitive environment, environmental compliance, system
upgrades, and other costs which cannot be determined at this time.
In addition to IP's construction expenditures, IP capital expenditures for
1999 through 2003 are expected to include $522 million for mandatory debt
retirements. In addition, IPSPT has long-term debt maturities of $86.4 million
in each of the above years.
Decommissioning: Because of IP's Board of Directors' decision to exit Clinton,
IP must be prepared to fund the cost of decommissioning the plant. Assuming the
most conservative immediate decommissioning method, IP estimates it will cost
approximately $376 million between 1999 and 2003. IP currently has $84 million
in decommissioning trust funds and would expect this amount to be used as well
as $37 million in additional collections from customers, including interest on
the trust, during this time period. In addition, IP will need to fund
approximately $255 million from other sources. IP is pursuing insurance and
other options, including a delayed decommissioning method which requires
significantly less cash in the next few years.
IP continues to pursue discussions with various parties interested in
purchasing Clinton. In the event of a sale of Clinton, IP expects to incur some
amount of obligation to provide decommissioning funds. The timing and amount of
such obligations cannot be determined at this time.
See "Note 4 -- Commitments and Contingencies" for additional information.
Internally generated cash, supplemented by external financing, will meet all
decommissioning, construction, and capital requirements.
Environmental Matters: See "Note 4 -- Commitments and Contingencies" for a
discussion of environmental matters that impact or could potentially impact IP.
Tax Matters See "Note 7 -- Income Taxes" for a discussion of effective tax rates
and other tax issues.
MARKET RISK
Risk Management: IP is exposed to both non-trading and trading market risks.
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rate or price changes. Non-trading market
risks include interest rate risk, equity price risk, and commodity price risk.
Trading market risk is comprised of commodity price risk. For a discussion of
credit risk exposure, see "Note 15 -- Financial and Other Derivative
Instruments." IP's risk management policy allows the use of derivative financial
instruments to manage its financial exposures. Market risk is measured through
various means, including VaR models. VaR represents the potential losses for an
instrument or portfolio resulting from hypothetical adverse changes in market
factors for a specified time period and confidence level. It does not represent
the maximum possible loss or an expected loss that may occur. Future gains and
losses will differ from those estimated, based on actual fluctuations in market
rates, operating exposures, and the timing thereof, and changes in the portfolio
of derivative financial instruments during the year.
Interest Rate Risk: IP is exposed to interest rate risk as a result of financing
through its issuance of fixed or variable-rate debt, including commercial paper
issuances or bank notes. Interest rate risk is the exposure of an entity's
financial condition to adverse movements in interest rates. Interest rate
exposure is managed according to policy by limiting variable-rate exposure to a
certain percentage of capitalization, utilizing derivative instruments when
deemed appropriate, and monitoring the effects of market changes in interest
rates. At December 31, 1998, there were no derivative financial instruments in
use related to interest rate risk.
IP's debt portfolio VaR was calculated quarterly based on variance/covariance
methodology using the RiskMetrics FourFifteen(TM) model. VaR was calculated
based on a 95 percent confidence factor and a holding period of one business
day. Interest rate risk as measured by VaR for 1998 follows:
Low High Average
(Millions of dollars) VaR VaR VaR
IP $ 6.7 $14.2 $ 9.9
Other Market Risk: IP is exposed to equity price risk. Equity price risk is the
risk of loss on equity investments from unfavorable movements in equity prices.
IP maintains trust funds, as required by the NRC, to fund certain costs of
nuclear decommissioning. See "Note 4 -- Commitments and Contingencies." As of
December 31, 1998, these funds were invested in domestic and international
equity securities, fixed income securities, and cash and cash equivalents. By
maintaining a portfolio that includes equity investments, IP is maximizing the
return to be used to fund nuclear decommissioning, which in the long term will
correlate better with inflationary increases in decommissioning costs. The
equity securities included in the corporation's portfolio are exposed to price
fluctuation in equity markets, and the fixed-rate, fixed-income securities are
exposed to market risk as a result of fluctuations in interest rates. IP
actively monitors its portfolio by benchmarking the performance of its
investments against equity and fixed-income indexes. It maintains and
periodically reviews established target allocations of the trust assets approved
in the investment policy statements. Nuclear decommissioning costs have
historically been recovered through IP's electric rates and the Soyland PCA.
Therefore, fluctuations in equity prices or interest rates have not affected the
earnings of the corporation. In the future, changes in the investments' fair
value will be reflected in the regulatory asset for probable future collections
from customers of decommissioning costs, and fluctuations in interest rates will
be reflected in earnings.
Commodity Price Risk: Commodity price risk is the risk of loss arising from
adverse movements in commodity prices. IP is exposed to the impact of market
fluctuations in the price of electricity. Established policies and procedures
are employed to manage its risks associated with those market fluctuations using
various commodity derivatives, including futures, forwards, swaps and options.
IP is exposed to trading commodity price risk through its energy trading
business and non-trading commodity price risk through its energy generation
business. To measure, monitor, and manage its commodity price risk, IP utilizes
"Monte Carlo" simulations of both trading and non-trading positions based on a
95 percent confidence level. At December 31, 1998, trading VaR utilizing a
four-day holding period was $1.3 million. Non-trading VaR utilizing a one-year
holding period was $13.7 million.
SAFE HARBOR
Certain of the statements contained in this report, including those in
Management's Discussion and Analysis, are forward-looking. Other statements,
particularly those using words like "expect," "intend," "predict," "estimate,"
and "believe," also are forward-looking. Although IP believes these statements
are accurate, its business is dependent on various regulatory issues, general
economic conditions and future trends, and these factors can cause actual
results to differ materially from the forward-looking statements that have been
made. In particular:
- - IP's activities are heavily regulated by both the federal government and
the State of Illinois. This regulation has changed substantially over the
past several years. The impacts of these changes include reductions in
rates pursuant to P.A. 90-561 and a phasing in of the opportunity for an
increasing number of customers to choose alternative energy suppliers. In
addition, future regulatory changes are certain to occur and their nature
and impact cannot be predicted.
- - IP is likely to face increased competition in the future. Deregulation of
certain aspects of IP's business at both the state and federal levels is
occurring, the primary results of which so far are that competing
generators of electricity will increasingly have the ability to sell
electricity to IP's customers and to require IP to transmit and distribute
that electricity. In addition, alternative sources of electricity, such as
co-generation facilities, are becoming increasingly popular. When customers
elect suppliers other than IP for their electricity, IP can avoid certain
costs and can gain revenue from transmitting and distributing that
electricity; however, the net effect of these elections generally is a
decrease in IP's revenue and operating income. Illinois transition law is
designed to protect utilities in three principal ways:
1) Departing customers are obligated to pay transition charges based on the
utility's lost revenue from that customer;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds; and
3) Utilities are permitted to seek rate relief in the event the change in law
leads to their ROE falling below a specified minimum based on a prescribed
test.
- - IP is exploring various strategies to best respond to its changing business
and regulatory environment. These strategies include acquisitions, focused
growth of unregulated businesses, and other options. Although IP would only
plan to undertake transactions that it believes are in the best interests
of its shareholders, there can be no certainty that any transaction will
fulfill these expectations.
- - To meet IP customers' electricity requirements, IP produces electricity in
Company-owned generation plants. Although IP has in place programs designed
to match its supplies with its needs, many circumstances can occur which
upset this balance. Specifically, generation facilities may experience
unplanned outages forcing the Company to acquire additional supplies in the
electricity marketplace. The availability and price of these additional
supplies are uncertain and at times highly volatile. Such situations can
lead to less profitable or even unprofitable outcomes.
- - Clinton is a nuclear-fueled generation facility. Although IP believes that
it operates this facility in accordance with all regulatory guidelines and
in a safe manner, accidents can occur. Liabilities and costs from such
accidents could exceed insurance provisions established for the Company and
have a significantly negative effect on IP.
- - There are various financial risks attendant to selling or shutting down
Clinton. These risks include the possibility that IP has underestimated the
costs necessary to effect a particular exit strategy. No nuclear facility
sale has been completed and relatively little financial information
regarding these transactions is available. Although the amounts used in
IP's analyses and in recording year-end accounting results represent
estimates based on guidance from industry experts, actual results may be
materially different from the estimates. In addition, the Company continues
to have ongoing nuclear operational exposures until the plant is sold or
shut down.
- - IP does not currently foresee any inability to obtain necessary financing
on reasonably favorable terms. However, events can occur in the Company's
business operations or in general economic conditions that could negatively
impact the Company's financial flexibility. In addition, restructuring
activities, such as the formation of an Illinova unregulated generation
subsidiary, can introduce other factors that could impact the Company's
financial flexibility. Further, the sale or shutdown of Clinton will
substantially reduce the Company's ability to issue indebtedness under its
existing mortgages. While the Company does not foresee any of these events
resulting in significant difficulties in obtaining future financing on
reasonably favorable terms, there can be no assurances that difficulties
will not occur.
- - The impact of environmental regulations on utilities is significant; and
the expectation is that more stringent requirements will be introduced over
time. Although IP believes it is in substantial compliance with all current
regulations, IP cannot predict the future impact of environmental
compliance. However, if more stringent requirements are introduced they are
likely to have a negative financial effect.
- - IP actively purchases and sells electricity and natural gas futures and
similar contracts with respect thereto. While IP has adopted various risk
management practices intended to minimize the risk of significant loss,
trading in assets of these types is inherently risky and these risk
management practices cannot guarantee that losses will not occur.
- - Although IP believes that it will complete its Year 2000 preparation in a
timely fashion, there can be no assurances that it will, or that unforeseen
problems will not arise. The consequences of Year 2000 problems are so
varied that IP can not predict this ultimate impact, if any. All
forward-looking statements in this report are based on information that
currently is available. IP disclaims any obligation to update any
forward-looking statement.
ILLINOIS POWER COMPANY
Responsibility for Information
The consolidated financial statements and all information in this annual report
are the responsibility of management. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
include amounts that are based on management's best estimates and judgments.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements. In the opinion of management, the consolidated financial statements
fairly reflect Illinois Power's financial position, results of operations and
cash flows.
Illinois Power believes that its accounting and internal accounting control
systems are maintained so that these systems provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition and
that the financial records are reliable for preparing the consolidated financial
statements.
The consolidated financial statements have been audited by Illinois Power's
independent accountants, PricewaterhouseCoopers LLP, in accordance with
generally accepted auditing standards. Such standards include the evaluation of
internal accounting controls to establish a basis for developing the scope of
the examination of the consolidated financial statements. In addition to the use
of independent accountants, Illinois Power maintains a professional staff of
internal auditors who conduct financial, procedural, and special audits. To
assure their independence, both PricewaterhouseCoopers LLP and the internal
auditors have direct access to the Audit Committee of the Board of Directors.
The Audit Committee is composed of members of the Board of Directors who are
not active or retired employees of Illinois Power. The Audit Committee meets
with PricewaterhouseCoopers LLP and the internal auditors and makes
recommendations to the Board of Directors concerning the appointment of the
independent accountants and services to be performed. Additionally, the Audit
Committee meets with PricewaterhouseCoopers LLP to discuss the results of their
annual audit, Illinois Power's internal accounting controls and financial
reporting matters. The Audit Committee meets with the internal auditors to
assess the internal audit work performed, including tests of internal accounting
controls.
Charles E. Bayless
Chairman, President
and Chief Executive Officer
Larry F. Altenbaumer
Senior Vice President
and Chief Financial Officer
ILLINOIS POWER COMPANY
Report of Independent Accountants
In our opinion, the accompanying consolidated balance sheets and the related
statements of income, statements of cash flows and statements of retained
earnings present fairly, in all material respects, the financial position of
Illinois Power Company and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit requires examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As explained in Note 2 to the consolidated financial statements, the
Company's commitment to exit nuclear operations resulted in an impairment of the
Clinton Power Station in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," in December 1998.
As explained in Note 2 to the consolidated financial statements, the Company
effected a quasi-reorganization in December 1998. In conjunction with the
accounting for a quasi-reorganization, the Company adjusted the recorded value
of specific assets and liabilities to fair value, including its fossil power
generation stations. In addition, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" and Emerging Issues Task Force Statement 98-10, "Accounting for
Energy Trading and Risk Management Activities."
As explained in Note 1 to the consolidated financial statements, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
for its generation segment of the business in December 1997.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 26, 1999
<TABLE>
<CAPTION>
Illinois Power Company
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
- -------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Operating Revenues
<S> <C> <C> <C>
Electric $ 1,224.2 $ 1,244.4 $ 1,202.9
Electric interchange 557.2 175.6 137.6
Gas 287.8 353.9 348.2
- -------------------------------------------------------------------------------------------------------------------------
Total 2,069.2 1,773.9 1,688.7
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses and Taxes
Fuel for electric plants 250.2 232.4 248.1
Power purchased 735.2 217.9 65.2
Gas purchased for resale 149.6 207.7 202.6
Other operating expenses 381.6 290.5 249.9
Maintenance 156.3 111.7 99.7
Depreciation and amortization 203.6 198.8 190.0
General taxes 123.2 133.8 131.3
Income taxes (30.9) 102.4 140.5
Income tax - impairment loss (853.6) - -
Clinton plant impairment loss (Note 2) 2,341.2 - -
- -------------------------------------------------------------------------------------------------------------------------
Total 3,456.4 1,495.2 1,327.3
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (1,387.2) 278.7 361.4
- -------------------------------------------------------------------------------------------------------------------------
Other Income
ITC - Clinton impairment 160.4 - -
Miscellaneous - net 2.6 3.0 1.5
- -------------------------------------------------------------------------------------------------------------------------
Total 163.0 3.0 1.5
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges (1,224.2) 281.7 362.9
- -------------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest expense 134.9 135.9 140.8
Allowance for borrowed funds used during construction (3.2) (5.0) (6.5)
- -------------------------------------------------------------------------------------------------------------------------
Total 131.7 130.9 134.3
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item (1,355.9) 150.8 228.6
Extraordinary item net of income tax benefit
of $ 118.0 million (Note 1) - (195.0) -
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,355.9) (44.2) 228.6
Less - Preferred dividend requirements 19.8 21.5 22.3
Plus - Carrying amount over (under) consideration
paid for redeemed preferred stock - 0.2 (0.7)
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (1,375.7) $ (65.5) $ 205.6
- -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of
these statements. Prior years restated to conform to new financial format.
