<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Earliest Event Reported: February 1, 2000
DYNEGY INC.
- ------------------------------------------------------------------------------
(Exact Name of Registrant As Specified In Its Charter)
Illinois 1-11156 74-2928353
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification Number)
1000 Louisiana, Suite 5800
Houston, Texas 77002
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(Address of Principal Executive Offices)
Registrant's Telephone Number:
(713) 507-6400
<PAGE>
ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
- ------- ------------------------------------
(a) AUDITED FINANCIAL STATEMENTS OF ILLINOVA CORPORATION
- ATTACHED
ITEM 7: FINANCIAL STATEMENTS, PRO-FORMA FINANCIAL INFORMATION AND EXHIBITS
- ------ ------------------------------------------------------------------
(a) FINANCIAL STATEMENTS - N/A
(b) PRO-FORMA FINANCIAL INFORMATION - ATTACHED
(c) EXHIBITS - N/A
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
By: /s/ Lisa Q. Metts
--------------------------------
Lisa Q. Metts
Vice President
DATE: March 16, 2000
3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Illinova Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
statements of income, of cash flows, of retained earnings and of comprehensive
income present fairly, in all material respects, the financial position of
Illinova Corporation and its subsidiaries (the "Company") at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 includes
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 16 to the consolidated financial statements, the Company
merged with Dynegy, Inc. on February 1, 2000.
As explained in Note 3 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 3 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 28, 2000
<PAGE>
ILLINOVA CORPORATION
ABBREVIATIONS USED THROUGHOUT THIS REPORT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
AFUDC Allowance for Funds Used During Construction ITC Investment Tax Credits
AmerGen AmerGen Energy Company kwh Kilowatt-Hour
BACT Best Available Control Technology MGP Manufactured-Gas Plant
Baldwin Baldwin Power Station MIPS Monthly Income Preferred Securities
C & I Commercial and Industrial MWH Megawatt-Hour
CAAA Clean Air Act Amendments NOV Notice of Violation
Clinton Clinton Power Station NOx Nitrogen Oxide
DOE U.S. Department of Energy NRC U.S. Nuclear Regulatory Commission
DOJ Department of Justice NWPA Nuclear Waste Policy Act of 1992
Dynegy Dynegy Inc. P.A. 90-561 Electric Service Customer Choice and Rate
EITF Emerging Issues Task Force of the Financial Relief Law of 1997
Accounting Standards Board PCA Power Coordination Agreement
EPS Earnings Per Share PECO PECO Energy Company
ESOP Employees' Stock Ownership Plan PPA Power Purchase Agreement
FAS Statement of Financial Accounting Standards ROE Return on Equity
FASB Financial Accounting Standards Board SCR Selective Catalytic Reduction
FERC Federal Energy Regulatory Commission SEC U.S. Securities and Exchange Commission
Hennepin Hennepin Power Station SFP Secondary Financial Protection
IBE Illinova Business Enterprises, Inc. SO//2// Sulfur Dioxide
ICC Illinois Commerce Commission SOP Statement of Position
IEP Illinova Energy Partners, Inc. Soyland Soyland Power Cooperative, Inc.
IGC Illinova Generating Company TOPrS Trust Originated Preferred Securities
IIC Illinova Insurance Company UFAC Uniform Fuel Adjustment Clause
Illinova Illinova Corporation UGAC Uniform Gas Adjustment Clause
IP Illinois Power Company U.S. EPA U.S. Environmental Protection Agency
IPFI Illinois Power Financing I Vermilion Vermilion Power Station
IPMI Illinova Power Marketing Inc. Wood River Wood River Power Station
</TABLE>
<PAGE>
ILLINOVA CORPORATION
<TABLE>
<CAPTION>
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)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31, 1999 1998 1997
OPERATING REVENUES
Electric $ 1,174.8 $ 1,224.2 $ 1,244.4
Electric interchange 445.9 557.2 175.6
Gas 303.7 287.8 353.9
Diversified enterprises 500.4 361.4 735.6
- ----------------------------------------------------------------------------------------------------------
Total 2,424.8 2,430.6 2,509.5
- ----------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Fuel for electric plants 246.9 250.2 232.4
Power purchased 328.1 735.2 217.9
Gas purchased for resale 164.6 149.6 207.7
Diversified enterprises 546.9 392.0 792.3
Other operating expenses 483.4 381.6 290.5
Maintenance 120.4 156.3 111.7
Depreciation and amortization 176.6 203.6 198.8
Amortization of regulatory asset 26.4 - -
General taxes 102.6 123.2 133.8
Clinton plant impairment loss (Note 3) - 2,666.9 -
- ----------------------------------------------------------------------------------------------------------
Total 2,195.9 5,058.6 2,185.1
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 228.9 (2,628.0) 324.4
- ----------------------------------------------------------------------------------------------------------
OTHER INCOME
Miscellaneous-net 18.7 3.1 3.5
Equity earnings in affiliates 12.9 22.5 17.5
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Total 31.6 25.6 21.0
- ----------------------------------------------------------------------------------------------------------
Income (loss) before interest charges and income taxes 260.5 (2,602.4) 345.4
- ----------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest expense 163.5 146.0 144.2
Allowance for borrowed funds used during construction (4.2) (3.2) (5.0)
Preferred dividend requirements of subsidiary 19.2 19.8 21.5
- ----------------------------------------------------------------------------------------------------------
Total 178.5 162.6 160.7
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Income (loss) before income taxes 82.0 (2,765.0) 184.7
- ----------------------------------------------------------------------------------------------------------
INCOME TAXES
Income tax - impairment loss - (982.8) -
ITC - Clinton impairment - (160.4) -
Other 41.4 (42.3) 80.3
- ----------------------------------------------------------------------------------------------------------
Total 41.4 (1,185.5) 80.3
- ----------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item 40.6 (1,579.5) 104.4
Extraordinary item net of income tax
benefit of $118.0 million (Note 1) - - (195.0)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) 40.6 (1,579.5) (90.6)
Carrying amount over consideration paid
for redeemed preferred stock of subsidiary 1.7 - .2
- ----------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 42.3 $ (1,579.5) $ (90.4)
==========================================================================================================
Earnings (loss) per common share before
extraordinary item (basic and diluted) $ 0.60 $ (22.04) $ 1.41
Extraordinary item per common share (basic and diluted) $ - $ - $ (2.63)
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) per common share (basic and diluted) $ 0.60 $ (22.04) $ (1.22)
Cash dividends declared per common share $ 1.24 $ 1.24 $ 1.24
Cash dividends paid per common share $ 1.24 $ 1.24 $ 1.24
Weighted average common shares (basic) 69,932,344 71,666,864 $ 73,991,651
</TABLE>
See notes to consolidated financial statements which are an integral part of
these statements.
<PAGE>
ILLINOVA CORPORATION
<TABLE>
<CAPTION>
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)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1999 1998
ASSETS
UTILITY PLANT
Electric (includes construction work in progress of
$274.6 million and $177.7 million, respectively) $ 5,669.9 $ 5,481.8
Gas (includes construction work in progress of $17.1
million and $15.3 million, respectively) 714.2 686.9
- ---------------------------------------------------------------------------------------------------------------------------
6,384.1 6,168.7
Less -- accumulated depreciation 1,795.0 1,713.7
- ---------------------------------------------------------------------------------------------------------------------------
4,589.1 4,455.0
Nuclear fuel - 20.3
- ---------------------------------------------------------------------------------------------------------------------------
4,589.1 4,475.3
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INVESTMENTS AND OTHER ASSETS 291.3 246.9
- ---------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 49.7 518.1
Accounts receivable (less allowance for doubtful
accounts of $5.5 million)
Service 98.1 105.9
Other 109.5 116.1
Accrued unbilled revenue 83.4 82.6
Materials and supplies, at average cost
Fossil fuel 38.9 25.6
Gas in underground storage 24.1 28.9
Operating materials 36.4 36.3
Assets from commodity price risk management activities 7.6 51.5
Prepaid and refundable income taxes 65.9 -
Prepayments and other 45.9 51.5
- ---------------------------------------------------------------------------------------------------------------------------
559.5 1,016.5
- ---------------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES
Transition period cost recovery 320.3 457.3
Other 172.9 279.6
- ---------------------------------------------------------------------------------------------------------------------------
493.2 736.9
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,933.1 $ 6,475.6
- ---------------------------------------------------------------------------------------------------------------------------
CAPITAL AND LIABILITIES
Capitalization
Common stock -- No par value, 200,000,000 shares authorized;
69,980,337 and 69,919,287 shares outstanding, respectively, stated at $ 1,211.9 $ 1,123.2
Less -- Deferred compensation -- ESOP 0.7 6.8
Retained earnings (deficit) - accumulated since 1/1/99 (44.5) -
Accumulated other comprehensive income (loss) (0.2) -
Less -- Capital stock expense 7.2 7.3
Less -- 5,701,600 and 5,762,650 shares of common stock in treasury,
respectively, at cost 137.3 138.7
- ---------------------------------------------------------------------------------------------------------------------------
Total common stock equity 1,022.0 970.4
Preferred stock of subsidiary 45.8 57.1
Mandatorily redeemable preferred stock of subsidiary 193.4 199.0
Long-term debt 2,060.9 2,334.6
- ---------------------------------------------------------------------------------------------------------------------------
Total capitalization 3,322.1 3,561.1
- ---------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable 178.7 256.5
Notes payable 641.2 147.6
Long-term debt maturing within one year 236.4 506.6
Dividends declared 22.3 21.7
Taxes accrued 32.4 30.6
Interest accrued 23.7 39.5
Liabilities from commodity price risk management activities 5.8 99.8
Other 107.2 112.0
- ---------------------------------------------------------------------------------------------------------------------------
1,247.7 1,214.3
- ---------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes 1,025.3 834.8
Accumulated deferred investment tax credits 38.1 39.6
Decommissioning liability - 567.4
Other 299.9 258.4
- ---------------------------------------------------------------------------------------------------------------------------
1,363.3 1,700.2
- ---------------------------------------------------------------------------------------------------------------------------
$ 5,933.1 $ 6,475.6
- ---------------------------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 4)
See notes to consolidated financial statements which are an integral part of these statements.