</TABLE>
<TABLE>
<CAPTION>
Illinois Power Company
C O N S O L I D A T E D B A L A N C E S H E E T S
- --------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
ASSETS
Utility Plant
Electric (includes construction work in progress
<S> <C> <C> <C> <C>
of $177.7 million and $214.3 million, respectively) $ 5,481.8 $ 6,690.4
Gas (includes construction work in progress of
$15.3 million and $10.7 million, respectively) 686.9 663.0
- --------------------------------------------------------------------------------------------------------------
6,168.7 7,353.4
Less -- accumulated depreciation 1,713.7 2,808.1
- --------------------------------------------------------------------------------------------------------------
4,455.0 4,545.3
Nuclear fuel in process - 6.3
Nuclear fuel under capital lease 20.3 126.7
- --------------------------------------------------------------------------------------------------------------
4,475.3 4,678.3
- --------------------------------------------------------------------------------------------------------------
Investments and Other Assets 2.6 5.9
- --------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 504.5 17.8
Accounts receivable (less allowance for doubtful accounts
of $5.5 million)
Service 105.9 115.6
Other 32.5 16.6
Accrued unbilled revenue 82.6 86.3
Materials and supplies, at average cost
Fossil fuel 25.6 12.6
Gas in underground storage 28.9 29.3
Operating materials 35.9 75.4
Assets from commodity price risk management activities 26.0 -
Prepayments and other 42.8 61.2
- --------------------------------------------------------------------------------------------------------------
884.7 414.8
- --------------------------------------------------------------------------------------------------------------
Deferred Charges
Transition period cost recovery 783.0 -
Other 284.2 192.5
- --------------------------------------------------------------------------------------------------------------
1,067.2 192.5
- --------------------------------------------------------------------------------------------------------------
$ 6,429.8 $ 5,291.5
- --------------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
Capitalization
Common stock -- No par value, 100,000,000 shares
authorized; 75,643,937 shares issued, stated at $ 1,382.4 $ 1,424.6
Retained earnings - 89.5
Less -- Capital stock expense 7.3 7.3
Less -- 12,751,724 and 9,428,645 shares of common stock in treasury,
respectively, at cost 286.4 207.7
- --------------------------------------------------------------------------------------------------------------
Total common stock equity 1,088.7 1,299.1
Preferred stock 57.1 57.1
Mandatorily redeemable preferred stock 199.0 197.0
Long-term debt 2,158.5 1,617.5
- --------------------------------------------------------------------------------------------------------------
Total capitalization 3,503.3 3,170.7
- --------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 216.2 102.7
Notes payable 147.6 376.8
Long-term debt and lease obligations maturing within
one year 506.6 87.5
Dividends declared - 22.9
Taxes accrued 29.4 27.5
Interest accrued 34.9 33.0
Liabilities from commodity price risk management activities 61.6 -
Other 86.2 78.7
- --------------------------------------------------------------------------------------------------------------
1,082.5 729.1
- --------------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated deferred income taxes 978.7 980.6
Accumulated deferred investment tax credits 39.6 208.3
Decommissioning liability 567.4 62.5
Other 258.3 140.3
- --------------------------------------------------------------------------------------------------------------
1,844.0 1,391.7
- --------------------------------------------------------------------------------------------------------------
$ 6,429.8 $ 5,291.5
- --------------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 4)
See notes to consolidated financial statements which are an integral part of
these statements. Prior year restated to conform to new financial format.
</TABLE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
C O N S O L I D A T E D S T A T E M E N T S O F C A S H FL O W S
- ----------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income (loss) ($1,355.9) ($44.2) $228.6
Items not requiring (providing) cash--
Depreciation and amortization 203.4 202.1 195.3
Allowance for funds used during construction (3.2) (5.0) (6.5)
Deferred income taxes (37.8) 29.4 64.2
Extraordinary item - 195.0 -
Impairment loss, net of tax 1,327.2 - -
Changes in assets and liabilities--
Accounts and notes receivable 11.9 57.7 (35.2)
Accrued unbilled revenue 3.7 19.7 (16.9)
Materials and supplies (15.9) (5.1) (1.2)
Accounts payable 38.3 (31.2) 29.8
Deferred revenue 87.4 - -
Interest accrued and other, net 51.0 0.3 (14.8)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 310.1 418.7 443.3
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures (311.5) (223.9) (187.3)
Allowance for funds used during construction 3.2 5.0 6.5
Other investing activities 5.1 27.8 5.0
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (303.2) (191.1) (175.8)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock and preferred stock (126.1) (114.6) (107.9)
Repurchase of common stock (78.6) (121.5) (18.9)
Redemptions--
Short-term debt (560.5) (164.1) (355.8)
Long-term debt (188.3) (160.8) (153.7)
Preferred stock - (39.0) (29.5)
Issuances--
Short-term debt 331.3 231.0 306.2
Long-term debt 1,116.5 150.0 -
Preferred stock - - 100.0
Other financing activities (14.5) (3.3) 0.3
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 479.8 (222.3) (259.3)
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 486.7 5.3 8.2
Cash and cash equivalents at beginning of year 17.8 12.5 4.3
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $504.5 $17.8 $12.5
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
Consolidated Statements of Retained Earnings
- --------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 89.5 $ 245.9 $ 129.6
Net income (loss) before dividends and carrying amount adjustment (1,355.9) (44.2) 228.6
- --------------------------------------------------------------------------------------------------------------------------
(1,266.4) 201.7 358.2
- --------------------------------------------------------------------------------------------------------------------------
Less-
Dividends-
Preferred stock 20.1 21.7 22.6
Common stock 82.9 90.7 86.6
Investment transfer to Illinova - - 2.4
Plus-
Carrying amount over (under) consideration
paid for redeemed preferred stock - 0.2 (0.7)
Quasi-Reorganization adjustment (Note 2) 1,327.2 - -
Transfer from other paid-in capital to
eliminate retained earnings deficit (Note 2) 42.2 - -
- --------------------------------------------------------------------------------------------------------------------------
1,266.4 (112.2) (112.3)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ - $ 89.5 $ 245.9
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of
these statements.
</TABLE>
Notes to Consolidated Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IP is a subsidiary of Illinova, a holding company. IP is engaged in the
generation, transmission, distribution, and sale of electric energy and the
distribution, transportation, and sale of natural gas in the state of Illinois.
The consolidated financial statements include the accounts of IP; Illinois Power
Securitization Limited Liability Company, a special purpose LLC whose sole
member is IP; IPSPT, a special purpose trust whose sole owner is Illinois Power
Securitization Limited Liability Company; Illinois Power Capital, L.P.; and
IPFI. See "Note 9 -- Long-Term Debt" and "Note 10 -- Preferred Stock" for
additional information.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. Preparation of financial statements
in conformity with generally accepted accounting principles requires the use of
management's estimates. Actual results could differ from those estimates.
Clinton Impairment and Quasi-Reorganization: In December 1998, IP's Board of
Directors decided to exit the nuclear portion of the business by either sale or
shutdown of Clinton. FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," requires that all
long-lived assets for which management has committed to a plan of disposal be
reported at the lower of carrying amount or fair value less cost to sell.
Consequently, IP wrote off the value of Clinton and accrued Clinton-related exit
costs, which resulted in an accumulated deficit in retained earnings.
IP's Board of Directors also voted in December 1998 to effect a
quasi-reorganization. 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 liabilities to
their fair values, with the net amount of these adjustments added to or deducted
from the deficit. Any remaining deficit in retained earnings is then eliminated
by a transfer from paid-in capital, giving the company a "fresh start" with a
zero balance in retained earnings.
For additional information, see "Note 2 -- Clinton Impairment and
Quasi-Reorganization."
Regulation: IP is regulated primarily by the ICC, FERC, and the NRC. Prior to
the enactment of P.A. 90-561, IP prepared its consolidated financial statements
in accordance with FAS 71, "Accounting for the Effects of Certain Types of
Regulation." Reporting under FAS 71 allows companies whose service obligations
and prices are regulated to maintain balance sheet assets representing costs
they expect to recover through inclusion in future rates. In July 1997, the 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 market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment in
December 1997 when P.A. 90-561 was enacted. IP evaluated the 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, i.e., the regulated portion of its business. In
December 1997, IP wrote off generation-related regulatory assets and liabilities
of approximately $195 million (net of income taxes). These net assets related to
previously incurred costs expected to be recoverable through future revenues,
including deferred Clinton post-construction costs, unamortized losses on
reacquired debt, previously recoverable income taxes, and other
generation-related regulatory assets. At December 31, 1998, the value of IP's
non-nuclear generation facilities was $2.9 billion.
IP's principal accounting policies are:
Regulatory Assets: Regulatory assets represent probable future revenues to IP
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Significant regulatory assets are as follows:
(Millions of dollars) 1998 1997
Unamortized losses on reacquired debt $ 40.1 $ 32.3
Manufactured-gas plant
site cleanup costs $ 44.7 $ 64.8
DOE decontamination and
decommissioning fees -- $ 6.3
Transition period cost recovery $783.0 --
Clinton decommissioning cost recovery $ 72.3 --
Utility Plant: The cost of additions to utility plant and replacements for
retired property units is capitalized. Cost includes labor, materials, and an
allocation of general and administrative costs, plus AFUDC as described below.
Maintenance and repairs, including replacement of minor items of property, are
charged to maintenance expense as incurred. When depreciable property units are
retired, the original cost and dismantling charges, less salvage value, are
charged to accumulated depreciation.
After 1998's write-off of Clinton, costs which would have been considered
capital additions at Clinton will be expensed. See "Note 2 -- Clinton Impairment
and Quasi-Reorganization."
Allowance for Funds Used During Construction: The FERC Uniform System of
Accounts defines AFUDC as the net costs for the period of construction of
borrowed funds used for construction purposes and a reasonable rate on other
funds when so used. AFUDC is capitalized as a component of construction work in
progress by those business segments applying the provisions of FAS 71. In 1998,
1997, and 1996, the pre-tax rate used for all construction projects was 5.7%,
5.6%, and 5.8%, respectively. Although cash is not currently realized from the
allowance, it is realized through the ratemaking process over the service life
of the related property through increased revenues resulting from a higher rate
base and higher depreciation expense. Non-regulated business segments capitalize
interest under the guidelines in FAS 34, "Capitalization of Interest Cost."
Depreciation: For financial statement purposes, IP depreciates the various
classes of depreciable property over their estimated useful lives by applying
composite rates on a straight-line basis. In each of the years 1996 through
1998, the provision for depreciation was 2.8% of the average depreciable cost
for Clinton. Provisions for depreciation for all other electric plant facilities
were 2.3%, 2.8%, and 2.6% in 1998, 1997, and 1996, respectively. Provisions for
depreciation of gas utility plant, as a percentage of the average depreciable
cost, were 3.5% in 1998, 3.3% in 1997, and 3.9% in 1996.
Depreciation of Clinton has been discontinued in 1999. See "Note 2 -- Clinton
Impairment and Quasi-Reorganization."
Amortization of Nuclear Fuel: IP leases nuclear fuel from the Fuel Company under
a capital lease. Amortization of nuclear fuel (including related financing
costs) is determined on a unit of production basis. A provision for spent fuel
disposal costs is charged to fuel expense based on kwh generated. See "Note 4 --
Commitments and Contingencies" for discussion of decommissioning and nuclear
fuel disposal costs. See "Note 2 -- Clinton Impairment and Quasi-Reorganization"
for discussion of the effect of the Clinton impairment on nuclear fuel.
Unamortized Debt Discount, Premium, and Expense: Discount, premium, and expense
associated with long-term debt are amortized over the lives of the related
issues. Costs related to refunded debt for business segments applying the
provisions of FAS 71 are amortized over the lives of the related new debt issues
or the remaining life of the old debt if no new debt is issued. Costs related to
refunded debt for the generating segment are expensed when incurred.
Revenue and Energy Cost: To more closely match revenues with expenses, IP
records revenue for services provided but not yet billed. Unbilled revenues
represent the estimated amount customers will be billed for service delivered
from the time meters were last read to the end of the accounting period. Until
August 1998, operating revenues included related taxes that had been billed to
customers. In August 1998, the practice of including revenue-related taxes in
operating revenues was discontinued for the electric portion of the business.
Taxes included in operating revenues were $54 million in 1998, $71 million in
1997, and $68 million in 1996. The cost of gas purchased for resale is recovered
from customers pursuant to the UGAC. Accordingly, allowable gas costs that are
to be passed on to customers in a subsequent accounting period are deferred. The
recovery of costs deferred under this clause is subject to review and approval
by the ICC. Prior to March 1998, the costs of fuel for electric generation and
purchased power costs were deferred and recovered from customers pursuant to the
UFAC. On March 6, 1998, IP initiated an ICC proceeding to eliminate the UFAC in
accordance with P.A. 90-561. A new base fuel cost recoverable under IP's
electric tariffs was established, effective on the date of the filing. UFAC
elimination prevents IP from automatically passing cost increases through to its
customers and exposes IP to the risks and opportunities of cost fluctuations and
operating efficiencies.
Under UFAC, IP was subject to annual ICC audits of its actual allowable fuel
costs. Costs could be disallowed, resulting in negotiations and/or litigation
with the ICC. In 1998, IP agreed to settlements with the ICC which closed the
audits for all previously disputed years. As a result of the settlements, IP
electric customers are receiving refunds totaling $15.1 million in the first
quarter of 1999. These refunds complete the process of eliminating the UFAC at
IP.
Income Taxes: Deferred income taxes result from temporary differences between
book income and taxable income and the tax bases of assets and liabilities on
the balance sheet. The temporary differences relate principally to plant and
depreciation.
Prior to December 31, 1998, investment tax credits used to reduce federal
income taxes had been deferred and were being amortized to income over the
service life of the property that gave rise to the credits. As a result of IP's
decision to exit Clinton operations, all previously deferred investment tax
credits associated with nuclear property were recorded as a credit to income at
December 31, 1998. For further discussion of Clinton-related investment tax
credits, see "Note 2 -- Clinton Impairment and Quasi-Reorganization."
IP is included in Illinova's consolidated federal income tax return. Income
taxes are allocated to the individual companies based on their respective
taxable income or loss. See "Note 7 -- Income Taxes" for additional discussion.
Preferred Dividend Requirements: Preferred dividend requirements reflected in
the Consolidated Statements of Income are recorded on the accrual basis.
Consolidated Statements of Cash Flows: Cash and cash equivalents include cash on
hand and temporary investments purchased with an initial maturity of three
months or less. Capital lease obligations not affecting cash flows increased by
$5 million, $30 million, and $31 million during 1998, 1997, and 1996,
respectively. Income taxes and interest paid are as follows:
Years ended December 31,
(Millions of dollars) 1998 1997 1996
Income taxes $ 14.6 $ 94.3 $ 65.9
Interest $ 151.6 $ 140.0 $ 147.4
New Accounting Pronouncements: Implementation of a quasi-reorganization requires
the adoption of any accounting standards that had not yet been adopted because
their required implementation date had not occurred. All applicable accounting
standards were adopted as of December 1998. For additional information, see
"Note 2 -- Clinton Impairment and Quasi-Reorganization."
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 was adopted early in connection with the requirements for
quasi-reorganization accounting. It did not have a significant impact on IP's
1998 financial statements. For additional information, see "Note 15 -- Financial
and Other Derivative Instruments."
The EITF reached a final consensus on Issue 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities" in November 1998,
effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10
creates a distinction between energy trading and non-trading activities and
establishes guidance for the accounting treatment of contracts used in energy
trading activities. The EITF concluded that contracts involved in energy trading
activities should be measured at fair value as of the balance sheet date with
gains and losses included in earnings. EITF Issue 98-10 was adopted early in
connection with the requirements for quasi-reorganization accounting. It did not
have a significant impact on IP's 1998 financial statements.
For additional information, see "Note 15 -- Financial and Other Derivative
Instruments."
The Accounting Standards Executive Committee of the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in March 1998, effective for financial statements for fiscal years
beginning after December 15, 1998. SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use.
Specifically, the nature of the costs incurred, not the timing of their
occurrence, determines whether costs are capitalized or expensed. SOP 98-1 was
adopted early in connection with the requirements for quasi-reorganization
accounting. SOP 98-1 did not have a significant impact on IP's 1998 financial
statements.
The Accounting Standards Executive Committee of the AICPA issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities" in April 1998, effective for
financial statements for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 was adopted early in connection with the
requirements for quasi-reorganization accounting. SOP 98-5 did not have a
significant impact on IP's 1998 financial statements.
The FASB issued FAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in February 1998, effective for periods beginning after
December 15, 1997. FAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are not as useful as they were when they were originally
adopted. The statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures. IP has complied with the requirements
of FAS 132. See "Note 12 -- Pension and Other Benefits Costs."