</TABLE>
<PAGE>
<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 F L O W S
- -----------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31, 1999 1998 1997
Cash Flows from Operating Activities
Net income (loss) $ 40.6 $ (1,579.5) $ (90.6)
Items not requiring (providing) cash --
Depreciation and amortization 207.0 203.4 202.1
Deferred income taxes 140.5 (43.9) 30.8
Extraordinary item - - 195.0
Impairment loss, net of tax - 1,523.7 -
Changes in assets and liabilities --
Accounts receivable 17.6 24.4 (19.4)
Accrued unbilled revenue (0.8) 3.7 19.7
Materials and supplies (17.1) (15.1) (5.4)
Prepayments (65.3) 15.6 (37.9)
Accounts payable (3.8) (5.6) 26.4
Deferred revenue (70.9) 87.4 -
Other deferred credits (192.7) 11.7 (21.1)
Interest accrued and other, net (94.4) 45.4 73.7
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (39.3) 271.2 373.3
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures (298.3) (311.5) (223.9)
Other investing activities 52.8 (53.7) (33.5)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (245.5) (365.2) (257.4)
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock (86.7) (88.9) (92.4)
Repurchase of common stock - (49.1) (90.4)
Reissuance of common stock 1.5 0.8 -
Redemptions --
Short-term debt (645.4) (607.9) (241.1)
Long-term debt (787.0) (188.3) (160.8)
Preferred stock of subsidiary (16.9) - (39.0)
Issuances --
Short-term debt 1,139.0 340.2 269.5
Long-term debt 250.0 1,186.5 250.0
Other financing activities (38.1) (14.2) (3.3)
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (183.6) 579.1 (107.5)
- -----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (468.4) 485.1 8.4
Cash and cash equivalents at beginning of year 518.1 33.0 24.6
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 49.7 $ 518.1 $ 33.0
=======================================================================================================================
See notes to consolidated financial statements which are an integral part of these statements.
</TABLE>
<PAGE>
ILLINOVA CORPORATION
<TABLE>
<CAPTION>
C O N S O L I D A T E D S T A T E M E N T S O F R E T A I N E D E A R N I N G S ( D E F I C I T )
- -----------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31, 1999 1998 1997
Balance at beginning of year $ - $ 51.7 $ 233.0
Net income (loss) before dividends and carrying amount adjustments 59.8 (1,559.7) (69.1)
- -----------------------------------------------------------------------------------------------------------------------------
59.8 (1,508.0) 163.9
- -----------------------------------------------------------------------------------------------------------------------------
Less-
Dividends-
Preferred stock of subsidiary 19.3 19.9 21.7
Common stock 86.7 88.1 90.7
Plus-
Carrying amount over consideration
paid for redeemed preferred stock of
subsidiary 1.7 - 0.2
Quasi-Reorganization adjustment (Note 3) - 1,313.3 -
Transfer from common stock equity to
eliminate retained earnings deficit (Note 3) - 302.7 -
- -----------------------------------------------------------------------------------------------------------------------------
(104.3) 1,508.0 (112.2)
- -----------------------------------------------------------------------------------------------------------------------------
Balance (deficit) at end of year $ (44.5) $ - $ 51.7
=============================================================================================================================
See notes to consolidated financial statements which are an integral part of these statements.
</TABLE>
<PAGE>
ILLINOVA CORPORATION
<TABLE>
<CAPTION>
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 O M P R E H E N S I V E I N C O M E ( L O S S )
- -------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the Years Ended December 31, 1999 1998 1997
Net income (loss) applicable to common stock $ 42.3 $ (1,579.5) $ (90.4)
----------------------------------------------------
Other comprehensive income (loss)
Foreign currency translation adjustments, net of taxes (0.2) - -
----------------------------------------------------
Comprehensive income (loss) $ 42.1 $ (1,579.5) $ (90.4)
=========================================================================================================================
See notes to consolidated financial statements which are an integral part of these statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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: Illinois Power
Company (IP), Illinova Generating Company (IGC), Illinova Energy Partners (IEP),
Illinova Insurance Company (IIC), Illinova Business Enterprises (IBE), and
Illinova Power Marketing, Inc. (IPMI). 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 formed to account for miscellaneous unregulated
business activities which do not fall within the business scope of other
Illinova subsidiaries. IPMI, a wholesale generation and power marketing
subsidiary, was created in April 1999. IP's fossil generating assets were
transferred to IPMI effective October 1, 1999. See "Note 2 - Illinova
Subsidiaries" 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, Illinova'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.
At the same time, the Board decided to implement a quasi-reorganization. A
quasi-reorganization is an accounting procedure that eliminates an accumulated
deficit in retained earnings which 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
common stock equity, giving the company a "fresh start" with a zero balance in
retained earnings.
Effective December 15, 1999, IP sold Clinton to AmerGen. The sale resulted in
revisions to the impairment of Clinton-related assets and the previously accrued
exit-related costs. The decrease in the impairment and the accruals was
recognized as an increase in common stock equity, offsetting in part the
decrease in common stock equity that resulted from the 1998 quasi-
reorganization.
<PAGE>
For additional information, see "Note 3 - Clinton Impairment, Quasi-
Reorganization and Sale of Clinton."
REGULATION IP is regulated primarily by the ICC and the FERC. 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. 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. 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 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 then
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.
The remaining segments of IP continue to prepare their financial statements in
accordance with FAS 71.
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 at December 31
are as follows:
(Millions of dollars) 1999 1998
- -----------------------------------------------------------------------------
Transition period cost recovery $320.3 $457.3
Unamortized losses on reacquired debt $ 66.2 $ 40.1
Manufactured-gas plant site cleanup costs $ 44.4 $ 44.7
Clinton decommissioning cost recovery $ 18.7 $ 72.3
<PAGE>
UTILITY PLANT The cost of additions to plant and replacements for retired
property units is capitalized. Cost includes labor, materials, and an
allocation of general and administrative costs, plus AFUDC or capitalized
interest 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.
Costs which would have been considered capital additions at Clinton were
expensed in 1999 due to the 1998 impairment of Clinton-related assets. See
"Note 3 - Clinton Impairment, Quasi-Reorganization and Sale of Clinton."
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
1999, 1998, and 1997, the pre-tax rate used for all construction projects was
5.5%, 5.7%, and 5.6%, 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,
including IPMI after September 30, 1999, capitalize interest under the
guidelines in FAS 34, "Capitalization of Interest Cost."
DEPRECIATION For financial statement purposes, various classes of depreciable
property are depreciated over their estimated useful lives by applying composite
rates on a straight-line basis. Depreciation of Clinton was discontinued in
1999. In the years 1998 and 1997, depreciation was 2.8% of the average
depreciable cost for Clinton. Provisions for depreciation for all other electric
plant facilities were 2.7%, 2.3%, and 2.8% in 1999, 1998, and 1997,
respectively. Provisions for depreciation of gas utility plant, as a percentage
of the average depreciable cost, were 3.5% in 1999 and 1998, and 3.3% in 1997.
AMORTIZATION OF NUCLEAR FUEL Prior to the sale of Clinton, amortization of
nuclear fuel (including related financing costs) was determined on a unit of
production basis. A provision for spent fuel disposal costs was charged to fuel
expense based on kwh generated.
TRANSITION PERIOD REGULATORY ASSET The transition period cost recovery
regulatory asset is amortized over the stranded cost recovery period mandated by
P.A. 90-561, which extends to 2006. The amount of amortization recorded in each
period is based on the recovery of such costs from rate payers as measured by
ROE. See "Note 3 - Clinton Impairment, Quasi-Reorganization and Sale of
Clinton" for additional information on the transition period cost recovery
regulatory asset.
<PAGE>
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 unregulated segments are expensed when incurred.
MANUFACTURED-GAS PLANT SITE CLEANUP COSTS REGULATORY ASSET The regulatory asset
for the probable future collections from rate payers of allowable MGP site
cleanup costs are amortized as the allowable costs are collected from rate
payers. See "Note 4 - Commitments and Contingencies" for additional
information.
CLINTON DECOMMISSIONING REGULATORY ASSET The regulatory asset for the probable
future collections from rate payers of decommissioning costs is amortized as the
decommissioning costs are collected from rate payers. See "Note 3 - Clinton
Impairment, Quasi-Reorganization and Sale of Clinton" and "Note 4 - Commitments
and Contingencies" for more information.
REVENUE RECOGNITION AND ENERGY COST Revenues for utility services are
recognized when services are provided to customers. As such, 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.
Taxes included in operating revenues were $23 million in 1999, $54 million in
1998, and $71 million in 1997. In August 1998, the practice of including state
public utility taxes in operating revenues, which is one of several taxes
included in operating revenues, was discontinued for the electric portion of
the business.
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 received refunds totaling $15.1
million in the first quarter of 1999. These refunds completed the process of
eliminating the UFAC at IP.
<PAGE>
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.
Investment tax credits used to reduce federal income taxes have been deferred
and are being amortized to income over the service life of the property that
gave rise to the credits. As a result of the decision to exit the nuclear
energy business, all previously deferred investment tax credits associated with
nuclear property were recorded as a credit to income at December 31, 1998.
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 7 - 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 at December 31, are presented below.
In 1998 and 1997 stock options were antidilutive and have been excluded from the
computation of earnings per share.
<TABLE>
<CAPTION>
(Millions of dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) applicable to common stock before
extraordinary item (basic and diluted) $ 42.3 $ (1,579.5) $ 104.6
Extraordinary item (basic and diluted) $ - $ - $ (195.0)
Net income (loss) applicable to common stock (basic
and diluted) $ 42.3 $ (1,579.5) $ (90.4)
Weighted average common shares for basic EPS 69,932,344 71,666,864 73,991,651
Effect of dilutive securities - stock options 65,504 - -
----------- ----------- -----------
Adjusted weighted average common shares for diluted EPS 69,997,848 71,666,864 73,991,651
----------- ----------- -----------
</TABLE>
<PAGE>
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. A portion of the cash on hand at December 31, 1999 and 1998 is
restricted; it is unavailable for general purpose cash needs. This cash is
reserved for use in paying off the Transitional Funding Trust Notes issued
under the provisions of P.A. 90-561. See "Note 8 - Long-Term Debt" for
additional discussion of the Transitional Funding Trust Notes. The amount of
restricted cash was $12.5 million at the end of 1999, and $4.3 million at the
end of 1998.
Income taxes and interest paid are as follows:
Years ended December 31,
- -----------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- -----------------------------------------------------------------------
Income taxes $ - $ 13.4 $ 78.3
Interest $ 182.1 $ 160.8 $ 145.3
ACCOUNTING PRONOUNCEMENTS Implementation of the quasi-reorganization in 1998
required the adoption of any accounting standards that had not yet been adopted
because their required implementation date had not occurred. All applicable
accounting standards were adopted as of December 1998. The standards adopted
included FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities." EITF Issue 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities," was adopted according to its December
1998 implementation rule.
Illinova recognized other comprehensive income for 1999 as required by FAS
130, "Reporting Comprehensive Income." FAS 130 established standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Illinova adopted the two-statement
approach, as provided for by FAS 130, and presents separate Consolidated
Statements of Comprehensive Income in addition to Consolidated Statements of
Income. Foreign currency translations make up Illinova's other comprehensive
income for 1999. There were no items reported as other comprehensive income in
1998 and 1997.
NOTE 2 - ILLINOVA SUBSIDIARIES
Illinova, a holding company, is the parent of subsidiaries IP, IPMI, IGC,
IEP, IIC, and IBE. IP has preferred shares that are publicly traded, but its
common stock is wholly owned by Illinova, as is the common stock of the other
subsidiaries. IP is engaged in the transmission, distribution, and sale of
electric energy and the distribution, transportation, and sale of natural gas in
the state of Illinois. IPMI is a newly created wholesale generation and power
marketing company to which IP's fossil generating assets were transferred
effective October 1, 1999. At December 31, 1999, Illinova's net investment in
IPMI was $2.5 billion.
<PAGE>
IGC competes in the independent power market and invests in energy supply
projects and power-producing facilities throughout the world, of which some are
operating and others are under construction. The following table summarizes its
investments in power-producing facilities:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Year of Fuel Total In-Service
Location Investment Type MW Date
- ------------------------------ ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Domestic & England
Teesside, England 1993 Natural Gas 1,875 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 1,015 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
Chorrera, Panama 1999 Diesel 96 1999
Asia
Zhejiang Province, China 1995 Coal 24 1996
Balochistan, Pakistan 1996 Natural Gas 586 1999
Hunan Province, China 1997 Coal 24 1999
- ------------------------------ ---- ----------- ----- ----------
</TABLE>
IGC's ownership interest totals 605 MW for the domestic and English plants,
328 MW for the Latin American plants, and 125 MW for the Asian plants. As of
December 31, 1999, IGC has approximately $280 million invested in the 1,058 MW
it owns. IGC's investments are primarily accounted for under the equity method.
At December 31, 1999, Illinova's net investment in IGC was $255 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 an active power marketer in both the wholesale and the
deregulated retail markets. In the Midwest, IEP has developed a retail natural
gas business, serving industrial and commercial customers. 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.
<PAGE>
IEP owns 50 percent of Tenaska Marketing Ventures, in partnership with Tenaska
Marketing, Inc. Tenaska Marketing Ventures markets natural gas in the Midwestern
United States and, through affiliates, in Canada. 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
1999, IEP acquired 100 percent of the following retail gas businesses: Equitable
Resources, Inc. in Indiana, Quality Energy Services, Inc. in Arizona, and Energy
Dynamics, Inc. in Illinois. The total purchase price of these businesses was
$4.1 million.
IIC is a captive insurance company whose primary business is to insure the
risks related to or associated with the business enterprises of the subsidiaries
of Illinova. At December 31, 1999, IIC maintained approximately $31 million of
liabilities covering both reported and incurred but not reported claims. These
liabilities are considered adequate to cover such claims. In 1999, IIC insured
certain risks of IP for premiums of $7.6 million.
IBE was created to account for miscellaneous business activities not regulated
by the ICC or the FERC and not falling within the business scope of other
Illinova subsidiaries. IBE is currently inactive.
NOTE 3 - CLINTON IMPAIRMENT, QUASI-REORGANIZATION AND SALE OF CLINTON
In December 1998, Illinova's Board of Directors decided to exit Clinton
operations, resulting in an impairment of Clinton-related assets and the accrual
of exit-related costs. The impairment and accrual of costs resulted in a
$1,523.7 million, net of income taxes, charge against earnings. Concurrent with
the decision to exit Clinton, Illinova's Board of Directors also decided to
effect a quasi-reorganization, whereby Illinova's consolidated accumulated
deficit in retained earnings of $1,616.0 million at December 31, 1998 was
eliminated. On December 15, 1999, IP sold Clinton to AmerGen. The sale
resulted in revisions to the impairment of Clinton-related assets and the
previously accrued exit-related costs. All such revisions were made directly to
the common stock equity account in the balance sheet.
BACKGROUND Clinton was placed in service in 1987 and represented approximately
20% of IP's installed generation capacity at December 31, 1998. Clinton did not
operate from September 1996 through the end of May 1999, at which time the plant
was successfully restarted. Clinton's equivalent availability was 59% for 1999,
and 0% for 1998 and 1997.
<PAGE>
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 created 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 and analyses of
expected shareholder value from various options related to Clinton, led
management to the conclusion 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 to achieve success in the new environment of deregulation
and competition.
In anticipation of a possible decision to exit Clinton, management submitted a
letter to the SEC describing proposed accounting for an impairment loss under
the "assets to be disposed of" provisions of FAS 121. The letter also requested
concurrence with the proposed accounting for a quasi-reorganization, whereby the
fossil generation assets would be written up to their fair value coincident with
recording the impairment loss for Clinton. In November 1998, the SEC confirmed
that it would not object to the proposed accounting.
At the time of its decision to exit Clinton operations, IP was pursuing
potential opportunities to sell Clinton. However, substantial uncertainty
existed with regard to the ability to convert any tentative agreement into an
executable transaction. As a result, in December 1998 IP accounted for the
Clinton exit based on the expectation of plant closure as of August 31, 1999.
CLINTON IMPAIRMENT AND ACCRUAL OF EXIT COSTS Prior to impairment, the book
value of Clinton, including construction work in progress, nuclear fuel, and
material and supplies, net of accumulated depreciation, was $2,617.6 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 was estimated to
be zero. This estimate was consistent with a management decision to close
Clinton. The adjustment of Clinton plant, nuclear fuel, and materials and
supplies to fair value resulted in an impairment loss of $2,594.4 million, net
of accumulated depreciation. Nuclear fuel and materials and supplies of $23.2
million remained on IP's books after the impairment, given management's
expectations that such amounts would 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 was discontinued.
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 $486.6 million charge to earnings.
IP also recorded a regulatory asset of $72.3 million reflecting probable future
collections from IP's customers of decommissioning costs deemed recoverable. The
regulatory asset was recognized as a credit to expense, offsetting a portion of
the Clinton impairment.
<PAGE>
Also concurrent with the decision to exit Clinton operations, IP recorded
other exit-related costs of $115.5 million. These other exit costs included
termination fees for nuclear fuel contracts, costs to transition the plant from
an operating mode to a decommissioning mode, employee severance, pension
curtailment benefits and other postretirement benefit costs. See "Note 11 -
Pension and Other Benefits Costs" for additional information. These costs were
recognized as charges to earnings.
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. 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 $457.3 million for the portion of IP's stranded costs deemed
probable of recovery during the transition period. The regulatory asset was
recognized as a credit to expense, offsetting a portion of the Clinton
impairment.
The Clinton impairment and accrual of exit-related costs resulted in an
impairment loss of $1,523.7 million, net of income taxes. Illinova had an
accumulated deficit in retained earnings of $1,616.0 million after recording the
impairment loss.
REVALUATION OF ASSETS AND LIABILITIES The quasi-reorganization necessitated a
review of IP's 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, and an economic
assessment was made using 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 had 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 $2,235.3 million, which was
recognized as an increase in retained earnings.
<PAGE>
Illinova determined that the book value of its long-term debt was greater than
its fair value, requiring an adjustment of $6.2 million. IP determined that the
book value of its mandatorily redeemable preferred stock and long-term debt
attributable to the generation portion of the business was greater than its fair
value, requiring an adjustment of $27.2 million. These adjustments to fair
value were recognized as decreases in retained earnings. The book value of
current assets and liabilities equaled 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. See "Note 13 - Fair Value of Financial
Instruments" for additional information.
In conjunction with Illinova's quasi-reorganization, IGC and IEP reviewed
their assets and liabilities and adjusted the book value of certain assets down
to fair value resulting 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 effect of adopting the accounting
pronouncements was $12.4 million, which was recognized as a direct charge to
retained earnings. See "Note 1 -Summary of Significant Accounting Policies" and
"Note 13 - Financial and Other Derivative Instruments" for additional
information.
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 $302.7 million,
which was eliminated by a transfer from common stock equity.