NOTE 2 -- CLINTON IMPAIRMENT AND QUASI-REORGANIZATION
In December 1998, IP's Board of Directors voted to exit Clinton operations,
resulting in an impairment of Clinton-related assets and accrual of exit-related
costs. The impairment and accrual of costs resulted in a $1,327.2 million, net
of income taxes, charge against earnings. Concurrent with the decision to exit
Clinton, IP's Board of Directors also voted to effect a quasi-reorganization, in
which IP's consolidated accumulated deficit in retained earnings of $1,369.4
million was eliminated. A quasi-reorganization is an accounting procedure
whereby a company adjusts its accounts to obtain a "fresh start." In a
quasi-reorganization, a company restates its assets and liabilities to their
fair value, adopts accounting pronouncements issued but not yet adopted, and
eliminates any remaining deficit in retained earnings by a transfer from other
paid-in capital.
Background
IP owns one nuclear generating station, Clinton, a 930-megawatt unit that
represents approximately 20 percent of IP's generating capacity. Significant
Clinton write-offs have weakened earnings and led to a 10-year decline in IP's
retained earnings balance. Clinton has not operated since September 1996. See
"Note 3 -- Clinton Power Station" for additional information.
In December 1997, the State of Illinois enacted P.A. 90-561, legislation
designed to introduce competition for electric generation service over a defined
transition period. P.A. 90-561 creates uncertainty regarding IP's ability to
recover electric generating costs and earn a reasonable rate of return on
generating assets. Uncertainties about deregulated generation pricing in
Illinois, coupled with IP's experience with nuclear operations, led management
to several conclusions:
- - Efficiency in nuclear operations can best be attained through scale,
including ownership of multiple plants over which to spread costs and
leverage talent and management systems.
- - Clinton requires disproportionate management attention.
- - Success in a deregulated generation market will require generation cost
efficiency.
Beginning in late 1997 and continuing through 1998, IP's management prepared
detailed evaluations of the expected shareholder value from various options
related to Clinton. These analyses ultimately identified that either the sale or
closure of Clinton would create more shareholder value than its continued
operation. Management determined that this strategic decision would provide a
fundamental change necessary for IP to achieve success in the new environment of
deregulation and competition.
In anticipation of a possible decision to exit Clinton, IP submitted a letter
to the SEC describing IP's proposed accounting for an impairment loss under the
"assets to be disposed of" provisions of FAS 121. The letter also requested
concurrence with IP's proposed accounting for a quasi-reorganization, whereby
the fossil generation assets would be written up to their fair value
simultaneous with recording the impairment loss for Clinton. In November 1998,
the SEC confirmed that it would not object to IP's proposed accounting.
In December 1998, IP's Board of Directors voted to exit Clinton operations
and proceed with the quasi-reorganization. The decision to implement the
quasi-reorganization did not require the approval of shareholders.
IP is pursuing potential opportunities to sell Clinton. However, substantial
uncertainty exists with regard to the ability to convert any tentative agreement
into an executable transaction. As a result, IP has accounted for the Clinton
exit based on the expectation of plant closure as of August 31, 1999. See "Note
3 -- Clinton Power Station" for additional information.
Clinton Impairment and Accrual of Exit Costs
Prior to impairment, the book value of Clinton plant, including construction
work in progress, nuclear fuel, and materials and supplies, net of accumulated
depreciation, was $2,594.4 million. FAS 121 requires that assets to be disposed
of be stated at the lower of their carrying amount or their fair value. The fair
value of Clinton is estimated to be zero. This estimate is consistent with
possible management decisions to sell or close Clinton. The adjustment of
Clinton plant, nuclear fuel, and materials and supplies to fair value resulted
in impairments of $1,385.6 million, $68.4 million, and $25.9 million,
respectively, for a total impairment loss of $1,479.9 million, net of
accumulated depreciation, income taxes, and ITC. Nuclear fuel and materials and
supplies of $23.2 million remain on IP's books after the impairment, given
management's expectation that such amounts will be consumed in 1999 prior to
Clinton's ultimate disposal. The impairment of Clinton plant, nuclear fuel, and
materials and supplies was recognized as a charge to earnings. Consistent with
Clinton's estimated fair value of zero and the provisions of FAS 121,
depreciation of Clinton has been discontinued. Clinton depreciation expense was
$94.4 million in 1998.
Concurrent with the decision to exit Clinton operations, IP accrued the
estimated cost to decommission the facility. Recognition of this liability, net
of previously accrued amounts, resulted in a $293.5 million, net of income
taxes, charge to earnings. This liability is based on the DECON method of
decommissioning. The DECON method requires the prompt removal of radioactive
materials from the site following the cessation of operations and results in
significant expenditures in the early years of the decommissioning process. IP
expects to complete decommissioning in 2028. The ultimate disposition of
Clinton, as well as the decommissioning method chosen, could have a material
impact on IP's ultimate decommissioning liability. See "Note 4 -- Commitments
and Contingencies."
Also concurrent with the decision to exit Clinton operations, IP recorded
$4.3 million, net of income taxes, of contract termination fees for nuclear fuel
contracts and $46.5 million, net of income taxes, of costs to transition the
plant from an operating mode to a decommissioning mode. In addition, IP recorded
employee severance costs of $25.8 million, net of income taxes; pension
curtailment benefits of $(7.2) million, net of income taxes; and other
postretirement benefit costs of $.4 million, net of income taxes. See "Note 12
- -- Pension and Other Benefits Costs" for additional information. These costs
were recognized as charges to earnings. Costs to transition the plant from an
operating mode to a decommissioning mode and employee severance costs would be
paid within 11 months of the expected plant closure date of August 31, 1999.
Regulatory Assets
P.A. 90-561 allows utilities to recover potentially non-competitive investment
costs ("stranded costs") from retail customers during the transition period,
which extends until December 31, 2006, with possible extension to December 31,
2008. During this period, IP is allowed to recover stranded costs through frozen
bundled rates and transition charges from customers who select other electric
suppliers.
P.A. 90-561 contains floor and ceiling provisions for utilities' allowed ROE.
During the transition period, a utility may request an increase in its base
rates if its ROE falls below a specified minimum based on a prescribed test.
Utilities are also subject to an overearnings test which requires sharing of
earnings in excess of specified levels with customers. See "Note 4 --
Commitments and Contingencies" for additional information.
In May 1998, the SEC staff issued interpretive guidance on the appropriate
accounting treatment during regulatory transition periods for asset impairments
and the related regulated cash flows designed to recover such impairments. The
staff's guidance established that an impaired portion of plant assets identified
in a state's legislation or rate order for recovery by means of a regulated cash
flow should be treated as a regulatory asset in the separable portion of the
enterprise from which the regulated cash flows are derived. Based on this
guidance and on provisions of P.A. 90-561, IP recorded a regulatory asset of
$472.4 million, net of income taxes, for the portion of its stranded costs
deemed probable of recovery during the transition period. The regulatory asset
was recognized as a credit to earnings, offsetting a portion of the Clinton
impairment. Under P.A. 90-561, amortization of the regulatory asset is included
in the overearnings test but is not included in the calculation for the floor
test.
IP also recorded a regulatory asset of $43.6 million, net of income taxes,
reflecting probable future collections from customers of decommissioning costs.
This regulatory asset was also recognized as a credit to earnings, offsetting a
portion of the Clinton impairment. This regulatory asset is also based on P.A.
90-561, which allows for continued recovery of decommissioning costs over the
originally anticipated 27-year remaining life of Clinton. See "Note 4 --
Commitments and Contingencies" for additional information.
Revaluation of Assets and Liabilities
In conjunction with effecting its quasi-reorganization, IP reviewed its assets
and liabilities to determine whether the book value of such items needed to be
adjusted to reflect their fair value. IP determined that its fossil generation
assets were not stated at fair value. With the help of a third-party consultant,
management conducted an economic assessment of its fossil generation assets to
determine their fair value. The assessment was based on projections of on-going
operating costs, future prices for fossil fuels, and market prices of
electricity in IP's service area.
Management concluded that IP's fossil generation assets have a fair value of
$2,867.0 million. This fair value was determined using the after-tax cash flows
of the fossil assets. Prior to the quasi-reorganization, the fossil generation
assets' book value, net of accumulated depreciation, was $631.7 million. The
adjustment to fair value resulted in a write-up of $1,348.6 million, net of
income taxes, which was recognized as an increase in retained earnings. The
estimated amortization of the adjustment to fair value is $71 million in 1999.
IP determined that the book value of its mandatorily redeemable preferred
stock and long-term debt attributable to the generation portion of the business
required an adjustment to fair value of $16.4 million, net of income taxes. This
adjustment to fair value was recognized as a decrease in retained earnings. The
book value of current assets and liabilities equals fair value and therefore
required no adjustments. IP's electric transmission and distribution assets and
its gas distribution assets are still subject to cost-based rate regulation and
therefore required no adjustment.
Early Adoption of Accounting Pronouncements
As part of the quasi-reorganization, IP was required to adopt all existing
accounting pronouncements. The following accounting pronouncements, which have
future mandatory adoption dates, were adopted in connection with the
quasi-reorganization:
- - FAS 133, "Accounting for Derivatives and Hedging Activities"
- - EITF 98-10, "Accounting for Energy Trading and Risk Management Activities"
- - SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use"
- - SOP 98-5, "Reporting on the Costs of Start-up Activities"
The effect of adopting the accounting pronouncements was $5.0 million, net of
income taxes, which was recognized as a direct charge to retained earnings. See
"Note 1 -- Summary of Significant Accounting Policies" and "Note 15 -- Financial
and Other Derivative Instruments."
Remaining Deficit in Retained Earnings
After the revaluation of other assets and liabilities to their fair value and
the early adoption of accounting pronouncements, the accumulated deficit in
retained earnings was $42.2 million, which was eliminated by a transfer from
other paid-in capital.
A summary of consolidated retained earnings and the effects of the Clinton
impairment and quasi-reorganization on the retained earnings balance follows:
(Millions of dollars)
Retained earnings at December 31, 1998,
prior to Clinton impairment and
quasi-reorganization $ (42.2)
- -------------------------------------------------------------------------------
Clinton impairment (charged)/credited to earnings:
Clinton plant, nuclear fuel, and materials
and supplies* (1,479.9)
Decommissioning costs, net of regulatory asset* (249.9)
Other exit costs* (69.8)
- -------------------------------------------------------------------------------
(1,799.6)
Transition period cost recovery* 472.4
- -------------------------------------------------------------------------------
Total Clinton impairment (1,327.2)
- -------------------------------------------------------------------------------
Accumulated deficit in retained earnings (1,369.4)
- -------------------------------------------------------------------------------
Quasi-reorganization (charged)/credited to retained earnings:
Generation assets fair value adjustment* 1,348.6
Mandatorily redeemable preferred stock and
long-term debt fair value adjustment* (16.4)
Early adoption of accounting pronouncements* (5.0)
- -------------------------------------------------------------------------------
Total quasi-reorganization 1,327.2
- -------------------------------------------------------------------------------
Retained earnings deficit at December 31, 1998 (42.2)
Transfer from other paid-in capital 42.2
- -------------------------------------------------------------------------------
Retained earnings balance at December 31, 1998,
after quasi-reorganization $ 0.0
- -------------------------------------------------------------------------------
*Amounts are net of income taxes.
See "Note 1 -- Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
NOTE 3--CLINTON POWER STATION
Clinton Operations
Clinton was placed in service in 1987 and represents approximately 20% of IP's
installed generation capacity. Clinton has not operated since September 1996,
when a leak in a recirculation pump seal caused IP operations personnel to shut
down the plant.
In January 1997, the NRC named Clinton among plants having a trend of
declining performance and, in January 1998, placed Clinton on its "Watch List"
of nuclear plants that require additional regulatory oversight.
In late 1997, an independent team conducted an ISA to thoroughly assess
Clinton's performance, and an NRC team performed an evaluation to validate the
ISA results. Both teams concluded that the underlying reasons for Clinton's
performance problems were ineffective leadership throughout the organization in
providing standards of excellence, complacency throughout the organization,
barrier weaknesses, and weaknesses in teamwork.
In January 1998, IP and PECO announced an agreement under which PECO provides
management services for Clinton, with IP maintaining the operating license and
ultimate oversight for the plant. PECO employees have assumed senior positions
at Clinton but the plant remains staffed primarily by IP employees. IP selected
PECO because it believed that bringing in PECO's experienced management team
would be the fastest and most efficient way to return Clinton to service and to
a superior level of operation.
In February 1998, IP filed with the NRC Clinton's Summary Plan for
Excellence, a comprehensive set of strategies and associated actions necessary
to improve performance, permit safe restart of the plant, and achieve excellence
in operations. IP is implementing the actions required prior to plant restart.
The NRC is conducting a formal review process in parallel with IP's recovery and
restart program.
In November 1998, a resource-loaded integrated schedule was developed which
identified work to be completed prior to restart. This schedule indicated that
restart of the plant would occur in the spring of 1999. As of early March, work
on the schedule has generally occurred as planned with restart still expected in
the spring of 1999.
Public meetings with the NRC to review remaining restart issues are occurring
approximately every two or three weeks. Major on-site NRC inspections to
evaluate key plant areas were initiated in February and are still in progress.
Transfer of Soyland's Ownership Share to IP
For discussion of the transfer of Soyland's ownership share to IP, see "Note 6
- -- Facilities Agreements."
Clinton Cost and Risks
IP's Clinton-related costs represented 41% of IP's total 1998 other operating
and maintenance expenses. Clinton's equivalent availability was 0% for 1998 and
1997 and 66% for 1996.
Currently, commercial reprocessing of spent nuclear fuel is not allowed in
the United States. The NWPA was enacted to establish a government policy on
disposal of spent nuclear fuel and/or high-level radioactive waste. Although the
DOE has failed to comply with its obligation under the NWPA to provide spent
nuclear fuel retrieval and storage by 1998, IP has on-site underwater storage
capacity that will accommodate its spent fuel storage needs for approximately 10
years. IP is currently an equity partner with seven other utilities in an effort
to develop a private temporary repository. 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. Safe, dry, on-site storage is technologically feasible
but is subject to licensing and local permitting requirements, for which there
may be effective opposition. See "Note 4 -- Commitments and Contingencies" for
additional information.
Ownership of a nuclear generating unit exposes IP to significant risks,
including increased and changing regulatory, safety and environmental
requirements, and the uncertain future cost of closing and dismantling the unit.
Exiting the Nuclear Business
In December 1998, IP's Board of Directors voted to exit the nuclear business by
selling Clinton or closing it permanently. IP has entered into discussions with
parties interested in purchasing Clinton. Principal concerns of interested
parties are plant restart, funding the decommissioning liability, terms of any
purchase agreement for power generated by Clinton including the length of the
agreement and price of the electricity sold, market price projections for
electricity in the region, property tax obligations of the purchaser, and income
tax issues. These concerns create substantial uncertainty with regard to the
ability to convert any tentative agreement into an executable transaction. In
light of these significant uncertainties with respect to IP's ability to sell
Clinton, IP is preparing to permanently decommission the facility. See "Note 4
- -- Commitments and Contingencies" and "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Commitments
IP estimates that it will spend approximately $370 million for construction
expenditures in 1999. IP construction expenditures for the period 1999 through
2003 are expected to total about $1.2 billion. With the planned sale or shutdown
of Clinton, no nuclear construction is included in the above estimates. Nuclear
construction will be expensed. In addition, in March 1999, IP will be required
to deposit $62 million in cash with the Fuel Company Trustee for noteholders and
take title to the partially depleted nuclear fuel in the reactor at Clinton.
Additional expenditures may be required during this period to accommodate
transitional expenditures related to a competitive environment, environmental
compliance costs and system upgrades, which cannot be determined at this time.
IP's capital expenditures for 1999 through 2003, in addition to IP
construction expenditures, are expected to include $522 million for mandatory
debt retirement. In addition, IPSPT has long-term debt maturities of $86.4
million in each of the above years.
In addition, IP has substantial commitments for the purchase of coal and
coal transportation under long-term contracts. Estimated coal contract
commitments for 1999 through 2003 are $664 million (excluding price escalation
provisions). Total coal purchases were $210 million in 1998, $181 million in
1997, and $184 million in 1996. IP has contracts with various natural gas
suppliers and interstate pipelines to provide natural gas supply, transportation
and leased storage. Estimated committed natural gas, transportation and leased
storage costs for 1999 through 2003 total $81 million. Total natural gas
purchased was $157 million in 1998, $185 million in 1997, and $207 million in
1996. IP anticipates that all gas-related costs will be recoverable under IP's
UGAC. See the subcaption "Fuel Cost Recovery" below for discussion of the UFAC.
IP has accrued contract cancellation fees of $7.1 million to cover minimum
purchase commitments under uranium procurement, conversion, and enrichment
contracts. For more information, see "Note 2 -- Clinton Impairment and
Quasi-Reorganization." IP is committed to purchase approximately $9 million of
emission allowances in 1999 and has contingent commitments for up to $5.5
million in additional 1999 emission allowances purchases, depending on whether
certain options are exercised.
Fuel Cost Recovery: On March 6, 1998, IP initiated an ICC proceeding for
elimination of the UFAC. This established a new base fuel cost recoverable under
IP's electric tariffs which includes a component for recovery of fuel costs, but
not a direct pass-through of such costs. Elimination of the UFAC exposes IP to
the risks and opportunities of market price volatility and operating
efficiencies. By eliminating the UFAC, IP eliminated exposure for potential
disallowed fuel and purchased power costs for the periods after December 31,
1996. Whether electric energy production costs will continue to be recovered
depends on a number of factors, including the number of customers served, demand
for electric service, and changes in fuel cost components. Furthermore, IP's
base electric rates to residential customers were reduced beginning in August
1998 and certain customers will be free to choose their electric generation
suppliers beginning in October 1999. These variables will be influenced, in
turn, by market conditions, availability of generating capacity, future
regulatory proceedings, and environmental protection costs, among other things.
IP's electric customers are receiving refunds totaling $15.1 million during the
first quarter of 1999 related to fuel cost disallowances as the final phase of
the elimination of the UFAC. These refunds close the ICC review process related
to the UFAC cost pass-through for the four years 1989, 1994, 1995, and 1996.
Utility Earnings Cap: P.A. 90-561 also contains floor and ceiling provisions
regarding ROE. During the transition period ending in 2006 (or 2008 at the
option of the utility), a utility may request an increase in its base rates if
the two-year average of its earned ROE is below the two-year average of the same
two years of the monthly average yields of 30-year U.S. Treasury bonds.
Conversely, if during the transition period the two-year average of its earned
ROE exceeds the two-year average for the same two years of the monthly average
yields of the 30-year U.S. Treasury bonds for annual periods ending September
30, plus 5.5% in 1999 or 6.5% in 2000 through 2004, the utility must refund to
customers 50 percent of the "overearnings." Regulatory asset amortization is
included in the calculation of ROE for the ceiling, or overearnings, test but is
not included in the calculation for the floor test.
Insurance: IP maintains insurance for certain losses involving the operation of
Clinton. For physical damage to the plant, IP purchases $1.6 billion of
insurance coverage from an industry-owned mutual insurance company. In the event
of a major nuclear accident with an estimated cost of reactor stabilization and
site decontamination exceeding $100 million, NRC regulations require that
insurance proceeds be dedicated and used first to return the reactor to and
maintain it in a safe and stable condition, and second to decontaminate the
reactor station site. Coverage is provided for a shortfall in the
Decommissioning Trust Fund if premature decommissioning of the reactor is
required due to an accident. If insurance limits are not exhausted by the above
coverages, the remaining coverage is applied to property damage and a portion of
the value of the undamaged property. If a major nuclear accident occurred at
Clinton, claims for property damage and other costs could exceed the limits of
current or available insurance coverage.
IP purchases business interruption coverage through the
industry-owned mutual insurance company. After a 17-week waiting period, the
insurance provides coverage if Clinton is out of service due to an accidental
property damage loss. Thereafter, the insurance provides weekly indemnity for up
to 162 weeks. Total coverage from this business interruption insurance, if
Clinton were out of service for the entire 162 weeks, would be $223.8 million.
Multiple major losses covered under the current property damage and business
interruption insurance coverages involving Clinton or other stations insured by
the industry-owned mutual insurance company could result in retrospective
premium assessments up to $11.6 million. IP is not collecting any business
interruption insurance payments for Clinton.
All U.S. nuclear reactor licensees are subject to the Price-Anderson Act
which currently limits public liability for a nuclear incident to $9.7 billion.
Private insurance covers the first $200 million. Retrospective premium
assessments against each licensed nuclear reactor in the United States provide
excess coverage. Currently, the liability to these nuclear reactor licensees for
such an assessment would be up to $88.1 million per incident, not including any
premium taxes assessed by the State of Illinois which may be applicable, payable
in annual installments of not more than $10 million.
As a licensee of a commercial nuclear power plant in the United States, IP
is required to maintain financial protection to cover claims of certain nuclear
workers. Prior to January 1998, IP met this requirement with insurance purchased
under a Master Worker Policy. On January 1, 1998, a new insurance policy was
issued that applies to claims first reported on or after January 1, 1998. This
policy has a limit of $200 million (reinstated annually if certain conditions
are met) for radiation injury claims against IP or other licensees who are
insured by this policy. If these claims exceed the $200 million limit of primary
coverage, the SFP provisions of the Price-Anderson Act would apply. Since
reserves for outstanding claims under former policies would be insufficient and
certain claims may still be made under former policies due to a discovery
period, IP could be assessed under these former policies along with the other
policyholders. IP's share could be up to $3.1 million in any one year.
IP may be subject to other risks that are not insurable, or its insurance
coverage to offset the various risks may be insufficient to meet potential
liabilities and losses. There is no assurance that IP will be able to maintain
insurance coverage at its present level. Under those circumstances, such losses
or liabilities could have a material adverse effect on IP's financial position.
If Clinton is sold, the purchaser will assume the decision-making
responsibilities for securing required insurance coverages.
If Clinton is decommissioned, IP will work jointly with the regulators to
modify its nuclear insurance program to reflect decommissioned plant status.
Nuclear property insurance will initially be reduced to the Property Rule's
minimum coverage limits of $1.06 billion. IP will proceed with filing a waiver
of the Property Rule's minimum insurance requirements which will reflect the
maximum probable decontamination event applicable to the decommissioned plant.
Regulations require any licensed plant to continue its purchase of full nuclear
liability limits and participation in the SFP program for a specified period
following shutdown or until decay heat removal capacity is reduced to acceptable
levels. IP will consider requesting a waiver to suspend participation in the SFP
program and reduce the level of liability insurance limits. Since business
interruption coverage is optional, IP will review the value of continuing this
coverage and adjust accordingly.
Decommissioning and Nuclear Fuel Disposal: IP is responsible for the costs of
decommissioning Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent with IP's assumption of all of Soyland's ownership obligations of
Clinton, Soyland's nuclear decommissioning trust assets of approximately $6
million were transferred to IP.
P.A. 90-561 provides for the continued recovery of decommissioning costs
through rates charged to IP's delivery service customers. An ICC approved
site-specific decommissioning study projected a cost of $538 million in 1996
dollars for decommissioning based on the assumption of the DECON method (prompt
removal and dismantlement of Clinton), which results in material expenditures in
the early years of decommissioning Clinton. The projected cost estimate in 2026
dollars, assuming a 2 percent annual inflation factor, is $988 million. This
estimate continues as the basis for assessing decommissioning costs to IP's
customers.
External decommissioning trusts, as prescribed by Illinois law and
authorized by the ICC, accumulate funds for the future decommissioning of
Clinton based on the expected service life of the plant. Decommissioning funds
are recorded as assets on the balance sheet. Beginning in 1999, IP will
recognize earnings and expenses of the trust on the income statement as they
occur. The trust summary is as follows:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Market value,
beginning of period $ 62.5 $ 41.4 $ 32.7
Company contributions 6.5 5.3 3.9
Appreciation in market value 15.1 15.8 4.8
- --------------------------------------------------------------------------------
Market value, end of period $ 84.1 $ 62.5 $ 41.4
- --------------------------------------------------------------------------------
In December 1998, IP's Board of Directors voted to exit Clinton operations
which resulted in an impairment of Clinton-related assets and accrual of
exit-related costs. As a result of the decision to exit Clinton operations, IP
accrued the estimated cost to decommission the facility. IP recognized the
present value of the decommissioning liability for Clinton not previously
accrued, in the amount of $293.5 million, net of income taxes. IP also recorded
a regulatory asset for the present value of the estimated future collections
from customers for decommissioning costs in the amount of $43.6 million, net of
taxes. A discount rate of 5.10%, the 30-year Treasury bond rate at December 31,
1998, was used to calculate the regulatory asset and decommissioning liability.
The ultimate disposition of Clinton, as well as the decommissioning method
chosen, could have a material impact on the total decommissioning liability.
If Clinton is closed, the estimated decommissioning expenditures under the
DECON method for the next five years are $376.2 million. IP currently has $84
million in decommissioning trust funds and would expect this amount to be used,
as well as $37 million in additional collections from customers, including
interest on the trust, during this time period. In addition, IP will need to
fund approximately $255 million from other sources. The estimated
decommissioning expenditures to be incurred as follows:
(Millions of dollars)
1999 $ 21.0
2000 63.9
2001 79.3
2002 105.0
2003 107.0
Thereafter 405.8
- --------------------------------------------------------------------------------
Total estimated liability 782.0
Discount at 5.10% 214.6
- --------------------------------------------------------------------------------
Total discounted liability $ 567.4
- --------------------------------------------------------------------------------
Under the NWPA, the DOE is responsible for the permanent storage and disposal
of spent nuclear fuel. The DOE currently charges one mill ($0.001) per net kwh
(one dollar per MWH) generated and sold for future disposal of spent fuel. IP is
recovering these charges through rates. In 1996, at the request of
nuclear-owning utilities and state regulatory agencies, the District of Columbia
Circuit Court of Appeals issued an order confirming DOE's unconditional
obligation to take responsibility for spent nuclear fuel commencing in 1998. The
DOE argued that it had no such obligation because of its inability to site and
license a permanent repository. Notwithstanding this decision, which the DOE did
not appeal, the DOE has indicated to all nuclear utilities that it will
experience delay in performance. The impact of any such delay on IP will depend
on many factors, including the duration of such delay and the cost and
feasibility of interim, on-site storage. Nuclear plant owners and others are
pursuing litigation against DOE at the D.C. Circuit Court of Appeals, the
Federal Court of Claims, federal district court, and in administrative
proceedings. These lawsuits are focused on establishing DOE liability for
damages caused by its failure to perform, the scope of those damages, and other
remedies. IP is participating in such litigation before the D.C. Circuit Court
of Appeals. To date, the unconditional nature of DOE's obligation has been
upheld but no court has yet quantified damages or ordered specific performance.
The outcome of these lawsuits is uncertain. See "Note 3 -- Clinton Power
Station" for additional information.
Power Supply and Reliability: Electricity was in short supply during the 1998
summer cooling season because of an unusually high number of plant outages in
the Midwest region. IP bought generation and transmission capacity to prevent
firm load curtailment and took additional steps to avoid power outages,
including upgrading transmission lines and equipment, readying emergency
procedures, and returning to service five units that had been in cold shutdown.
Expenses incurred as a result of the shortage have had a material adverse impact
on IP.
The electric energy market experienced unprecedented prices for power
purchases during the last week of June 1998. IP's power purchases for 1998 were
$517 million higher than 1997 due to summer price spikes resulting in a $274
million increase in power purchased, additional purchases of $215 million to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts as part of the wholesale
trading business. Income from interchange sales was $382 million higher than in
1997 due to increased sales volumes and higher prices. Although IP's margin on
volumes between 1998 and 1997 resulted in IP being a net seller, higher prices
resulted in a $135 million net purchase margin. For more information, see
subcaption below titled "IP Wholesale Energy Markets" and "Note 15 -- Financial
and Other Derivative Instruments."
IP expects to have in excess of 400 MW of additional generation on line for
the summer of 1999. This includes approximately 235 MW from five oil-fired units
which were brought up from cold shutdown during the summer of 1998 and 176 MW
from four natural gas turbines that IP plans to install before the summer of
1999. Total cost for the two projects is estimated at $87 million. IP also plans
to refurbish nine gas turbines already in service at a cost of $13 million. At
an October 1998 public ICC proceeding on reliability, 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 assuming Clinton will not be
operating. However, IP expects to have sufficient generating capacity to serve
firm load during the periods of peak summer demand using demand-side and
supply-side initiatives taken in response to the 1998 regional supply crisis. If
generation is lost or demand is at unprecedented levels, firm load could be
curtailed. In addition, the restructuring of the Soyland PCA agreement is also
expected to free up an additional 287 MW of capacity. For more information, see
"Note 7 -- Facilities Agreements" concerning the Soyland PCA.
IP Wholesale Energy Markets: IP buys and sells electricity in the Midwest,
Southern, and Northeastern U.S. markets. In the normal course of business, IP
incurs price exposure on the electricity bought or sold. Where the markets
allow, IP will hedge such exposure through the use of electricity futures,
forward, and option contracts with qualified counterparties. In 1998, market
losses of approximately $33 million were recorded in connection with these
agreements based on forward market prices. Of this amount, approximately $28
million was charged to purchased power. The remaining $5 million resulted from
the early adoption of FAS 133 and was accounted for as part of the
quasi-reorganization. The ultimate financial impact of these contracts will
depend primarily on wholesale prices and IP's system availability. If system
availability is limited and market conditions cause wholesale prices to rise to
the levels seen in 1998, IP could incur significant costs to meet its wholesale
contract obligations. For more information, see "Note 1 -- Summary of
Significant Accounting Policies," subcaption New Accounting Pronouncements and
"Note 2 -- Clinton Impairment and Quasi-Reorganization."
Environmental Matters
Clean Air Act: IP continues to purchase emission allowances to comply with the
SO2 emission reduction requirements of Phase I (1995-1999) of the Acid Rain
Program (Title 4) of the 1990 Clean Air Act Amendments (CAAA). An emission
allowance is the authorization by the U.S. EPA to emit one ton of SO2. The ICC
approved IP's Phase I Acid Rain Compliance Plan in September 1993, and IP is
continuing to implement that plan. IP has acquired sufficient emission
allowances to cover more than 70 percent of its anticipated needs for 1999 and
expects to purchase the remainder on the spot market. Baldwin and Hennepin are
switching from high-sulfur Illinois coal to low-sulfur Wyoming coal to attain
compliance with Phase II (2000 and beyond) of the Acid Rain SO2 provisions of
the CAAA. The cost to convert Baldwin and Hennepin is estimated to be $125
million.
To comply with the Phase I NOx emission reduction requirements of the acid
rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin
Unit 3 and Vermilion Unit 2. On November 29, 1994, the Phase I NOx rules were
remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA reinstated, with some
modifications, the Phase I NOx rules effective January 1, 1996. IP was and
continues to be positioned to comply with these revised rules without additional
modifications to any of its generating plants.
The U.S. EPA issued revised Phase II NOx emission limits on December 10,
1996. IP has prepared a Phase II Compliance Plan. Capital expenditures for IP's
NOx Compliance Plan are expected to total $118 million when the project is
complete in early 2000. Approximately $58 million was spent through the end of
1998. The majority of this investment is for installation of SCR equipment on
Baldwin Units 1 and 2. This work is being done in conjunction with replacement
of the air heaters on these units.