<PAGE>
A summary of consolidated retained earnings and the effects of the Clinton
impairment and quasi-reorganization on the retained earnings balance follows:
<TABLE>
<CAPTION>
(Millions of dollars)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Retained earnings (deficit) 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 (2,594.4)
Decommissioning costs, net of regulatory asset (414.3)
Other exit costs (115.5)
Transition period cost recovery 457.3
Income taxes 1,143.2
- ---------------------------------------------------------------------------------------
Total Clinton impairment (1,523.7)
- ---------------------------------------------------------------------------------------
Accumulated deficit in retained earnings (1,616.0)
- ---------------------------------------------------------------------------------------
Quasi-reorganization (charged)/credited to retained earnings:
Generation assets fair value adjustment 2,235.3
Mandatorily redeemable preferred stock and
long-term debt fair value adjustment (33.4)
Fair value adjustment of IGC and IEP investments (5.7)
Early adoption of accounting pronouncements (12.4)
Income taxes (870.5)
- ---------------------------------------------------------------------------------------
Total quasi-reorganization 1,313.3
- ---------------------------------------------------------------------------------------
Retained earnings deficit at December 31, 1998 (302.7)
Transfer from common stock equity 302.7
- ---------------------------------------------------------------------------------------
Retained earnings balance at December 31, 1998, after
quasi-reorganization $ -
=======================================================================================
</TABLE>
SALE OF CLINTON TO AMERGEN On April 15, 1999, IP announced that it had reached
an interim agreement with AmerGen and PECO, whereby AmerGen would purchase and
operate Clinton and IP would buy at least 80% in 1999 and at least 75% during
the years 2000 through 2004 of the plant's electricity output. Under the interim
agreement, PECO was responsible for Clinton's direct operating and capital
expenses and continued to assist with the management of the plant under the
existing management services contract while IP compensated PECO for management
services based on the amount of electricity the plant produced. On July 1, 1999,
IP announced that it had signed a definitive asset sale agreement and a power
purchase agreement with AmerGen. In December 1999, IP's sale of Clinton to
AmerGen was completed. AmerGen paid IP $12.4 million for the plant and property.
<PAGE>
At December 31, 1998, IP accounted for its decision to exit Clinton based on
the expectation of plant closure. IP revised its impairment of Clinton-related
assets and accruals for exit-related costs in accordance with the terms of the
sale in December 1999. The net decrease in the impairment and the accruals was
recognized as an increase in common stock equity, revising the original effect
of the 1998 quasi-reorganization on common stock equity. The change in the
impairment loss and the net reductions in the exit-related accruals result in an
increase in common stock equity of $88.2 million as follows:
Increase (decrease) in common stock equity (Millions of dollars)
- ------------------------------------------------------------------------------
Clinton plant impairment $ 12.4
Decommissioning costs, net of regulatory asset 288.5
Other shutdown-related costs 129.1
Power purchase agreement costs (145.0)
Other sale-related costs (5.6)
Transition period cost recovery (115.9)
Income taxes (75.3)
- ------------------------------------------------------------------------------
Total change in impairment loss and accruals $ 88.2
- ------------------------------------------------------------------------------
DECOMMISSIONING COSTS AND DECOMMISSIONING REGULATORY ASSET
<TABLE>
<CAPTION>
Accrual Accrual
Balance at 1999 Other Cash Balance at
(Millions of dollars) December 31, 1998 Accruals Adjustments Payments December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Decommissioning costs $ 567.4 $ - $ (330.6) $ (211.9) $ 24.9
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
As a result of the sale, AmerGen has assumed responsibility for operating and
ultimately decommissioning Clinton. However, IP was required to transfer its
decommissioning trust funds in the amount of $98.5 million to AmerGen on the
sale closing date and make an additional payment of $113.4 million to the
decommissioning trust funds. In addition, IP is responsible for five future
annual payments of approximately $5.0 million to the decommissioning trust
funds. The reduction in the decommissioning liability was $330.6 million. IP
also reversed comprehensive income of $6.2 million, which had been recorded on
the decommissioning trust funds. The accrual balance for decommissioning costs
at December 31, 1999 is $24.9 million, of which $5.0 million is included in
other current liabilities and $19.9 million is included in other deferred
credits in the accompanying consolidated balance sheet.
<PAGE>
In November 1999, the ICC allowed for continued recovery of decommissioning
costs associated with Clinton after the sale to AmerGen. IP adjusted the
regulatory asset for probable future collections from IP's customers of
decommissioning costs to reflect the ICC's limitation on recovery of such costs
to an amount corresponding to approximately 75% of IP's future payment
responsibility for decommissioning costs under the asset purchase agreement.
The decrease in the regulatory asset was $48.3 million. At December 31, 1999,
the regulatory asset balance was $18.7 million. See "Note 1 - Summary of
Significant Accounting Policies" for additional information.
The following table summarizes the accruals that IP recorded in December 1998
and December 1999, adjustments to the accruals, cash payments, and the balances
of the accruals at December 31, 1999 by income statement line item in which the
costs would have otherwise been recognized:
<TABLE>
<CAPTION>
Accrual Accrual
Balances at 1999 Other Cash Balances at
(Millions of dollars) December 31, 1998 Accruals Adjustments Payments December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other operating expenses
Contract termination costs $ 7.1 $ - $ (7.1) $ - $ -
Transition costs from operating
mode to decommissioning mode 76.9 - (76.9) - -
Employee severance costs 42.7 - (37.1) (5.6) -
Pension curtailment benefits* (11.9) - (7.1) - (19.0)
Other postretirement benefits* 0.7 - (0.9) - (0.2)
- ------------------------------------------------------------------------------------------------------------------------------
$115.5 $ - $(129.1) $(5.6) $(19.2)
- ------------------------------------------------------------------------------------------------------------------------------
* These amounts are included in the curtailment gain in "Note 11 - Pension and Other Benefits Costs."
- ------------------------------------------------------------------------------------------------------------------------------
Power purchased
Power purchase agreement costs $ - $145.0 $ - $ - $145.0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
OTHER SHUTDOWN-RELATED COSTS In December 1999, IP adjusted various accruals for
other exit-related costs that were originally recorded in December 1998. IP
reversed contract termination fees for nuclear fuel contracts of $7.1 million,
which were transferred to AmerGen. In addition, IP reversed costs to transition
the plant from an operating mode to a decommissioning mode of $76.9 million. IP
also reduced its accrual for employee severance costs by $37.1 million and paid
$5.6 million to AmerGen on the sale closing date for severance costs. Pension
curtailment benefits increased by $7.1 million, and other postretirement benefit
costs decreased by $.9 million.
POWER PURCHASE AGREEMENT COSTS The Clinton sale was contingent on IP signing a
power purchase agreement with AmerGen. The power purchase agreement requires
that IP purchase 75% of Clinton's output over the 5-year life of the agreement
at fixed prices that exceed current and projected wholesale prices. Therefore,
IP accrued $145.0 million for the premium that IP estimates it is paying over
the life of the agreement, which will be amortized based on the energy purchased
from AmerGen. At December 31, 1999, $26.1 million is included in other current
liabilities and $118.9 million is included in other deferred credits in the
accompanying consolidated balance sheet.
TRANSITION PERIOD COST RECOVERY If IP had known at December 31, 1998 that the
Clinton exit would ultimately be concluded as a sale transaction, the impairment
loss would have been lower and IP would have recorded a lower transition period
cost recovery regulatory asset. Accordingly, as a result of the adjustments
which decreased the accruals and the impairment loss, IP reduced its transition
period cost recovery regulatory asset by $115.9 million.
See "Note 1 - Summary of Significant Accounting Policies" for a discussion of
other accounting issues.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Estimated coal contract commitments for 2000 through 2004 are $602 million
(excluding price escalation provisions). Total coal purchases were $195 million
in 1999, $210 million in 1998, and $181 million in 1997.
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 2000 through
2004 total $61 million. Total natural gas purchased was $165 million in 1999,
$157 million in 1998, and $185 million in 1997. IP anticipates that all gas-
related costs will be recoverable under IP's UGAC.
<PAGE>
UTILITY EARNINGS CAP P.A. 90-561 contains floor and ceiling provisions for IP's
return on equity (ROE). During the transition period ending in 2006 (or 2008 at
the option of the utility and approval by the ICC), IP 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 monthly average yields of 30-year U.S. Treasury bonds for
the same two years. Conversely, if during the transition period the two-year
average of its earned ROE exceeds the two-year average of the monthly average
yields of the 30-year U.S. Treasury bonds for the same two years, plus 5.5% in
1999 or 6.5% in 2000 through 2004 (which increases to 8.5% in 2000 through 2004
if a utility chooses not to implement transition charges after 2006), IP 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.
NUCLEAR DECOMMISSIONING COSTS See "Note 3 - Clinton Impairment, Quasi-
Reorganization and Sale of Clinton" for additional information on the sale of
Clinton Power Station.
ENVIRONMENTAL MATTERS
CLEAN AIR ACT Prior to the sale of its fossil generating facilities to Illinova
on October 1, 1999, IP purchased emission allowances to comply with the SO//2//
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. Environmental Protection Agency (U.S. EPA) to emit
one ton of SO//2//. The ICC approved IP's Phase I Acid Rain Compliance Plan in
September 1993, and IPMI is continuing to implement that plan. IPMI has acquired
sufficient emission allowances to cover approximately 50 percent of its
anticipated needs for 2000 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 minimize the number of SO//2// allowances needed in
Phase II of the Acid Rain SO//2// Program of the CAAA. The cost to convert
Baldwin and Hennepin to use low-sulfur coal is estimated to be approximately
$125 million.
To comply with the Phase I NOx emission reduction requirements of the Acid
Rain Program 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. Phase I of the
Acid Rain NOx reduction program ended December 31, 1999.
The U.S. EPA issued revised Phase II NOx emission limits on December 10, 1996.
IP prepared a Phase II Compliance Plan. Capital expenditures for the NOx
Compliance Plan are expected to total approximately $140 million when the
project is complete in early 2000. Approximately $100 million was spent through
the end of 1999. The majority of this investment is for installation of
selective catalytic reduction (SCR) and over fire air equipment on Baldwin Units
1 and 2. This work is being done in conjunction with replacement of the air
heaters on these units. The addition of over fire air equipment and the
change to low sulfur coal are expected to provide sufficient NOx reductions for
Phase II.
<PAGE>
In addition, regulators are continuing to finalize rulemakings 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 would require the
installation of NOx controls by May 2003. Preliminary estimates of the capital
expenditures needed by IPMI 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 IPMI.