In addition, regulators are continuing to finalize rulemaking to comply with
current federal air quality standards for ozone. On October 27, 1998, the U.S.
EPA finalized air pollution rules that will require substantial reductions of
NOx emissions in Illinois and 21 other states. This rule will require the
installation of NOx controls by May 2003, with each Illinois utility's exact
reduction requirement to be specified in 1999. Preliminary estimates of the
capital expenditures needed in 2000 through 2003 to comply with these new NOx
limitations are $90 million to $140 million. The legality of this proposal,
along with its technical feasibility, is being challenged by a number of states,
utility groups, and utilities, including IP.
Global Warming: In December 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
percent below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. Before it can take effect, this Protocol must be ratified
by the U.S. Senate. However, United States Senate Resolution 98, which passed
95-0 in July 1997, says the Senate would not ratify an agreement that fails to
involve all countries or would damage the economy of the United States. Since
the Protocol does not contain key elements that Senate Resolution 98 specifies
are necessary, ratification will be a major political issue. It is anticipated
that a ratification vote will be delayed until the current administration
decides whether it can meet the provisions of Senate Resolution 98.
IP will face major changes in the way it generates electricity if the Kyoto
Protocol is ratified or if the Protocol's reduction goals are incorporated into
other environmental regulations. IP would have to repower some generating units
and change from coal to natural gas in other units to reduce greenhouse gas
emissions. IP estimates that compliance with these proposed regulations may
require significant capital outlays and annual operating expenses which could
have a material adverse impact on IP.
Manufactured-Gas Plant: IP's estimated liability for MGP site remediation is $61
million. This amount represents IP's current estimate of the costs it will incur
to remediate the 24 MGP sites for which it is responsible. Because of the
unknown and unique characteristics at each site, IP cannot currently determine
its ultimate liability for remediation of the sites.
In October 1995, to offset some of the burden imposed on its customers, IP
initiated litigation against a number of its insurance carriers. As of June
1998, settlements or settlements in principle have been reached with all 30 of
the carriers. Settlement proceeds recovered from the carriers will offset a
significant portion of the MGP remediation costs and will be credited to
customers through the tariff rider mechanism which the ICC has previously
approved. Cleanup costs in excess of insurance proceeds will be fully recovered
from IP's transmission and distribution customers.
Electric and Magnetic Fields: The possibility that exposure to EMF emanating
from power lines, household appliances, and other electric sources may result in
adverse health effects continues to be the subject of litigation and
governmental, medical, and media attention. Litigants have also claimed that EMF
concerns justify recovery from utilities for the loss in value of real property
adjacent to power lines, substations, and other such sources of EMF. The number
of EMF cases has declined as national and international science commission
studies have failed to confirm EMF health risks. Additional research is being
conducted. On July 3, 1997, President Clinton signed legislation extending the
National EMF Research and Public Information Dissemination Program through 1998.
Research results, policy decision, and public information developments will
continue into 1999. It is too soon to tell what impact, if any, these actions
may have on IP's financial position.
Other
Legal Proceedings: IP is involved in legal or administrative proceedings before
various courts and agencies with respect to matters occurring in the ordinary
course of business, some of which involve substantial amounts of money.
Management believes that the final disposition of these proceedings will not
have a material adverse effect on the consolidated financial position or the
results of operations.
Accounts Receivable: IP sells electric energy and natural gas to residential,
commercial, and industrial customers throughout Illinois. At December 31, 1998,
59%, 24%, and 17% of "Accounts receivable -- Service" were from residential,
commercial, and industrial customers, respectively. IP maintains reserves for
potential credit losses and such losses have been within management's
expectations. The reserve for doubtful accounts remained at $5.5 million in
1998.
Contingencies
Soyland: For more information, see "Note 6 -- Facilities Agreements" for
discussion of Soyland contingencies.
Nuclear Fuel Lease: For more information, see "Note 8 -- Capital Leases" for
discussion of contingencies related to IP's nuclear fuel lease.
Internal Revenue Service Audit: The Internal Revenue Service is currently
auditing IP's federal income tax returns for the years 1994 through 1997. At
this time, the outcome of the audit cannot be determined. Management does not
expect that the results will have a material adverse effect on IP's financial
position or results of operations. For a detailed discussion of income taxes,
see "Note 7 -Income Taxes."
NOTE 5--LINES OF CREDIT AND SHORT-TERM LOANS
IP has total lines of credit represented by bank commitments amounting to $354
million, all of which were unused at December 31, 1998. These lines of credit
are renewable in May 1999, November 1999 and May 2002. These bank commitments
support the amount of commercial paper outstanding at any time, limited only by
the amount of unused bank commitments, and are available to support IP
activities. At December 31, 1998, the level of IP short-term debt was
significantly lower than historical levels due to using the December
securitization proceeds to redeem commercial paper and short-term borrowings.
This level is expected to increase as funds are expended to redeem long-term
debt and equity.
IP pays facility fees up to .10% per annum on $350 million of the total lines
of credit, regardless of usage. The interest rate on borrowings under these
agreements is, at IP's option, based upon the lending banks' reference rate,
their Certificate of Deposit rate, the borrowing rate of key banks in the London
interbank market, or competitive bid.
IP has letters of credit capacity totaling $201 million, all of which were
undrawn at December 31, 1998. IP pays fees up to .95% per annum on the undrawn
amount of credit. On February 12, 1999, IP acquired an additional letter of
credit for $30 million with a .425% per annum fee on the undrawn amount of
credit.
In addition, IP and the Fuel Company each have a short-term financing option
to obtain funds not to exceed $30 million. IP and the Fuel Company pay no fees
for this uncommitted facility and funding is subject to availability upon
request.
For the years 1998, 1997, and 1996, IP had short-term borrowings consisting
of bank loans, commercial paper, extendible floating rate notes, and other
short-term debt outstanding at various times as follows:
(Millions of dollars, except rates) 1998 1997 1996
Short-term borrowings
at December 31, $ 147.6 $ 376.8 $ 310.0
Weighted average interest
rate at December 31, 6.0% 6.0% 5.7%
Maximum amount outstanding
at any month end $ 370.9 $ 376.8 $ 310.0
Average daily borrowings
outstanding during
the year $ 317.2 $ 284.4 $ 261.9
Weighted average interest
rate during the year 5.7% 5.8% 5.6%
NOTE 6--FACILITIES AGREEMENTS
On March 13, 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership obligations in
connection with the transfer from Soyland to IP of all of Soyland's interest in
Clinton pursuant to an agreement reached in 1996. Soyland's title to the plant
and directly related assets such as nuclear fuel were transferred to IP on May
1, 1997. Soyland's nuclear decommissioning trust assets were transferred to IP
on May 19, 1997, consistent with IP's assumption of all of Soyland's ownership
obligations, including those related to decommissioning.
FERC approved an amended PCA between Soyland and IP in July 1997. The amended
PCA obligates Soyland to purchase all of its capacity and energy needs from IP
for at least 10 years. The amended PCA provides that a contract cancellation fee
will be paid by Soyland to IP in the event that a Soyland member terminates its
membership in Soyland. In May 1997, three distribution cooperative members
terminated their membership by buying out of their respective long-term
wholesale power contracts with Soyland. This action resulted in Soyland paying a
fee of $20.8 million to IP in June 1997 to reduce its future base capacity
charges. Fee proceeds of $2.9 million were used to offset IP's costs of
acquiring Soyland's share of Clinton, and the remaining $17.9 million was
recorded as interchange revenue. In December 1997, Soyland signed a letter of
intent to pay in advance the remainder of its base capacity charges in the PCA,
approximately $70 million. Soyland received the necessary financing and
regulatory approvals in the second quarter of 1998. IP received $30 million and
$40 million from Soyland during the first and second quarters of 1998,
respectively. The prepayment was deferred and is being recognized as interchange
revenue evenly over the initial term of the PCA, September 1, 1996, through
August 31, 2006. In December 1998, Soyland and IP signed an agreement to
restructure the PCA in which IP acts as an agent for Soyland in obtaining and
scheduling power and energy and related transmission from other parties. The two
parties intend to establish a final agreement in March 1999.
NOTE 7 -- INCOME TAXES
Deferred tax assets and liabilities were comprised of the following:
Balances as of December 31,
(Millions of dollars) 1998 1997
Deferred tax assets:
- --------------------------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ 9.2 $ 11.2
- --------------------------------------------------------------------------------
Noncurrent:
Depreciation and other property related 150.4 46.2
Alternative minimum tax 140.5 156.8
Unamortized investment tax credit 18.1 116.9
Misc. book/tax recognition differences 375.0 40.3
- --------------------------------------------------------------------------------
684.0 360.2
- --------------------------------------------------------------------------------
Total deferred tax assets $ 693.2 $ 371.4
- --------------------------------------------------------------------------------
Deferred tax liabilities:
- --------------------------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ .1 $ .9
- --------------------------------------------------------------------------------
Noncurrent:
Depreciation and other property related 1,292.8 1,348.0
Misc. book/tax recognition differences 369.9 (7.1)
- --------------------------------------------------------------------------------
1,662.7 1,340.9
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ 1,662.8 $ 1,341.8
- --------------------------------------------------------------------------------
Income taxes included in the Consolidated Statements of Income consist of
the following components:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Current taxes--
Included in operating
expenses and taxes $ 7.6 $ 72.7 $79.2
Included in other income
and deductions (4.2) (.7) (14.5)
- --------------------------------------------------------------------------------
Total current taxes 3.4 72.0 64.7
- --------------------------------------------------------------------------------
Deferred taxes--
Included in operating
expenses and taxes
Property related differences (30.0) 9.2 60.4
Alternative minimum tax 16.4 41.7 1.1
Gain/loss on reacquired debt 3.4 .4 (1.6)
Clinton plant impairment (853.6) -- --
Enhanced retirement
and severance -- .5 2.6
Misc. book/tax recognition
differences (20.0) (16.7) 6.1
Included in other income
and deductions
Property related differences .3 (.4) 10.2
Misc. book/tax recognition
differences .3 1.5 1.7
- --------------------------------------------------------------------------------
Total deferred taxes (883.2) 36.2 80.5
- --------------------------------------------------------------------------------
Deferred investment tax
credit--net
Included in operating
expenses and taxes (8.3) (7.3) (7.3)
Included in other income
and deductions--
Clinton plant impairment (160.4) -- --
- --------------------------------------------------------------------------------
Total investment
tax credit (168.7) (7.3) (7.3)
- --------------------------------------------------------------------------------
Total income taxes from
continuing operations (1,048.5) 100.9 137.9
- --------------------------------------------------------------------------------
Income tax--
Extraordinary item
Current tax expense -- (17.8) --
Deferred tax expense -- (100.2) --
- --------------------------------------------------------------------------------
Total extraordinary item -- (118.0) --
- --------------------------------------------------------------------------------
Total income taxes $(1,048.5) $ (17.1) $ 137.9
- --------------------------------------------------------------------------------
The reconciliations of income tax expense to amounts computed by applying the
statutory tax rate to reported pretax income from continuing operations for the
period are set-out below:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Income tax expense at the
federal statutory tax rate $ (781.1) $ 88.1 $ 128.3
Increases/(decreases) in taxes
resulting from--
State taxes,
net of federal effect (172.6) 11.8 13.7
Investment tax credit
amortization (8.3) (7.3) (7.3)
Clinton plant impairment (85.4) -- --
Depreciation not normalized 4.4 11.3 9.4
Interest expense on
preferred securities (6.8) (6.9) (6.9)
Other--net 1.3 3.9 .7
- --------------------------------------------------------------------------------
Total income taxes from
continuing operations $(1,048.5) $ 100.9 $ 137.9
- --------------------------------------------------------------------------------
Combined federal and state effective income tax rates were 43.6%, 40.1%,
and 37.6% for the years 1998, 1997, and 1996 respectively.
IP is subject to the provisions of the Alternative Minimum Tax System. As a
result, IP has an Alternative Minimum Tax credit carryforward at December 31,
1998, of approximately $140.5 million. This credit can be carried forward
indefinitely to offset future regular income tax liabilities in excess of the
tentative minimum tax.
The Internal Revenue Service is currently auditing IP's consolidated
federal income tax returns for the years 1994 through 1997. At this time, the
outcome of the audit cannot be determined; however, the results of the audit are
not expected to have a material adverse effect on IP's consolidated financial
position or results of operations.
The tax effect of the Clinton plant impairment and quasi-reorganization are
included in the above amounts. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
Because of the passage of P.A. 90-561 in 1997, IP's electric generation
business no longer meets the criteria for application of FAS 71. As required by
FAS 101, "Regulated Enterprises -- Accounting for the Discontinuation of
Application of FASB Statement No. 71," the income tax effects of the write-off
of regulatory assets and liabilities related to electric generation are
reflected in the extraordinary item for the cumulative effect of a change in
accounting principle.
NOTE 8 -- CAPITAL LEASES
The Fuel Company, which is 50 percent owned by IP, was formed in 1981 for the
purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to
the Fuel Company's cost of fuel as consumed (including related financing and
administrative costs). Billings under the lease agreement were $4 million in
1998, $4 million in 1997, and $35 million in 1996, including financing costs of
$4 million, $4 million, and $5 million, respectively. IP is required to pay
financing costs whether or not fuel is consumed. IP is obligated to make
subordinated loans to the Fuel Company at any time the obligations of the Fuel
Company that are due and payable exceed the funds available to the Fuel Company.
Lease terms stipulate that, in the event Clinton is out of service for 24
consecutive months, IP is obligated to purchase Clinton's incore nuclear fuel
from the Fuel Company. In accordance with this provision, IP will purchase the
fuel for $62.1 million in the first quarter of 1999. IP has an obligation for
nuclear fuel disposal costs of leased nuclear fuel. See "Note 4 -- Commitments
and Contingencies" for discussion of decommissioning and nuclear fuel disposal
costs. Nuclear fuel lease payments are included with "Fuel for electric plants"
on IP's Consolidated Statements of Income.
Current obligations under capital lease for nuclear fuel were $62.1 million
at December 31, 1998, and $18.7 million at December 31, 1997.
NOTE 9 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
First mortgage bonds--
<S> <C> <C>
6 1/2% series due 1999 $ 72.0 $ 72.0
6.60% series due 2004 (Pollution Control Series A) - 6.3
7.95% series due 2004 39.0 72.0
6.0% series due 2007 (Pollution Control Series B) - 18.7
8.30% series due 2017 (Pollution Control Series I) - 33.8
7 3/8% series due 2021 (Pollution Control Series J) 84.7 84.7
8 3/4% series due 2021 57.1 57.1
5.70% series due 2024 (Pollution Control Series K) 35.6 35.6
7.40% series due 2024 (Pollution Control Series L) 84.1 84.1
- --------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 372.5 464.3
- --------------------------------------------------------------------------------------------------------------------------
New mortgage bonds--
6 1/8% series due 2000 40.0 40.0
5.625% series due 2000 110.0 110.0
6.25% series due 2002 100.0 -
6.0% series due 2003 100.0 -
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
8.0% series due 2023 229.0 229.0
7 1/2% series due 2025 148.5 177.0
5.40% series due 2028 (Pollution Control Series A) 18.7 -
5.40% series due 2028 (Pollution Control Series B) 33.8 -
Adjustable rate series due 2028
(Pollution Control Series M, N, and O) 111.8 111.8
Adjustable rate series due 2032
(Pollution Control Series P, Q, and R) 150.0 150.0
- --------------------------------------------------------------------------------------------------------------------------
Total new mortgage bonds 1,211.8 987.8
- --------------------------------------------------------------------------------------------------------------------------
Total mortgage bonds 1,584.3 1,452.1
- --------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes--
5.39% due 2000 110.0 -
5.26% due 2001 100.0 -
5.31% due 2002 80.0 -
5.34% due 2003 85.0 -
5.38% due 2005 175.0 -
5.54% due 2007 175.0 -
5.65% due 2008 139.0 -
-------------------------------------------------------------------------------------------------------------------------
Total transitional funding trust notes 864.0 -
-------------------------------------------------------------------------------------------------------------------------
Medium-term notes, series A - 68.0
Variable rate long-term debt due 2017 75.0 75.0
- --------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 75.0 143.0
- --------------------------------------------------------------------------------------------------------------------------
2,523.3 1,595.1
Adjustment to Fair Value 25.3 -
Unamortized discount on debt (15.5) (16.8)
- --------------------------------------------------------------------------------------------------------------------------
Total long-term debt excluding capital lease obligations 2,533.1 1,578.3
Obligations under capital leases 132.0 126.7
- --------------------------------------------------------------------------------------------------------------------------
2,665.1 1,705.0
Long-term debt and lease obligations maturing within one year (506.6) (87.5)
- --------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 2,158.5 $ 1,617.5
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the above table, the "adjustment to fair value" is the total adjustments of
debt to fair value in the quasi-reorganization. The adjustments to the fair
value of each debt series will be amortized over its remaining life to interest
expense. See "Note 2 -Clinton Impairment and Quasi-Reorganization" for more
information.
In March 1998, IP issued $18.7 million of 5.4% Pollution Control Bonds
Series A due 2028 and used the proceeds to redeem $18.7 million of 6.0%
Pollution Control Bonds Series B due 2007 in April 1998. In March 1998, IP
issued $33.8 million of 5.4% Pollution Control Bonds Series B due 2028 to
refinance $33.8 million of 8.3% Pollution Control Bond Series I due 2017 in
April 1998. $100 million of 6.25% New Mortgage Bonds due 2002 were issued in
July 1998, and $100 million of 6% New Mortgage Bonds due 2003 were issued in
September 1998.
In December 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes as allowed under the Illinois Electric Utility Transition Funding Law in
P.A. 90-561. The proceeds of the notes were used by IP to retire debt and equity
securities. These notes have maturity dates ranging from one to 10 years, with
an average interest rate of 5.41%.
In November 1998, IP called $6.3 million of 6.6% Pollution Control Bonds
Series A due 2004. In December 1998, $28.5 million of 7.50% New Mortgage Bonds
due 2025 and $33.0 million of 7.95% First Mortgage Bonds were purchased on the
open market.
In January 1999, $57.1 million of 8.75% First Mortgage Bonds due 2021 and
$229 million of 8% New Mortgage Bonds due 2023 were purchased through a
redemption notice. IP also redeemed $5.4 million of 7.95% First Mortgage Bonds
due 2004 in January 1999. In February 1999, IP redeemded $36.8 million of 6.5%
First Mortgage Bonds due 1999 and $5 million of 7.95% First Mortgage Bonds due
2004.
In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At
December 31, 1998, all these notes have matured and been retired. Interest rates
on variable rate long-term debt due 2017 are adjusted weekly and ranged from
3.75% to 4.20% at December 31, 1998.
For the years 1999, 2000, 2001, 2002, and 2003, IP has long-term debt
maturities in the aggregate of (in millions) $72, $150, $0, $100, and $200,
respectively. In addition, IPSPT has long-term debt maturities of $86.4 million
in each of the above years. These amounts exclude capital lease requirements.
See "Note 8 -- Capital Leases."
At December 31, 1998, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $64.7 million.
In 1992, IP executed a new general obligation mortgage (New Mortgage) to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both
mortgages are secured by liens on substantially all of IP's properties. A
corresponding issue of First Mortgage Bonds, under the First Mortgage, secures
any bonds issued under the New Mortgage. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The remaining balance of net bondable
additions at December 31, 1998, was approximately $1.9 billion.
NOTE 10 -- PREFERRED STOCK
<TABLE>
<CAPTION>
(Millions of dollars)
December 31, 1998 1997
Serial Preferred Stock, cumulative, $50 par value--
Authorized 5,000,000 shares; 1,139,110 shares outstanding
<S> <C> <C>
Series Shares Redemption Prices
4.08% 283,290 $ 51.50 $ 14.1 $ 14.1
4.26% 136,000 51.50 6.8 6.8
4.70% 176,000 51.50 8.8 8.8
4.42% 134,400 51.50 6.7 6.7
4.20% 167,720 52.00 8.4 8.4
7.75% 241,700 50.00 after July 1, 2003 12.1 12.1
Net premium on preferred stock .2 .2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock, $50 par value $ 57.1 $ 57.1
- -----------------------------------------------------------------------------------------------------------------------------------
Serial Preferred Stock, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Preference Stock, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Serial Preferred Stock, Preference Stock and Preferred Securities $ 57.1 $ 57.1
- -----------------------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable Preferred Securities of:
Illinois Power Capital, L.P.
Monthly Income Preferred Securities, cumulative, $25 liquidation preference--
3,880,000 shares authorized and outstanding $ 97.0 $ 97.0
Illinois Power Financing I
Trust Originated Preferred Securities, cumulative, $25 liquidation preference--
4,000,000 shares authorized and outstanding 100.0 100.0
Adjustment to Fair Value 2.0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Mandatorily Redeemable Preferred Stock $ 199.0 $ 197.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the above table, only the MIPS and TOPrS were restated to their fair
value in the quasi-reorganization. The serial preferred stock was not restated
because it is equity rather than an asset or a liability. The increase in the
value of the MIPS and the TOPrS will be amortized to interest expense over the
remaining life of these securities. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for more information.
Serial Preferred Stock ($50 par value) is redeemable at the option of IP in
whole or in part at any time with not less than 30 days and not more than 60
days notice by publication. The MIPS are redeemable at the option in whole or in
part on or after October 6, 1999, with not less than 30 days and not more than
60 days notice by publication. The TOPrS mature on January 31, 2045, and may be
redeemed in whole or in part at any time on or after January 31, 2001.
Illinois Power Capital, L.P., is a limited partnership in which IP serves
as a general partner. Illinois Power Capital issued (1994) $97 million of
tax-advantaged MIPS at 9.45% (5.67% after-tax rate) with a liquidation
preference of $25 per share. IP consolidates the accounts of Illinois Power
Capital, L.P.
IPFI is a statutory business trust in which IP serves as sponsor. IPFI
issued (1996) $100 million of TOPrS at 8% (4.8% after-tax rate). IP consolidates
the accounts of IPFI.
NOTE 11 -- COMMON STOCK AND RETAINED EARNINGS
As of December 31, 1998, IP effected a quasi-reorganization in which IP's
accumulated deficit in retained earnings of $1,369.4 million was eliminated by a
$1,327.2 million restatement of other assets and liabilities to their fair value
and a transfer of $42.2 million from additional paid-in capital. See "Note 2 --
Clinton Impairment and Quasi-Reorganization" for additional information
regarding the effects upon retained earnings.
On May 31, 1994, common shares of IP began trading as common shares of
Illinova. Illinova is the sole shareholder of IP common stock.
On December 22, 1998, IPSPT issued $864 million of Transitional Funding
Trust Notes, with IP as servicer. As of December 31, 1998, IP used $49.3 million
of the funds to repurchase 2.3 million of its common shares from Illinova.
In 1998, IP repurchased 3,323,079 shares of its common stock from Illinova.
In 1997 and 1996, IP repurchased 6,017,748 shares and 714,811 shares,
respectively, of its common stock from Illinova. Under Illinois law, such shares
may be held as treasury stock and treated as authorized but unissued, or may be
canceled by resolution of the Board of Directors. IP holds the common stock as
treasury stock and deducts it from common equity at the cost of the shares.
IP employees participate in an ESOP that includes an incentive compensation
feature which is tied to achievement of specified corporate performance goals.
This arrangement began in 1991 when IP loaned $35 million to the Trustee of the
Plans, which used the loan proceeds to purchase 2,031,445 shares of IP's common
stock on the open market. The loan and common shares were converted to Illinova
instruments with the formation of Illinova in May 1994. These shares are held in
a suspense account under the plans and are being distributed to the accounts of
participating employees as the loan is repaid by the Trustee with funds
contributed by IP, together with dividends on the shares acquired with the loan
proceeds. IP financed the loan with funds borrowed under its bank credit
agreements.
For the year ended December 31, 1998, 86,020 common shares were allocated
to salaried employees and 77,019 shares to employees covered under the
Collective Bargaining Agreement through the matching contribution feature of the
ESOP arrangement. Under the incentive compensation feature, 56,315 common shares
were allocated to employees for the year ended December 31, 1998. During 1998,
IP contributed $4.7 million to the ESOP and, using the shares allocated method,
recognized $5.2 million of expense. Interest paid on the ESOP debt was
approximately $.9 million in 1998 and dividends used for debt service were
approximately $2.2 million.
In 1992, the Board of Directors adopted and the shareholders approved a
Long-Term Incentive Compensation Plan (the Plan) for officers or employee
members of the Board, but excluding directors who are not officers or employees.
The types of awards that may be granted under the Plan are restricted stock,
incentive stock options, non-qualified stock options, stock appreciation rights,
dividend equivalents and other stock-based awards. The Plan provides that any
one or more types of awards may be granted for up to 1,500,000 shares of
Illinova's common stock. The following table outlines the activity under this
Plan at December 31, 1998. No options were exercised through February 1999.
Year Options Grant Year Expiration Options Options
Granted Granted Price Exercisable Date Exercised Forfeited
1992 62,000 $23.375 1996 6/10/02 20,000 10,500
1993 73,500 $24.250 1997 6/09/03 22,000 10,500
1994 82,650 $20.875 1997 6/08/04 29,450 4,400
1995 69,300 $24.875 1998 6/14/05 3,900 11,000
1996 80,500 $29.750 1999 2/07/06 -- 6,500
1997 82,000 $26.125 2000 2/12/07 -- 6,000
1998 120,500 $29.094 2001 2/11/08 -- --
1998 165,000 $30.250 2001 6/24/08 -- --
In October 1995, the FASB issued FAS 123, "Accounting for Stock-Based
Compensation" effective for fiscal years beginning after December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current period and is not envisioned to be material in
any future period. As permitted by FAS 123, IP continues to account for its
stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
The provisions of Supplemental Indentures to IP's General Mortgage
Indenture and Deed of Trust contain certain restrictions with respect to the
declaration and payment of dividends. IP was not limited by any of these
restrictions at December 31, 1998. Under the Restated Articles of Incorporation,
common stock dividends are subject to the preferential rights of the holders of
preferred and preference stock.
NOTE 12 -- PENSION AND OTHER BENEFITS COSTS
Illinova offers certain benefit plans to employees of Illinova and its principal
subsidiaries. IP is sponsor and administrator of the benefit plans disclosed
below.
IP is reimbursed by the other Illinova subsidiaries for their share of the
expenses of the benefit plans. The values and discussion below represent the
plans in total, including the amounts attributable to the other subsidiaries.
<TABLE>
<CAPTION>
(Millions of dollars)
Pension Benefits Other Benefits
1998 1997 1998 1997
Change in benefit obligation
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 417.6 $ 361.6 $ 89.4 $ 81.7
Service cost 12.8 10.2 2.6 1.9
Interest cost 30.4 28.2 6.3 5.9
Plan participants' contributions - - 0.4 0.4
Amendments 2.0 - - -
Actuarial (gain) / loss 45.2 43.1 3.8 5.4
Benefits paid (32.8) (25.5) (7.0) (5.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 475.2 $ 417.6 $ 95.5 $ 89.4
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 432.1 $ 357.2 $ 49.7 $ 34.3
Actual return on plan assets 73.7 95.6 9.2 8.0
Employer contribution 4.5 4.8 11.4 12.9
Plan participants' contributions - - 0.4 0.4
Benefits paid (32.8) (25.5) (7.0) (5.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 477.5 $ 432.1 $ 63.7 $ 49.7
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets greater/(less) than benefit obligation $ 2.3 $ 14.5 $ (31.8) $ (39.7)
Unrecognized net actuarial (gain)/loss (32.1) (38.9) (7.3) (6.3)
Unrecognized prior service cost 17.6 17.4 - -
Unrecognized net asset/liability at transition (21.9) (26.1) 36.0 38.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net amounts recognized $ (34.1) $ (33.1) $ (3.1) $ (7.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amounts recognized consist of:
Prepaid benefit cost $ 1.9 $ 1.9 $ - $ -
Accrued benefit liability (36.0) (35.0) (3.1) (7.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amounts recognized $ (34.1) $ (33.1) $ (3.1) $ (7.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
1998 1997 1998 1997
Weighted-average assumptions as of December 31
Discount rate 7.0% 7.5% 7.0% 7.0%
Expected return on plan assets 9.5% 9.5% 9.5% 9.0%
Rate of compensation increase 4.5% 4.5% 5.5% 5.5%
</TABLE>
<TABLE>
<CAPTION>
(Millions of dollars)
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
Components of net periodic benefit cost
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 12.8 $ 10.2 $ 10.1 $ 2.6 $ 1.9 $ 2.2
Interest cost 30.4 28.2 26.8 6.3 5.9 6.1
Expected return on plan assets (35.3) (31.7) (30.4) (4.4) (3.0) (2.2)
Amortization of prior service cost 1.9 1.9 1.9 - - -
Amortization of transitional liability/(asset) (4.2) (4.2) (4.2) 2.7 2.7 2.7
Recognized net actuarial (gain)/loss - 4.2 - - (0.3) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 5.6 $ 8.6 $ 4.2 $ 7.2 $ 7.2 $ 8.8
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 6.9% health care trend rate was used for 1999.
Trend rates were assumed to decrease gradually to 5.5% in 2005 and remain at
this level going forward. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan.
A one percentage point change in assumed health care cost trend rates would
have the following effects for 1998:
1 Percentage 1 Percentage
(Millions of dollars) Point Increase Point Decrease
Effect on total of service and
interest cost components $ 1.2 $ (1.0)
Effect on postretirement
benefit obligation 11.3 (9.5)
IP changed the measurement date for the pension obligation of the plan from
September 30 to December 31 which is reflected in the 1998 fiscal year. As a
result, the time frame for the 1998 reporting period is October 1, 1997, through
December 31, 1998. The unrecognized prior service cost is amortized on a
straight-line basis over the average remaining service period of employees who
are expected to receive benefits under the plan.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets, specifically the nonqualified supplemental retirement
plan for management employees, were $6.3 million, $5.6 million, and $0 as of
December 31, 1998, and $4.8 million, $3.9 million, and $0 as of December 31,
1997.
On December 9, 1998, IP's Board of Directors voted to exit Clinton
operations. Concurrent with the decision to exit Clinton operations, IP accrued
estimated employee severance and retention costs of $25.8 million, net of income
taxes; pension curtailment benefits of $(7.2) million, net of income taxes; and
other postretirement benefit costs of $.4 million, net of income taxes. These
amounts are not reflected in the above tables. If the decision is made to
permanently close Clinton, the number of Clinton employees would decrease from
950 to 240 over an 11-month transition period as the plant moves from an
operating to a decommissioning mode. Employees expected to be released include
engineering, plant technical and operational, office administration, and
maintenance employees. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
NOTE 13 -- SEGMENTS OF BUSINESS
In 1997, the FASB issued FAS 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement supersedes FAS 14, "Financial Reporting
for Segments of a Business Enterprise," and establishes new standards for
defining a company's segments and disclosing information about them.