U.S. ENVIRONMENTAL PROTECTION AGENCY COMPLAINT On November 3, 1999, the U.S.
EPA issued a Notice of Violation (NOV) against IP and, with the Department of
Justice (DOJ), filed Complaint No. 99C833 against IP in the U.S. District Court,
Southern District of Illinois. Similar notices and lawsuits were filed against a
number of other utilities. Both the NOV and Complaint allege violations of the
Clean Air Act and regulations thereunder. More specifically, both allege, based
on the same events, that certain equipment repairs, replacements and maintenance
activities at IP's three generating units at Baldwin, prior to their transfer to
IPMI, constituted "major modifications" under either or both the Prevention of
Significant Deterioration and the New Source Performance Standards regulations.
When non-exempt "major modifications" occur, the Clean Air Act and related
regulations generally require that generating facilities meet more stringent
emissions standards. The regulations under the Clean Air Act provide certain
exemptions to the definition of "major modifications," particularly an exemption
for routine repair, replacement or maintenance. Management has analyzed each of
the activities covered by the U.S. EPA's allegations and believes they are all
done routinely throughout the utility industry as necessary to maintain the
operational efficiency and safety of the equipment, and are covered by the
exemption for routine repair, replacement and maintenance. Management believes
that the U.S. EPA is changing, or attempting to change through enforcement
actions, the intent and meaning of its regulations and that, even assuming the
activities in question were found not to qualify for the routine exemption,
there were no increases either in annual emissions or in the maximum hourly
emissions achievable at any of the units caused by any of the activities. The
regulations provide an exemption for increased hours of operation or production
rate and for increases in emissions resulting from demand growth. Although none
of IP's other facilities is covered in the Complaint and NOV, the U.S. EPA has
officially requested information concerning activities at IP's Vermilion, Wood
River, and Hennepin plants, also prior to their transfer to IPMI. It is possible
that the U.S. EPA will eventually commence enforcement actions against those
plants. The U.S. EPA has the authority to seek penalties for the alleged
violations in question at the rate of up to $27,500 per day for each violation.
The U.S. EPA also may be seeking installation of BACT, or equivalent, at Baldwin
and possibly at the other three plants. A significant portion of the cost of
BACT is already included in the capital budget in connection with previously
planned pollution control upgrades. U.S. EPA's and DOJ's claims are believed to
be without merit, with no likely outcome that would have a material adverse
affect on Illinova's operations or its financial performance.
<PAGE>
MANUFACTURED-GAS PLANTS IP's estimated liability for MGP site remediation is
$58 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, IP initiated litigation against a number of its insurance
carriers. Settlement proceeds recovered from these carriers offset a significant
portion of the MGP remediation costs and are credited to customers through the
tariff rider mechanism which the ICC previously approved. Cleanup costs in
excess of insurance proceeds are considered probable of recovery from IP's
transmission and distribution customers. See "Note 1 - Summary of Significant
Accounting Policies" for additional information.
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. 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, 1999,
58%, 28%, and 14% 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
1999.
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 7 - Income Taxes."
PARENTAL GUARANTEES Illinova provides credit support for IGC and IEP up to an
aggregate limit of $115.6 million. The level of credit support utilized at
December 31, 1999, was $100.9 million. See "Note 2 - Illinova Subsidiaries" for
additional information.
NOTE 5 - LINES OF CREDIT AND SHORT-TERM LOANS
IP has total lines of credit represented by bank commitments amounting to
$350.0 million, all of which were unused at December 31, 1999. These lines of
credit are renewable in May 2000 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, 1999 and 1998, IP had $302.3 million and $97.6 million of
commercial paper outstanding, respectively.
<PAGE>
IP pays facility fees up to .20% per annum on $350.0 million of the total
lines of credit, regardless of usage. The interest rate on borrowings under
these agreements is, at IP's option, based on 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 $198.2 million, all of which were
undrawn at December 31, 1999. IP pays fees up to .98% per annum on the undrawn
amount of credit. Illinova has letters of credit capacity totaling $14.6
million at December 31, 1999, all of which were undrawn at December 31, 1999.
IPMI entered into a Loan Agreement dated November 19, 1999, which provides
IPMI with a line of credit of $450 million. At December 31, 1999, $313.9 million
was outstanding under the Loan Agreement, of which $180 million was designated
as Alternate Base Rate loans (as defined in the Loan Agreement) and $133.9
million as Eurodollar loans (as defined in the Loan Agreement). The ABR loans
incurred interest at an annual rate of 7.42% and is due quarterly and the
Eurodollar loans incurred interest at an annual rate of 7.41% and is due either
monthly or as specified in the applicable Borrowing Request or Interest Election
Request (as defined in the Loan Agreement). All outstanding balances and unpaid
interest under the Loan Agreement mature on November 17, 2000.
At December 31, 1999 and 1998, IP had $25 million and $50 million of
extendible floating rate notes outstanding, respectively. IP incurred interest
on such notes at a rate of 6.7% during 1999. The outstanding notes mature on
April 10, 2000.
<TABLE>
<CAPTION>
(Millions of dollars, except rates) 1999 1998
------------------ ------------------
<S> <C> <C>
Short-term borrowings at December 31, $641.2 $147.6
Weighted average interest rate at December 31, 6.8% 6.0%
Maximum amount outstanding at any month end $641.2 $370.9
Average daily borrowings outstanding during the $319.8 $321.0
year
Weighted average interest rate during the year 5.8% 5.7%
</TABLE>
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, was 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.
<PAGE>
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 was 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 agreed to a restructuring of the PCA in which IP acts as an agent
for Soyland in obtaining and scheduling power and energy and related
transmission from other parties. Pursuant to a comprehensive agreement dated
March 1, 1999, the remaining deferred revenue of $61 million was brought into
income in the first quarter of 1999 and, subsequent to December 31, 1999, IP has
no further power or energy supply obligations to Soyland.
NOTE 7 - INCOME TAXES
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
Balances as of December 31,
- -----------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
- -----------------------------------------------------------------------------------------------------------
Current -
Misc. book/tax recognition differences $ 20.3 $ 9.2
- -----------------------------------------------------------------------------------------------------------
Noncurrent -
Depreciation and other property related 51.8 150.4
Alternative minimum tax 227.8 140.5
Unamortized investment tax credit 13.8 18.1
Misc. book/tax recognition differences 106.5 389.7
- -----------------------------------------------------------------------------------------------------------
399.9 698.7
- -----------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 420.2 $ 707.9
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities
- -----------------------------------------------------------------------------------------------------------
Current -
Misc. book/tax recognition differences $ 1.9 $ 0.1
- -----------------------------------------------------------------------------------------------------------
Noncurrent -
Depreciation and other property related 1,252.5 1,292.8
Misc. book/tax recognition differences 172.7 240.7
- -----------------------------------------------------------------------------------------------------------
1,425.2 1,533.5
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $1,427.1 $1,533.6
===========================================================================================================
</TABLE>
<PAGE>
Income taxes included in the Consolidated Statements of Income consist of the
following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Years Ended December 31,
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes $ (87.3) $ 3.4 $ 70.3
- --------------------------------------------------------------------------------------------------------
Deferred taxes -
Property related differences 105.6 (30.0) 8.8
Alternative minimum tax (24.1) 16.4 41.7
Gain/loss on reacquired debt 4.9 3.4 .4
Clinton plant impairment - (982.8) -
Enhanced retirement and severance - - .5
Misc. book/tax recognition differences 43.6 (27.2) (34.1)
Investment tax credit (1.3) (8.3) (7.3)
Investment tax credit - Clinton plant impairment - (160.4) -
- --------------------------------------------------------------------------------------------------------
Total deferred taxes 128.7 (1,188.9) 10.0
- --------------------------------------------------------------------------------------------------------
Total income taxes (benefits) from continuing operations 41.4 (1,185.5) 80.3
- --------------------------------------------------------------------------------------------------------
Income tax (benefit), extraordinary item
Current tax expense - - (17.8)
Deferred tax expense - - (100.2)
- --------------------------------------------------------------------------------------------------------
Total extraordinary item - - (118.0)
- --------------------------------------------------------------------------------------------------------
Total income taxes (benefits) $ 41.4 $ (1,185.5) $ (37.7)
========================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
(Millions of Dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at the
federal statutory tax rate $ 27.2 $ (898.3) $ 64.7
Increases / (decreases) in taxes
resulting from -
State taxes, net of federal effect 6.0 (198.5) 8.7
Investment tax credit amortization (1.3) (8.3) (7.3)
Clinton plant impairment - (85.4) -
Depreciation not normalized 2.2 4.4 11.3
Preferred dividend requirement of subsidiary 0.9 1.0 1.7
Other - net 6.4 (.4) 1.2
- ------------------------------------------------------------------------------------------------------------------
Total income taxes (benefits) from continuing operations $ 41.4 $ (1,185.5) $ 80.3
==================================================================================================================
</TABLE>
<PAGE>
Combined federal and state effective income tax rates were 49.5%, 42.9%, and
43.4% for the years 1999, 1998, and 1997, respectively.
Illinova is subject to the Alternative Minimum Tax, and has an Alternative
Minimum Tax Credit carryforward at December 31, 1999, of approximately $227.8
million. This credit can be carried forward indefinitely to offset future
regular income tax liabilities in excess of the tentative minimum tax.
At December 31, 1999, the Company had approximately $51 million of federal
income tax net operating loss carryfoward available to offset future taxable
income. Under current tax law, this loss may be carried forward 20 years.
The Internal Revenue Service is currently auditing Illinova's consolidated
federal income tax returns for the years 1994 through 1997. The audits are not
expected to have a material adverse effect on Illinova's consolidated financial
position or results of operations.
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.