The new statement requires that segments be based on the internal structure
and reporting of a company's operations. Because of the realignment of Illinois
Power into five operating segments during 1998, Illinois Power has determined
that it is not practicable to present the new segment information for 1997 and
1996 because it is not available and the cost to develop it is excessive.
Therefore, the information for 1998 is presented under the format specified by
FAS 131; the comparative information for 1998, 1997, and 1996 is presented in
accordance with FAS 14.
1998
IP is comprised of five business groups. The business groups and their principal
services are as follows:
- - IP Customer Service Business Group -- transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas.
- - IP Wholesale Energy Business Group -- fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities.
- - IP Nuclear Generation Business Group -- nuclear-fueled electric generation.
- - IP Financial Business Group -- provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - IP Support Services Business Group -- provides specialized support
functions, including information technology, human resources, environmental
resources, purchasing and materials management, and public affairs.
Of the above-listed segments, the IP Financial Business Group and the IP
Support Services Business Group did not individually meet the minimum threshold
requirements for separate disclosure and are combined in the Other category.
Three measures were used to judge segment performance: contribution margin,
cash flow, and return on net invested capital.
<TABLE>
<CAPTION>
(Millions of dollars)
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $1,505.7 $ 557.2 $ 6.3 $ - $2,069.2
Intersegment revenue (1) - 482.3 (2.4) - 479.9
- ------------------------------------------------------------------------------------------------------
Total revenue 1,505.7 1,039.5 3.9 - 2,549.1
Depreciation and amortization expense 68.3 30.3 99.1 5.9 203.6
Other operating expenses(1) 894.4 999.0 379.2 3.4 2,276.0
- ------------------------------------------------------------------------------------------------------
Operating income (loss) 543.0 10.2 (474.4) (9.3) 69.5
Interest expense 70.4 13.8 59.3 (8.6) 134.9
AFUDC (0.1) (0.9) (2.5) 0.3 (3.2)
- ------------------------------------------------------------------------------------------------------
Net income (loss) before taxes 472.7 (2.7) (531.2) (1.0) (62.2)
Income tax expense (benefit) 194.4 (1.9) (232.3) 5.4 (34.4)
Miscellaneous--net 0.5 (1.0) 0.1 3.2 2.8
Interest revenue - - - (1.9) (1.9)
- ------------------------------------------------------------------------------------------------------
Net income (loss) after taxes 277.8 0.2 (299.0) (7.7) (28.7)
Preferred dividend requirement 9.7 2.2 7.9 0.0 19.8
- ------------------------------------------------------------------------------------------------------
Net income (loss)(2) $ 268.1 $ (2.0) $ (306.9) $ (7.7) $ (48.5)
Clinton plant impairment loss 1,327.2 1,327.2
- ------------------------------------------------------------------------------------------------------
Net income (loss) available to common $ 268.1 $ (2.0) $(1,634.1) $ (7.7) $(1,375.7)
- ------------------------------------------------------------------------------------------------------
Other information --
Total assets(3) $1,831.8 $3,039.0 $ 1,010.2 $548.8 $ 6,429.8
Total expenditures for additions to
long-lived assets 124.4 116.0 62.5 8.6 311.5
- ------------------------------------------------------------------------------------------------------
Corporate Measures --
Contribution margin(4) $ 315.7 $ 7.0 $ (268.5) $(13.7) $ 40.5
Cash flow(5) 237.4 27.2 (280.8) 23.1 6.9
Return on net invested capital(6) 24.28% 0.33% N/A (2.65)% 1.01%
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) Intersegment revenue priced at 2.5 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service.
Nuclear reflects a replacement power expense for the increment of market
price over the intersegment price.
(2) Net income (loss) before Clinton plant impairment loss.
(3) Primary assets for Nuclear include transition period cost recovery,
decommissioning assets, shared general and intangible plant, and nuclear
fuel.
(4) Contribution margin represented by net income before financing costs (net
of tax), preferred dividend requirement, and Clinton plant impairment loss.
(5) Cash flow before financing activities.
(6) Return on net invested capital calculated as contribution margin divided by
net invested capital (includes Clinton plant impairment loss and
quasi-reorganization).
GEOGRAPHIC INFORMATION
(Millions of dollars)
December 31, 1998 1997 1996
Revenues: (1)
United States $2,069.2 $1,773.9 $1,688.7
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,440.5 $4,534.1 $4,559.2
- --------------------------------------------------------------------------------
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include plant, equipment, and investments in subsidiaries.
<TABLE>
<CAPTION>
1998, 1997, and 1996
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Total Total Total
Electric Gas Company Electric Gas Company Electric Gas Company
- ------------------------------------------------------------------------------------------------------------------------------------
Operation information -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues $1,781.4 $287.8 $2,069.2 $1,420.0 $353.9 $1,773.9 $1,340.5 $348.2 $1,688.7
Operating expenses,
excluding provision for
income taxes 1,747.6 252.1 1,999.7 1,081.3 311.5 1,392.8 886.2 300.5 1,186.7
Clinton plant impairment loss 2,341.2 - 2,341.2 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income (2,307.4) 35.7 (2,271.7) 338.7 42.4 381.1 454.3 47.7 502.0
AFUDC 3.1 0.1 3.2 4.9 0.1 5.0 6.3 0.2 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income,
including AFUDC $(2,304.3) $ 35.8 $(2,268.5) $343.6 $42.5 $386.1 $460.6 $ 47.9 $508.5
- ---------------------------------------------------------- ------------------ ------------------
Other deductions, net 1.0 (1.5) 1.2
Interest charges 134.9 135.9 140.8
Income tax - Clinton impairment (1,014.0) - -
Provision for income taxes (34.5) 100.9 137.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (1,355.9) 150.8 228.6
Extraordinary item
(net of taxes) - (195.0) -
Preferred dividend
requirements (19.8) (21.5) (22.3)
Carrying value over
(under) consideration
paid for redeemed
preferred stock - 0.2 (0.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to common stock $(1,375.7) $(65.5) $205.6
- ------------------------------------------------------------------------------------------------------------------------------------
Other information -
Depreciation $ 177.9 $ 25.7 $ 203.6 $171.5 $ 24.1 $195.6 $164.0 $ 22.5 $186.5
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 285.6 $ 25.9 $ 311.5 $201.3 $ 22.6 $223.9 $164.0 $ 23.3 $187.3
- ------------------------------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $ 5,169.0 $457.9 $5,626.9 $4,508.1 $453.8 $4,961.9 $4,577.1 $481.9 $5,059.0
- ---------------------------------------------------------- -------------------- ------------------------------
Nonutility plant and
other investments 2.3 5.7 14.3
Assets utilized for
overall operations 800.6 323.9 495.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $6,429.8 $5,291.5 $5,568.5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 1998: Utility plant, nuclear fuel, materials and supplies, prepaid and
deferred energy costs, and transition period cost recovery.
1997 and 1996: Utility plant, nuclear fuel, materials and supplies,
deferred Clinton costs, and prepaid and deferred energy costs.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
presented in accordance with the requirements of FAS 107, "Disclosures about the
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and valuation
methodologies discussed below.
Illinois Power has early-adopted FAS 133 due to the quasi-reorganization.
Accordingly, assets and liabilities were adjusted to reflect current fair value.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for more
information.
1998 1997
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
Nuclear decommissioning
trust funds $ 84.1 $ 84.1 $ 62.5 $ 62.5
Cash and cash equivalents 504.5 504.5 17.8 17.8
Mandatorily redeemable
preferred stock* 199.0 200.0 197.0 202.7
Long-term debt* 2,533.1 2,545.2 1,578.3 1,627.6
Notes payable 147.6 147.6 376.8 376.8
Other Financial Instruments:
Trading/Energy futures
and forward contracts 28.0 28.0 -- --
Non-trading/Energy futures
and forward contracts 5.4 5.4 -- --
Non-trading/Emission Allowances
Forward contracts 2.0 2.0 -- --
Option contracts .2 .2 -- --
* In the above table, the 1998 carrying value of mandatorily redeemable
preferred stock and long-term debt reflect an adjustment in carrying value
to fair value due to the quasi-reorganization. The portion of these items
which relate to electric generation has been adjusted to fair value. The
remainder is attributed to the regulated part of the business in which
return on assets is based on book value of debt. Therefore no adjustment to
fair value was made for the portion of mandatorily redeemable preferred
stock and long-term debt relating to Illinois Power's regulated business.
The fair values represent 100 percent of the current fair value for
mandatorily redeemable preferred stock and long-term debt.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments listed in the table above:
Nuclear Decommissioning Trust Funds: The fair values of available-for-sale
marketable debt securities and equity investments held by the Nuclear
Decommissioning Trust are based on quoted market prices at the reporting date
for those or similar investments.
Cash and Cash Equivalents: The carrying amount of cash and cash equivalents
approximates fair value due to the short maturity of these instruments.
Mandatorily Redeemable Preferred Stock and Long-Term Debt: The fair value of
mandatorily redeemable preferred stock and long-term debt is estimated based on
the quoted market prices for similar issues or by discounting expected cash
flows at the rates currently offered for debt of the same remaining maturities,
as advised by IP's bankers.
Notes Payable: The carrying amount of notes payable approximates fair value due
to the short maturity of these instruments.
Other Financial Instruments: Other financial instruments are comprised of
derivative financial instruments which have been restated to market according to
FAS 133. See "Note 15 -- Financial and Other Derivative Instruments" for more
information. Fair Value is determined using quoted market prices or indices.
NOTE 15 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
Trading Activities: IP engages in the brokering and marketing of electricity. IP
uses a variety of instruments, including fixed-price swap agreements,
variable-price swap agreements, exchange-traded energy futures and options
contracts, and over-the-counter forwards, swaps, and options.
As of December 31, 1998, IP adopted EITF 98-10. IP has recorded its trading
instruments at fair value in accordance with EITF 98-10's application criteria.
For more information regarding Illinois Power's adoption of new accounting
pronouncements, see "Note 1 -Summary of Significant Accounting Policies." At
December 31, 1998, derivative assets and liabilities were recorded on the
Consolidated Balance Sheets at fair value with unrealized gains and losses shown
net in the Consolidated Statements of Income. IP records realized gains and
losses as components of operating revenues and operating expenses in the
Consolidated Statements of Income.
The notional quantities and maximum terms of commodity instruments held for
trading purposes at December 31, 1998, are presented below:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity 5,174 MW 5,524 MW 1 yr
All notional amounts reflect the volume of transactions but do not represent
the dollar amounts or actual megawatts exchanged by the parties to the
contracts. Accordingly, notional amounts do not accurately measure IP's exposure
to market or credit risk.
The estimated fair value of commodity instruments held for trading purposes
at December 31, 1998, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity $ 21.8 $ 49.8
The fair value was estimated using quoted prices and indices where available
and considering the liquidity of the market for the instrument. The fair values
are subject to volatility based on changing market conditions.
The weighted average term of the trading portfolio, based on volume is less
than one year. The maximum and average terms disclosed herein are not indicative
of likely future cash flows as these positions may be modified by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and IP's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Non-Trading Activities: To reduce the risk from market fluctuations in the price
of electricity and related transmission, IP enters into forward transactions,
swaps, and options (energy derivatives). These instruments are used to hedge
expected purchases, sales, and transmission of electricity (a portion of which
are firm commitments at the inception of the hedge). The weighted average
maturity of these instruments is less than one year.
Periodically, IP has utilized interest rate derivatives (principally interest
rate swaps and caps) to adjust the portion of its overall borrowings subject to
interest rate risk. As of December 31, 1998, there were no interest rate
derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP has entered
into swap agreements, forward contracts, and written put options with other
utilities to mitigate the risk from market fluctuations in the price of the
allowances. At December 31, 1998, the notional amount of two emission allowance
swaps was 126,925 units, with a recorded liability of $15.6 million, based on
fair value at delivery date. The maximum maturity of the swap agreements is 10
years. These agreements do not fall under the scope of FAS 133. The notional
amount of the two forward contracts is 32,000 emission allowances with a fair
value of $2 million. The maximum term of the forward contracts is five years,
commencing in 1993. Both contracts expired in January 1999. Due to the remote
probability of exercise, three put options written by IP are considered to be
immaterial.
As of December 31, 1998, IP adopted FAS 133. For more information regarding
IP's adoption of new accounting pronouncements, see "Note 1 -- Summary of
Significant Accounting Policies." IP's derivative assets and liabilities were
recorded on the Consolidated Balance Sheets at fair value with unrealized gains
and losses shown net in the equity section of the Consolidated Balance Sheets as
part of the quasi-reorganization. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for more information. In the future, unless hedge
accounting is applied, unrealized gains and losses will be shown net in the
Consolidated Statements of Income. IP records realized gains and losses as
components of operating revenues and operating expenses in the Consolidated
Statements of Income.
Hedge accounting is appropriate only if the derivative is effective at
offsetting cash flows from or changes in the fair value of the underlying hedged
item and is designated as a hedge at its inception. Additionally, changes in the
market value of the hedge must move in an inverse direction or limit an adverse
result from changes in the market value of the item being hedged, (the
effectiveness of the hedge). This effectiveness is measured both at the
inception of the hedge and on an ongoing basis, with an acceptable level of
effectiveness being at least 80 percent and not more than 125 percent for hedge
designation. If and when hedge effectiveness ceases to exist at an acceptable
level, hedge accounting ceases and mark-to-market accounting is applied. As of
December 31, 1998, all non-trading derivative instruments were accounted for
using mark-to-market accounting.
The notional quantities and the average term of the energy derivative
commodity instruments held for other than trading purposes at December 31, 1998,
follows:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity 1,450 MW 1,050 MW 1 yr
In addition to the fixed-price notional volumes above, IP has also recorded a
$25 million liability in 1998 for two "commodity for commodity" energy swap
agreements totaling 350 MW. However, these swap agreements do not meet the
definition of a derivative under FAS 133.
The notional amount is intended to be indicative of the level of activity in
such derivatives, although the amounts at risk are significantly smaller because
changes in the market value of these derivatives generally are offset by changes
in the value associated with the underlying physical transactions or in other
derivatives. When energy derivatives are closed out in advance of the underlying
commitment or anticipated transaction, the market value changes may not be
offset because price movement correlation ceases to exist when the positions are
closed.
The estimated fair value of energy derivative commodity instruments held for
non-trading purposes at December 31, 1998, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity $ 4.2 $ 9.6
The fair value was estimated using quoted prices and indices where available,
and considering the liquidity of the market for the instrument. The fair values
are subject to significant volatility based on changing market conditions.
The average maturity and fair value discussed above are not necessarily
indicative of likely future cash flows. These positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions, market liquidity, and IP's risk management portfolio needs
and strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Trading and Non-Trading -- General Policy: In addition to the risk associated
with price movements, credit risk is also part of IP's risk management
activities. Credit risk relates to the risk of loss resulting from
non-performance of contractual obligations by a counterparty. While IP has
experienced no significant losses due to credit risk, off-balance-sheet risk
exists to the extent that counterparties to these transactions may fail to
perform as required by the terms of each contract. In order to minimize this
risk, IP enters into such contracts with those counterparties only after an
appropriate credit review has been performed. IP periodically reviews the
effectiveness of these financial contracts in achieving corporate objectives.
Should the counterparties to these contracts fail to perform, IP could be forced
to acquire alternative hedging arrangements or be required to honor the
underlying commitment at then current market prices. In such an event, IP might
incur additional loss to the extent of amounts, if any, already paid to the
counterparties. In view of its criteria for selecting counterparties and its
experience to date in successfully completing these transactions, IP believes
that the risk of incurring a significant financial statement loss due to the
non-performance of counterparties to these transactions is remote.