<PAGE>
NOTE 8 - LONG-TERM DEBT
<TABLE>
<CAPTION>
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage bonds of subsidiary--
6 1/2% series due 1999 $ - $ 72.0
7.95% series due 2004 - 39.0
7 3/8% series due 2021 (Pollution Control Series J) - 84.7
8 3/4% series due 2021 - 57.1
5.70% series due 2024 (Pollution Control Series K) - 35.6
7.40% series due 2024 (Pollution Control Series L) - 84.1
- --------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds of subsidiary - 372.5
- ---------------------------------------------------------------------------------------------------------------------------
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 95.7 100.0
6.0% series due 2003 90.0 100.0
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
7.5% series due 2009 250.0 -
8.0% series due 2023 - 229.0
5.70% series due 2024 (Pollution Control Series U) 35.6 -
7.40% series due 2024 (Pollution Control Series V) 84.1 -
7 1/2% series due 2025 97.6 148.5
5.40% series due 2028 (Pollution Control Series A) 18.7 18.7
5.40% series due 2028 (Pollution Control Series B) 33.8 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 1,287.3 1,211.8
- --------------------------------------------------------------------------------------------------------------------------
Total mortgage bonds of subsidiary 1,287.3 1,584.3
- --------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes of subsidiary--
5.39% due 2000 23.6 110.0
5.26% due 2001 100.0 100.0
5.31% due 2002 80.0 80.0
5.34% due 2003 85.0 85.0
5.38% due 2005 175.0 175.0
5.54% due 2007 175.0 175.0
5.65% due 2008 139.0 139.0
- --------------------------------------------------------------------------------------------------------------------------
Total transitional funding trust notes of subsidiary 777.6 864.0
- --------------------------------------------------------------------------------------------------------------------------
Variable rate long-term debt of subsidiary due 2017 75.0 75.0
Illinova 6.15% Senior Notes due 2001 30.0 30.0
Illinova 6.46% Senior Notes due 2002 20.0 40.0
Illinova 7 1/8% Senior Notes due 2004 100.0 100.0
- --------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 225.0 245.0
- --------------------------------------------------------------------------------------------------------------------------
2,289.9 2,693.3
Adjustment to Fair Value 16.4 31.4
Unamortized discount on debt (9.0) (15.5)
- --------------------------------------------------------------------------------------------------------------------------
Total long-term debt excluding obligations of IP Fuel Company 2,297.3 2,709.2
Obligations of IP Fuel Company - 132.0
- --------------------------------------------------------------------------------------------------------------------------
2,297.3 2,841.2
Long-term debt maturing within one year (236.4) (506.6)
- --------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 2,060.9 $ 2,334.6
==========================================================================================================================
</TABLE>
<PAGE>
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 are being amortized over its remaining life to
interest expense. See "Note 3 - Clinton Impairment, Quasi-Reorganization and
Sale of Clinton" for more information.
In November 1999, Illinova repurchased $20 million of 6.46% Senior Notes due
2002.
In June 1999, IP issued $250 million of 7.5% New Mortgage Bonds due 2009.
In January 1999, $57.1 million of 8 3/4% First Mortgage Bonds due 2021 and
$229 million of 8.0% 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 1/2%
First Mortgage Bonds due 1999 and $5 million of 7.95% First Mortgage Bonds due
2004.
During March 1999, IP redeemed $12.5 million of 7.95% First Mortgage Bonds due
2004. IP redeemed $39.9 million of 7 1/2% New Mortgage Bonds due 2025 in April
1999, and redeemed an additional $11 million of the 7 1/2% series in October
1999. Also, $10 million of 6.0% New Mortgage Bonds due 2003 were redeemed in
August 1999 and $4.3 million of 6.25% New Mortgage Bonds due 2002 were redeemed
in October 1999.
On July 20, 1999, IP's 1943 mortgage (First Mortgage) was retired. All
remaining First Mortgage debt was substituted with debt issued under the 1992
mortgage (New Mortgage) or defeased. New Mortgage Bonds of $35.6 million with a
coupon rate of 5.70% due 2024 (Series K) and $84.1 million with a coupon rate of
7.40% due 2024 (Series L) were substituted for First Mortgage Bonds with
identical terms and amounts (replacement Series U and V). With proceeds received
from the December 1998 securitization issuance, IP defeased $35.2 million of 6
1/2% First Mortgage Bonds due 1999, $16.1 million of 7.95% First Mortgage Bonds
due 2004 and $84.7 million of 7 3/8% First Mortgage Bonds due 2021.
During January 2000, IP repurchased $32 million of 7 1/2% New Mortgage Bonds
due 2025.
For the years 2000, 2001, 2002, 2003, and 2004, Illinova and IP have long-term
debt maturities in the aggregate of (in millions) $150.0, $30.0, $115.7, $190.0,
and $100.0, respectively.
During 1999, IP paid $132 million to extinguish all obligations of IP Fuel
Company. IP Fuel Company was formed for the purpose of leasing nuclear fuel to
IP for Clinton. There were no obligations of IP Fuel Company at December 31,
1999.
In December 1998, Illinois Power Special Purpose Trust issued $864 million of
Transitional Funding Trust Notes (the Notes) as allowed under the Illinois
Electric Utility Transition Funding Law in P. A. 90-561. As of December 31, 1999
IP had used $674.3 million of the funds to repurchase outstanding debt
obligations and $49.3 million to repurchase 1.8 million shares of Illinova
common stock. During 1999, IP paid down the Notes by $86.4 million. IP plans to
pay down such Notes ratably through 2008: therefore, at December 31, 1999, $86.4
million is classified as Long-term debt maturing within one year.
At December 31, 1999, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $96.1 million. This amount
is included in other deferred charges in the accompanying consolidated balance
sheet.
The remaining balance of net bondable additions at December 31, 1999, was
approximately $293 million.
<PAGE>
<TABLE>
<CAPTION>
NOTE 9 - PREFERRED STOCK OF SUBSIDIARY
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
Serial Preferred Stock of Subsidiary, cumulative, $50 par value --
Authorized 5,000,000 shares; 912,675 and 1,139,110 shares outstanding,
respectively
<S> <C> <C> <C> <C> <C> <C>
1999 1998 Redemption
Series Shares Shares Prices
4.08% 225,510 283,290 $ 51.50 $ 11.3 $ 14.1
4.26% 104,280 136,000 51.50 5.2 6.8
4.70% 145,170 176,000 51.50 7.2 8.8
4.42% 102,190 134,400 51.50 5.1 6.7
4.20% 143,760 167,720 52.00 7.2 8.4
7.75% 191,765 241,700 50.00 after July 1, 2003 9.6 12.1
Net premium on preferred stock 0.2 0.2
- ------------------------------------------------------------------------------------------------------------
Total Preferred Stock of Subsidiary, $50 par value $ 45.8 $ 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 and Preference Stock of Subsidiary $ 45.8 $ 57.1
- ------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable Preferred Securities of:
Illinois Power Capital, L.P.
Monthly Income Preferred Securities, cumulative, $25 liquidation
preference--Authorized 3,880,000 shares; 3,725,100 and $ 93.1 $ 97.0
3,880,000 shares outstanding, respectively
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 0.3 2.0
- ------------------------------------------------------------------------------------------------------------
Total Company Obligated Mandatorily Redeemable Preferred
Stock of Subsidiary $193.4 $199.0
- ------------------------------------------------------------------------------------------------------------
</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 is being amortized to interest expense over the minimum
remaining life of the securities. See "Note 3 - Clinton Impairment, Quasi-
Reorganization and Sale of Clinton" 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 mature on September 30, 2043, and are
redeemable at IP's 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 at IP's option, 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. Illinova and IP consolidate 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). Illinova
and IP consolidate the accounts of IPFI.
<PAGE>
During 1999, IP redeemed $11.3 million of various issues of Serial Preferred
Stock, and $3.9 million of Illinois Power Capital, L.P. tax advantaged MIPS.
Proceeds from the Transitional Funding Trust Notes were used for these
redemptions. The carrying amount of these securites was $1.7 million greater
than consideration paid which has been included in net income applicable to
common stock in the 1999 Consolidated Statement of Income.
Under the Restated Articles of Incorporation common stock dividends are
subject to the preferential rights of the holders of preferred and preference
stock.
NOTE 10 - 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 $1,616.0 million was eliminated by a $1,313.3 million restatement of
other assets and liabilities to their fair value and a transfer of $302.7
million from common stock equity. See "Note 3 - Clinton Impairment, Quasi-
Reorganization and Sale of Clinton" for additional information regarding the
effects upon retained earnings.
On December 15, 1999, IP sold Clinton to AmerGen, which resulted in a revision
to the impairment of Clinton-related assets and the previously accrued nuclear
investment exit-related costs. The net decrease in the impairment and the
accruals was $88.2 million, which was recognized as an increase in common stock
equity, revising the original effect of the 1998 quasi-reorganization on common
stock equity.
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. The
Illinova Investment Plus Plan provides for direct purchase of common stock and
reinvestment of 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 at the then current market price. Under this plan, 4,213,637 shares of
common stock were designated for issuance at December 31, 1999. 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.
<PAGE>
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.
IP financed the loan with funds borrowed under its bank credit agreements. The
loan and common shares became Illinova instruments on formation of Illinova in
May 1994. These shares are held in a Loan Suspense Account under the ESOP and
are released and allocated to the accounts of participating employees as the
loan is repaid by the Trustee with cash contributed by IP for company stock
matching and incentive compensation awards. Common dividends received on
allocated and unallocated shares held by the Plan are used to repay the loan
which then releases additional shares to cover dividends on shares held in
participating employees' accounts. The number of shares released when funds are
received by the Trustee is based on the closing price of the common stock on the
last day of the award period or the common stock dividend date. At December 31,
1999, 38,772 shares remain unallocated.