An Executive Risk Management Committee has been established to oversee all
corporate risk management. The Executive Risk Management Committee's
responsibilities include reviewing IP's overall risk management strategies, as
well as monitoring and assessing risk exposure and risk management activities to
ensure compliance with all applicable risk management limitations, policies, and
procedures.
<TABLE>
<CAPTION>
NOTE 16 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA (UNAUDITED)
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
First Quarter Second Quarter Third Quarter Fourth Quarter
1998 1998 1998 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $489.5 $467.0 $715.3 $397.4
Operating income (loss) 61.8 (9.8) 66.5 (1,505.7)
Net income (loss) 30.4 (40.6) 35.4 (1,381.1)
Net income (loss) applicable to common stock 25.5 (45.6) 30.4 (1,386.0)
Cash dividends declared on common stock - 42.8 - 40.4
Cash dividends paid on common stock 22.2 20.5 22.2 40.4
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues $472.8 $415.3 $497.1 $388.7
Operating income 88.9 82.6 101.8 5.4
Net income (loss) before extraordinary item 55.0 51.4 71.9 (27.5)
Net income (loss) after extraordinary item 55.0 51.4 71.9 (222.5)
Net income (loss) applicable to common stock 49.5 46.0 67.5 (228.5)
Cash dividends declared on common stock 23.5 23.2 22.2 22.2
Cash dividends paid on common stock 23.5 23.5 23.2 22.2
</TABLE>
<TABLE>
<CAPTION>
Illinois Power Company
S E L E C T E D C O N S O L I D A T E D F I N A N CI A L D A T A
(Millions of dollars)
1998 1997 1996 1995 1994 1988
- ------------------------------------------------------------------------------------------------------------------------------------
Operating revenues
<S> <C> <C> <C> <C> <C> <C>
Electric $ 1,224.2 $ 1,244.4 $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 949.9
Electric interchange 557.2 175.6 137.6 116.3 110.0 109.7
Gas 287.8 353.9 348.2 272.5 302.0 334.8
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 2,069.2 1,773.9 1,688.7 1,641.4 1,589.5 1,394.4
- ------------------------------------------------------------------------------------------------------------------------------------
Extraordinary item net of income tax benefit $ - $(195.0) $ - $ - $ - $ -
Cumulative effect of change in
accounting principle net of income taxes $ - $ - $ - $ - $ - $ 34.0
Net income (loss) after extraordinary item &
change in accounting principle $ (1,355.9) (44.2) 228.6 182.7 180.3 189.4
Effective income tax rate 43.6% 40.1% 37.6% 39.1% 38.4% 29.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable
to common stock $(1,375.7) (65.5) 205.6 155.5 161.8 151.9
Cash dividends declared on common stock 83.2 91.1 87.1 77.9 49.1 188.9
Cash dividends paid on common stock 105.4 92.4 84.8 75.3 60.5 185.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,429.8 $ 5,291.5 $ 5,568.5 $ 5,567.2 $ 5,595.8 $ 6,053.1
- ------------------------------------------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 1,088.7 $ 1,299.1 $ 1,576.1 $ 1,478.1 $ 1,466.0 $ 1,895.6
Preferred stock 57.1 57.1 96.2 125.6 224.7 315.2
Mandatorily redeemable preferred stock 199.0 197.0 197.0 97.0 133.0 160.0
Long-term debt 2,158.5 1,617.5 1,636.4 1,739.3 1,946.1 2,341.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 3,503.3 $ 3,170.7 $ 3,505.7 $ 3,440.0 $ 3,769.8 $ 4,712.0
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings $ - $ 89.5 $ 245.9 $ 129.6 $ 51.1 $ 517.9
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 311.5 $ 223.9 $ 187.3 $ 209.3 $ 193.7 $ 115.5
Cash flows from operations $ 310.1 $ 418.7 $ 443.3 $ 473.7 $ 280.2 $ 225.2
AFUDC as a percent of earnings
applicable to common stock (0.2)% (7.6)% 3.2% 3.9% 5.7% 40.3%
Ratio of earnings to fixed charges N/A 0.57 3.40 2.77 2.73 1.83
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Illinois Power Company
SELECTED ILLINOIS POWER COMPANY STATISTICS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1988
- -----------------------------------------------------------------------------------------------------------------------------------
Electric Sales in kwh (Millions)
<S> <C> <C> <C> <C> <C> <C>
Residential 4,893 4,734 4,782 4,754 4,537 4,411
Commercial 4,053 3,943 3,894 3,804 3,517 2,939
Industrial 8,701 8,403 8,493 8,670 8,685 7,415
Other 375 426 367 367 536 964
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to ultimate consumers 18,022 17,506 17,536 17,595 17,275 15,729
Interchange 16,199 7,230 5,454 4,444 4,837 4,903
Wheeling 2,710 3,253 928 642 622 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total electric sales 36,931 27,989 23,918 22,681 22,734 20,632
- -----------------------------------------------------------------------------------------------------------------------------------
Electric Revenues (Millions of dollars)
Residential $469 $489 $483 $500 $471 $373
Commercial 329 325 318 321 295 215
Industrial 374 376 360 392 378 312
Other 39 40 38 37 30 50
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from ultimate consumers 1,211 1,230 1,199 1,250 1,174 950
Interchange 557 176 138 116 110 110
Wheeling 13 14 4 3 3 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total electric revenues $1,781 $1,420 $1,341 $1,369 $1,287 $1,060
- -----------------------------------------------------------------------------------------------------------------------------------
Gas Sales in Therms (Millions)
Residential 305 343 427 356 359 367
Commercial 131 147 177 144 144 148
Industrial 67 47 99 88 81 155
- -----------------------------------------------------------------------------------------------------------------------------------
Sales to ultimate consumers 503 537 703 588 584 670
Transportation of customer-owned gas 267 309 251 273 262 235
- -----------------------------------------------------------------------------------------------------------------------------------
Total gas sold and transported 770 846 954 861 846 905
Interdepartmental sales 26 19 9 21 5 9
- -----------------------------------------------------------------------------------------------------------------------------------
Total gas delivered 796 865 963 882 851 914
- -----------------------------------------------------------------------------------------------------------------------------------
Gas Revenues (Millions of dollars)
Residential $183 $238 $216 $173 $192 $207
Commercial 65 77 79 60 66 71
Industrial 24 20 40 24 31 48
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues from ultimate consumers 272 335 335 257 289 326
Transportation of customer-owned gas 7 9 7 8 9 13
Miscellaneous 9 10 6 7 4 (4)
- -----------------------------------------------------------------------------------------------------------------------------------
Total gas revenues $288 $354 $348 $272 $302 $335
- -----------------------------------------------------------------------------------------------------------------------------------
System peak demand (native load) in kw (thousands) 3,694 3,532 3,492 3,667 3,395 3,508
Firm peak demand (native load) in kw (thousands) 3,617 3,469 3,381 3,576 3,232 3,077
Net generating capability in kw (thousands) 3,838 3,289 4,148 3,862 4,121 3,938
- -----------------------------------------------------------------------------------------------------------------------------------
Electric customers (end of year) 580,356 580,257 549,957 529,966 553,869 546,443
Gas customers (end of year) 408,428 405,710 389,223 374,299 388,170 385,336
Employees (end of year) 3,965 3,655 3,635 3,559 4,350 4,663
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 21(a)
Subsidiaries of Illinova Corporation and Illinois Power Company
State or Jurisdiction
Name of Incorporation
- ---- ---------------------
Illinova Corporation Illinois
Illinois Power Company Illinois
IP Gas Supply Company Illinois
Illinois Power Fuel Company (1) Illinois
Illinois Power Capital, L.P. (2) Delaware
Illinois Power Financing I Delaware
Illinois Power Securitization Limited
Liability company (3) Delaware
Illinois Power Special Purpose Trust (4) Delaware
Illinois Business Enterprises, Inc. (5) Illinois
Illinova Generating Company Illinois
Electric Energy, Inc. (6) Illinois
Illinova Resource Recovery, Inc.
(formerly IPG Canfield Co.) Illinois
IGC Krishnapatnam Company
(formerly IPG Dominguez Co.) Illinois
IPG Eastern, Inc. Illinois
IPG Ferndale, Inc. Illinois
IPG Frederickson, Inc. Illinois
IGC Solutions, Inc.
(formerly IPG LAP Cogen, Inc.) Illinois
IGC Grimes Frontier, Inc.
(formerly IPG Panorama Co.) Illinois
IPG Paris, Inc. Illinois
IPG Western, Inc. Illinois
IGC Acquisition Co.
(formerly IPG Aztec Co.) Illinois
IGC Brazos, Inc. Illinois
IGC Development Company Illinois
IGC International, Inc. Cayman Islands
IGC Grimes County, Inc.
(formerly IGC Sub Co., Inc.) Illinois
White Oak Energy Investors, Inc. Illinois
IGC Maranon, LLC Cayman Islands
IGC Miel, Inc. Cayman Islands
IGC Azucar, Inc. Cayman Islands
ECI Energy, Ltd. (7) Delaware
North American Energy Services Co. (8) Washington
IGC ELCO Partnership, LLC (9) Cayman Islands
ELCO Power Investment Company, LLC (10) Cayman Islands
IGC Jamaica Partnership, LLC (11) Cayman Islands
IGC International II, Inc. (12) Cayman Islands
IGC Flores Partnership, LLC (13) Cayman Islands
IGC Flores Partnership II, LLC (14) Cayman Islands
IGC Flores Loanco, LLC Cayman Islands
FIG Leasing International, Inc. (15) Cayman Islands
FIG Leasing International III, Inc. (16) Cayman Islands
FIG Equipment, LLC (17) Cayman Islands
IGC Aguaytia Partners, LLC (18) Cayman Islands
IGC Mauritius Holding Company
(formerly IGC-ABC Shanghai Co.)(19) Mauritius
Illinova ZJ XC Company (20) Mauritius
IGC Mauritius International Company (21) Mauritius
IGC Uch, LLC (22) Cayman Islands
Operaciones de Arequipa, LLC (23) Cayman Islands
Tenaska-Illinova Generating
International, LLC (24) Cayman Islands
Fuerza Electrica de Latinoamerica,LLC (25) Cayman Islands
IGC (Encoe), LLC Cayman Islands
IGC Vietnam Development, Inc. Cayman Islands
IGC STI Guna Company (26) Mauritius
COE (UK) Corp. (27) Connecticut
COE (Gencoe) Corp. (28) Connecticut
Charter Oak (Paris), Inc. (29) Connecticut
IGC (Wind),LLC (30) Cayman Islands
Illinova Energy Partners, Inc. Delaware
Tenaska Marketing Ventures (31) Nebraska
EMC/Illinova Energy Partners (32) Oklahoma
Illinova Insurance Company Vermont
(1) Illinois Power Company owns 50% of the common stock of Illinois Power Fuel
Company.
(2) Illinois Power Company is the general partner in Illinois Power Capital,
L.P., with a 3% equity ownership share. Illinois Power Capital is
consolidated in the accounts of Illinois Power Company.
(3) Illinois Power Company is the sole member of Illinois Power Securitization
Limited Liability Company.
(4) Illinois Power Securitization Limited Liability Company is the sole owner
of the Illinois Power Special Purpose Trust
(5) Illinova owns 100% of the common stock of Illinois Business Enterprises,
Inc.
(6) Illinova Generating Company owns 20% of the common stock of EEI.
(7) Illinova Generating Company owns 47.5% of the voting common stock of ECI
Energy, Ltd.
(8) Illinova Generating Company owns 100% of the common stock of North American
Energy Services Company.
(9) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II Inc. (a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of IGC ELCO
Partnership, LLC.
(10) IGC ELCO Partnership, LLC (a subsidiary of IGC International, Inc. and IGC
International II, Inc.) owns 66.7% of the common stock of ELCO Power
Investment Company, LLC.
(11) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of IGC Jamaica
Partnership, LLC.
(12) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 100% of the equity of IGC International II, Inc.
(13) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of IGC Flores
Partnership, LLC.
(14) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of IGC Flores
Partnership II, LLC.
(15) IGC Flores Partnership, LLC (a subsidiary of IGC International, Inc. and
IGC International II, Inc.) owns 51% of the common stock of FIG Leasing
International, LLC.
(16) IGC Flores Partnership, LLC (a subsidiary of IGC International, Inc. and
IGC International II, Inc.) owns 51% of the common stock of FIG Leasing
International III, Inc..
(17) IGC Flores Partnership, LLC (a subsidiary of IGC International, Inc. and
IGC International II, Inc.) owns 50% of the common stock of FIG Equipment,
LLC.
(18) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc.(a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of IGC Aguaytia
Partners, LLC.
(19) IGC International II, Inc. (a wholly-owned subsidiary of Illinova
Generating Company) owns 100% of the equity of IGC Mauritius.
(20) IGC International II, Inc. (a wholly-owned subsidiary of IGC International,
Inc.) owns 100% of the equity of Illinova ZJ XC Company.
(21) IGC International II, Inc. (a wholly-owned subsidiary of IGC International,
Inc.) owns 100% of the equity of ICG Mauritius International Company.
(22) IGC International,II Inc. (a wholly-owned subsidiary of IGC International,
Inc.) owns 99% and IGC International, Inc. (a wholly-owned subsidiary of
Illinova Generating Company) owns 1% of the common stock of IGC Uch, LLC.
(23) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of Operaciones de
Arequipa, LLC.
(24) IGC Uch, LLC (a subsidiary of IGC International, Inc. and IGC International
II, Inc.)owns 50% of the voting common stock of Tenaska-Illinova Generating
International, LLC.
(25) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 99% and IGC International II, Inc. (a wholly-owned subsidiary
of IGC International, Inc.) owns 1% of the common stock of Fuerza Electrica
de Latinoamerica, LLC.
(26) IGC International II, Inc. (a wholly-owned subsidiary of IGC International,
Inc.) owns 100% the equity IGC STI Guna Company.
(27) IGC (Encoe), LLC (a wholly-owned subsidiary of Illinova Generating Company)
owns 79.9% and COE (Gencoe) Corp. (owned 49% by IGC (Encoe), LLC) owns
20.1% of the common stock of COE (UK) Corp.
(28) IGC (Encoe), LLC (a wholly-owned subsidiary of Illinova Generating Company)
owns 49% of the common stock of COE (Gencoe) Corp.
(29) IPG Paris, Inc. (a wholly-owned subsidiary of Illinova Generating Company)
owns 100% of the common stock of Charter Oak (Paris), Inc.
(30) IGC International, Inc. (a wholly-owned subsidiary of Illinova Generating
Company) owns 100% of the equity of IGC (Wind) Inc.
(31) Illinova Energy Partners, Inc. owns 50% of the equity of Tenaska Marketing
Ventures.
(32) Illinova Energy Partners, Inc. owns 51% of the equity of EMC/Illinois
Energy Partners.
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-22068), the Registration Statement on Form S-8
(No. 33-60278), the Registration Statement on Form S-8 (No. 33-66124), the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
333-03011), and the Prospectus constituting part of the Registration Statement
on Form S-3 (No. 333-17847) of our report dated February 26, 1999, appearing on
page a-20 of the Annual Report to Shareholders in the Appendix to the Illinova
Corporation Proxy Statement which is incorporated in this Annual Report on Form
10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
March 26, 1999
Exhibit 23.2
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-71061) of
our report dated February 26, 1999, appearing on page a-18 of the Annual Report
to Shareholders in the Appendix to the Illinois Power Company Information
Statement which is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
March 26, 1999
<TABLE> <S> <C>
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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 SATEMENT OF ILLINOIS POWER COMPANY.
</LEGEND>
<CIK> 0000049816
<NAME> ILLINOIS POWER COMPANY
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<COMMERCIAL-PAPER-OBLIGATIONS> 98
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<OTHER-INCOME-NET> 163
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