For the year ended December 31, 1999, 131,196 common shares were allocated to
salaried employees and 102,628 shares to employees covered under the Collective
Bargaining Agreement through the matching contribution feature of the ESOP
arrangement. Under the incentive compensation feature, 189,121 common shares
were allocated to employees for the year ended December 31, 1999. Using the
shares allocated method, IP recognized $5.2 million of expense in 1999. During
1999, 1998, and 1997, IP contributed $10.0 million, $4.7 million, and $5.0
million, respectively, to the ESOP. Interest paid on the ESOP debt was
approximately $.5 million in 1999, $.9 million in 1998, and $1.3 million in
1997, and dividends used for debt service were approximately $2.1 million in
1999, $2.2 million in 1998, and $2.3 million in 1997.
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. These stock-
based awards generally vest over three years, have a maximum term of 10 years
and have exercise prices equal to the market price on the date the awards were
granted. The following table outlines the activity under this Plan at
December 31, 1999.
<TABLE>
<CAPTION>
Year Options Grant Year Expiration Options Options
Granted Granted Price Exercisable Date Exercised Forfeited
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1992 62,000 $23.375 1996 6/10/02 45,000 10,500
1993 73,500 $24.250 1997 6/09/03 47,000 10,500
1994 82,650 $20.875 1997 6/08/04 36,600 4,400
1995 69,300 $24.875 1998 6/14/05 7,800 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 - -
1999 30,000 $24.688 2002 1/18/09 - -
1999 165,500 $24.281 2002 2/10/09 - -
1999 30,000 $21.781 2002 4/12/09 - -
1999 187,020 $31.125 2002 12/8/09 - -
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
In August 1999, the Board accelerated the vesting of stock options (other than
those granted to the CEO) contingent on merger consummation.
PRO FORMA DISCLOSURES In October 1995, the FASB issued FAS No. 123, "Accounting
for Stock-Based Compensation," effective for fiscal years beginning after
December 15, 1995. 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."
Had compensation expense for Illinova's stock options been recognized based on
the fair value on the grant date under the methodology prescribed by FAS 123,
Illinova's net income (loss) applicable to common stock and diluted earnings
(loss) per share for the three years ended December 31, would have been impacted
as shown in the following table (in millions, except per share).
<TABLE>
<CAPTION>
1999 1998 1997
----- ---------- --------
<S> <C> <C> <C>
Reported net income (loss) applicable to common stock $42.3 $(1,579.5) $(90.4)
Pro forma net income (loss) applicable to common stock $41.1 $(1,580.2) $(90.7)
Reported diluted earnings (loss) per common share $0.60 $ (22.04) $(1.22)
Pro forma diluted earnings (loss) per common share $0.59 $ (22.04) $(1.22)
</TABLE>
The fair value of options granted, which is amortized to expense over the
option vesting period in determining the pro forma impact, is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Expected life of options 10 years 10 years 10 years
<S> <C> <C> <C>
Risk-free interest rates 5.75% 5.88% 6.30%
Expected volatility of stock 33% 24% 19%
Expected dividend yield 4.4% 4.5% 5.3%
</TABLE>
The weighted average fair value of options granted during 1999, 1998, and 1997
was $6.44, $5.45, and $4.29 per share, respectively.
<PAGE>
NOTE 11 - 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
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 475.2 $ 417.6 $ 95.5 $ 89.4
Service cost 16.3 12.8 3.1 2.6
Interest cost 32.7 30.4 7.2 6.3
Participant contributions - - - 0.4
Plan amendments 0.4 2.0 - -
Actuarial (gain)/loss (53.8) 45.2 (0.9) 3.8
Special termination benefits 6.3 - - -
Curtailment (gain)/loss (22.6) - (8.9) -
Benefits paid (37.2) (32.8) (5.1) (7.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 417.3 $ 475.2 $ 90.9 $ 95.5
- -----------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 477.5 $ 432.1 $ 63.7 $ 49.7
Actual return on plan assets 120.6 73.7 9.8 9.2
Employer contributions 18.4 4.5 10.9 11.4
Participant contributions - - 0.8 0.4
Benefits paid (37.2) (32.8) (5.1) (7.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 579.3 $ 477.5 $ 80.1 $ 63.7
- -----------------------------------------------------------------------------------------------------------------------------------
Reconciliation of funded status
Funded status $ 162.0 $ 2.3 $ (10.8) $(31.8)
Unrecognized actuarial (gain)/loss (165.5) (32.1) (13.8) (7.3)
Unrecognized prior service cost 10.5 17.6 - -
Unrecognized transition obligation/(asset) (17.6) (21.9) 25.6 36.0
- -----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized (gain)/loss $ (10.6) $ (34.1) $ 1.0 $ (3.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Amounts recognized in the Consolidated Balance Sheets consist of:
Prepaid benefit cost $ 5.1 $ 1.9 $ 1.0 $ -
Accrued benefit liability (15.7) (36.0) - (3.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net amount recognized (gain)/loss $ (10.6) $ (34.1) $ 1.0 $ (3.1)
===================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assumptions as of December 31
Discount rate 8.0% 7.0% 8.0% 7.0%
Expected return on plan assets 9.5% 9.5% 9.5% 9.5%
Rate of compensation increase 4.5% 4.5% 4.5% 5.5%
Medical trend - initial trend 6.9% 6.9%
Medical trend - ultimate trend 5.5% 5.5%
Medical trend - year of ultimate trend 2005 2005
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost
Service cost $ 16.3 $ 12.8 $ 10.2 $ 3.1 $ 2.6 $ 1.9
Interest cost 32.7 30.4 28.2 7.2 6.3 5.9
Expected return on plan assets (40.7) (35.3) (31.7) (6.0) (4.4) (3.0)
Amortization of prior service cost 1.9 1.9 1.9 - - -
Amortization of transition 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 $ 6.0 $ 5.6 $ 8.6 $ 7.0 $ 7.2 $ 7.2
Additional cost/(income) due to FAS 88 $(12.7) - - (0.2) - -
- -----------------------------------------------------------------------------------------------------------------------------------
Total net periodic benefit cost/(income) $ (6.7) $ 5.6 $ 8.6 $ 6.8 $ 7.2 $ 7.2
===================================================================================================================================
For measurement purposes, a 6.9% health care trend rate was used for 2000. 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 1999:
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
1 Percentage 1 Percentage
Point Increase Point Decrease
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate effect on service cost and interest cost $ 1.3 $ (1.2)
Effect on accumulated postretirement benefit obligation 9.8 (8.9)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
Concurrent with the decision to exit Clinton operations, IP recognized a
pension plan curtailment gain of $11.9 million and additional postretirement
medical plan curtailment costs of $.7 million at December 31, 1998. These
amounts were recognized in the 1998 Consolidated Statement of Income; however,
these amounts are not reflected in the 1998 amounts in the above tables.
Revisions to the curtailment amounts resulted from the sale of Clinton. The
sale of Clinton resulted in a pension plan curtailment gain of $22.6 million and
a postretirement medical plan curtailment gain of $8.9 million. Unrecognized
prior service cost and transition obligation were immediately recognized as a
result of the Clinton sale curtailment in accordance with FAS 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," accounting methods.
The net result of FAS 88 accounting for the Clinton sale was a one-time
pension plan income item of $19.0 million and a postretirement medical plan
income item of $.2 million in addition to the ongoing plans' net periodic
pension expense. The 1999 pension plan curtailment gain of $19.0 million and the
postretirement medical plan curtailment gain of $.2 million were not recognized
in the 1999 Consolidated Statement of Income. The curtailment gains were
recognized as an adjustment to common stock equity, as explained in Note 3
"Clinton Impairment, Quasi-Reorganization and Sale of Clinton." These amounts
are reflected in the 1999 amounts in the above tables.
The supplemental executive retirement plan (SERP) accrued benefits were paid
as a lump sum to all participants as of December 31, 1999. As a result, IP
recognized an immediate one-time cost of $6.3 million and the SERP plan ceased
to exist as of December 31, 1999.
The former IP employees who are now employed by AmerGen due to the sale of
Clinton are considered to be terminated employees in the pension plans with the
following exceptions: (1) employees at Clinton who have not completed the
vesting requirements to qualify for benefits under the provision of the IP
pension plans can meet the service requirements for vesting by remaining
employed at AmerGen until the vesting requirement is fulfilled, and (2)
employees who remain at Clinton until age 55 are entitled to the same early
retirement benefit reductions as an active employee at IP who chooses to retire
between ages 55 and 62.
The former IP employees who are now employed by AmerGen due to the sale of
Clinton who have met the eligibility requirements for post retirement welfare
benefits will remain eligible for these benefits and continue to accrue service
towards these benefits while employed by AmerGen. Those employees who have not
yet met the eligibility requirement for the post retirement welfare plans, but
who are age 50 or over at the time of the sale, will be able to accrue service
at AmerGen towards the eligibility and benefits under the IP plans.
NOTE 12 - 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.
<PAGE>
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 because it is
not available and the cost to develop it is excessive. Therefore, the
information for 1998 and 1999 is presented under the format specified by FAS
131; the comparative information for 1999, 1998, and 1997 is presented in
accordance with FAS 14.
1999 AND 1998
Illinova is comprised of eight business groups. The business groups and their
principal services are as follows:
. Customer Service Business Group - transmission, distribution, and sale of
electric energy; distribution, transportation, and sale of natural gas.
. Wholesale Energy Business Group - fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities. Effective
October 1, 1999, the Wholesale Energy Business Group began operations as an
unregulated subsidiary, IPMI.
. Nuclear Generation Business Group - nuclear-fueled electric generation. The
nuclear assets were sold to AmerGen on December 15, 1999. See "Note 3 -
Clinton Impairment, Quasi-Reorganization and Sale of Clinton" for additional
information.
. 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.
. 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.
. 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 Financial Business Group, the Support
Services Business Group, and Corporate did not individually meet the minimum
threshold requirements for separate disclosure and are combined in the Other
category.
In 1998, three measures were used to judge segment performance: contribution
margin, cash flow, and return on net invested capital. Return on net invested
capital was deleted as a corporate measure in 1999.
<PAGE>
Illinova Corporation
<TABLE>
<CAPTION>
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Illinova
Customer Wholesale Energy Illinova
1999 Service Energy (5) Nuclear Partners Generating Other (6) Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 1,484.3 $ 406.2 $ 33.9 $ - $ - $ - $ 1,924.4
Diversified enterprise revenue - - - 408.3 86.8 5.3 500.4
Intersegment revenue (1) 4.5 458.5 146.4 - - (609.4) -
---------------------------------------------------------------------------------------
Total Revenue 1,488.8 864.7 180.3 408.3 86.8 (604.1) 2,424.8
Depreciation and amortization expense 94.5 101.7 6.8 - - - 203.0
Other operating expenses (1) 1,040.9 651.7 339.1 423.6 97.8 (560.2) 1,992.9
---------------------------------------------------------------------------------------
Operating income (loss) 353.4 111.3 (165.6) (15.3) (11.0) (43.9) 228.9
Interest expense (7) 105.5 71.1 (25.7) - - 12.6 163.5
AFUDC (4.2) - - - - - (4.2)
---------------------------------------------------------------------------------------
Net income (loss) before taxes 252.1 40.2 (139.9) (15.3) (11.0) (56.5) 69.6
Income tax expense (benefit) 94.9 14.4 (53.8) (4.8) 0.3 (9.6) 41.4
Miscellaneous-net 0.5 (1.3) (3.1) - (8.0) 0.9 (11.0)
Equity earnings in subsidiaries - - - (2.9) (10.0) - (12.9)
Interest revenue - - - - - (7.7) (7.7)
---------------------------------------------------------------------------------------
Net income (loss) after taxes 156.7 27.1 (83.0) (7.6) 6.7 (40.1) 59.8
Preferred dividend requirement and
carrying amount over consideration paid
for redeemed preferred stock 13.6 9.1 (3.6) - - (1.6) 17.5
---------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 143.1 $ 18.0 $ (79.4) $ (7.6) $ 6.7 $ (38.5) $ 42.3
====================================================================================================================================
Other information --
Total assets $ 2,507.8 $ 2,929.2 $ - $ 71.2 $269.4 $ 155.5 $ 5,933.1
Subsidiary's investment in equity
method investees - - - 10.7 225.7 - 236.4
Total expenditures for additions to
long-lived assets 111.1 180.2 - - - 7.0 298.3
====================================================================================================================================
Corporate Measures --
Contribution margin (2) $ 212.7 $ 67.8 $ (97.5) $ (7.6) $ 6.7 $ (32.6) $ 149.5
Cash flow (3) 125.5 (67.5) (242.9) (3.6) 30.3 38.6 (119.6)
Return on net invested capital (4) N/A N/A N/A N/A N/A N/A N/A
====================================================================================================================================
</TABLE>
(1) Intersegment revenue priced at 2.9 cents per kwh delivered for 1999.
Intersegment expense is reflected in other operating expenses for Customer
Service. Effective October 1, 1999, intersegment revenue is reflected at the
PPA price between IP and IPMI. Intersegment revenue and expense is shown for
management reporting purposes but is eliminated in consolidation.
(2) Contribution margin represented by net income before financing costs (net-
of-tax) and preferred dividend requirement.
(3) Cash flow before financing activities and strategic investments.
(4) Return on net invested capital was deleted as a corporate measure in 1999.
(5) Effective October 1, 1999, the Wholesale Energy Business Group began
operations as an unregulated subsidiary, IPMI. Results of IPMI's operations
are included in the Wholesale Energy Business Group.
(6) Other includes those segments that did not individually meet the minimum
threshold requirements for separate disclosure and elimination entries.
(7) Interest expense is allocated based on net invested capital of the segments.
<PAGE>
GEOGRAPHIC INFORMATION
(Millions of dollars)
- -----------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Revenues: (1)
United States $2,409.6 $2,425.8 $2,509.5
Foreign countries (Seven in 1999) 15.2 4.8 -
- -----------------------------------------------------------------------------
$2,424.8 $2,430.6 $2,509.5
=============================================================================
(Millions of dollars)
- -----------------------------------------------------------------------------
December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,645.5 $4,513.9 $4,590.4
Foreign countries (Nine in 1999) 192.1 135.8 120.8
- -----------------------------------------------------------------------------
$4,837.6 $4,649.7 $4,711.2
=============================================================================
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include plant, equipment, and investments in subsidiaries.
<PAGE>
Illinova Corporation
<TABLE>
<CAPTION>
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
Illinova
Customer Wholesale Energy Illinova
1998 * Service Energy Nuclear Partners Generating Other (6) 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 (474.2) 2,430.6
Depreciation and amortization expense 68.3 30.3 99.1 - - 5.9 203.6
Other operating expenses (1) 909.9 996.3 366.9 354.5 28.7 (468.2) 2,188.1
--------------------------------------------------------------------------------
Operating income (loss) 527.5 12.9 (462.1) (14.7) (12.8) (11.9) 38.9
Interest expense (7) 53.9 16.2 64.8 - - 11.1 146.0
AFUDC (0.1) (0.9) (2.5) - - 0.3 (3.2)
--------------------------------------------------------------------------------
Net income (loss) before taxes 473.7 (2.4) (524.4) (14.7) (12.8) (23.3) (103.9)
Income tax expense (benefit) 194.0 (5.4) (226.2) (4.2) 2.4 (2.9) (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 279.2 4.0 (298.3) (6.5) 8.1 (22.5) (36.0)
Preferred dividend requirement 7.3 2.4 10.1 - - - 19.8
--------------------------------------------------------------------------------
Net income (loss) $ 271.9 $ 1.6 $ (308.4) $ (6.5) $ 8.1 $ (22.5) $ (55.8)
Clinton plant impairment loss - - 1,523.7 - - - 1,523.7
--------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 271.9 $ 1.6 $(1,832.1) $ (6.5) $ 8.1 $ (22.5) $(1,579.5)
==================================================================================================================================
Other information --
Total assets (2) $ 2,290.4 $3,043.7 $ 241.4 $ 74.2 $ 221.4 $ 604.5 $ 6,475.6
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 (3) $ 306.7 $ 8.6 $ (261.3) $ (6.5) $ 8.1 $ (16.1) $ 39.5
Cash flow (4) 266.9 26.3 (266.1) 1.2 25.9 (91.0) (36.8)
Return on net invested capital (5) 16.1% 0.4% N/A 15.8% 4.0% N/A 1.0%
==================================================================================================================================
</TABLE>
* Restated to reflect change in management philosophy of allocation between
business segments and to make comparable to the 1999 segment information.
The restatement primarily relates to the transfer of the transition period
cost recovery asset from Nuclear to Customer Service.
(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 segment price. Intersegment revenue and expense is shown for
management reporting purposes but is eliminated in consolidation.
(2) Primary assets for Nuclear include decommissioning assets, shared general
and intangible plant and nuclear fuel.
(3) Contribution margin represented by net income before financing costs (net-
of-tax), preferred dividend requirement and Clinton plant impairment loss.
(4) Cash flow before financing activities.
(5) Return on net invested capital calculated as contribution margin divided
by net invested capital (includes Clinton plant impairment loss and
quasi-reorganization).
(6) Other includes those segments that did not individually meet the minimum
threshold requirements for separate disclosure and elimination entries.
(7) Interest expense is allocated based on net invested capital of the segments.
<PAGE>
1999
<TABLE>
<CAPTION>
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------
1999
--------------------------------------------
Diversified Total
Electric Gas Enterprises Corporation
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operation information -
Operating revenues $ 1,620.7 $ 303.7 $ 500.4 $ 2,424.8
Operating expenses, excluding provision for
income taxes 1,358.9 272.2 546.9 2,195.9
Clinton plant impairment loss - - - -
- ------------------------------------------------------------------------------------------------------
Pre-tax operating income 261.8 31.5 (46.5) 228.9
AFUDC 4.0 0.2 - 4.2
- ------------------------------------------------------------------------------------------------------
Pre-tax operating income, including AFUDC $ 265.8 $ 31.7 $ (46.5) $ 233.1
- ------------------------------------------------------------------------------------------------------
Other deductions, net (31.6)
Interest charges 163.5
Income tax - Clinton impairment -
Provision for income taxes 41.4
Preferred dividend requirements of subsidiary 19.2
- ------------------------------------------------------------------------------------------------------
Net income 40.6
Extraordinary item (net of taxes) -
Carrying amount over consideration
paid for redeemed preferred stock of subsidiary 1.7
- ------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 42.3
- ------------------------------------------------------------------------------------------------------
Other information -
Depreciation $ 125.6 $ 26.2 $ 24.8 $ 176.6
- ------------------------------------------------------------------------------------------------------
Capital expenditures $ 175.9 $ 21.3 $ 101.1 $ 298.3
- ------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $ 1,778.9 $ 461.0 $ 2,890.7 $ 5,130.6
- ------------------------------------------------------------------------------------------------------
Nonutility plant and other investments 13.2
Assets utilized for overall operations 789.3
- ------------------------------------------------------------------------------------------------------
Total assets $ 5,933.1
- ------------------------------------------------------------------------------------------------------
</TABLE>
*1999: Utility plant, materials and supplies, prepaid and deferred energy
costs, and transition period cost recovery.
1998
<TABLE>
<CAPTION>
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------
1998
--------------------------------------------
Diversified Total
Electric Gas Enterprises Corporation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operation information -
Operating revenues $ 1,781.4 $ 287.8 $ 361.4 $ 2,430.6
Operating expenses, excluding provision for
income taxes 1,747.6 252.1 392.0 2,391.7
Clinton plant impairment loss 2,666.9 - - 2,666.9
- ------------------------------------------------------------------------------------------------------
Pre-tax operating income (2,633.1) 35.7 (30.6) (2,628.0)
AFUDC 3.1 0.1 - 3.2
- ------------------------------------------------------------------------------------------------------
Pre-tax operating income, including AFUDC $(2,630.0) $ 35.8 $ (30.6) $(2,624.8)
- ------------------------------------------------------------------------------------------------------
Other deductions, net (25.6)
Interest charges 146.0
Income tax - Clinton impairment (1,143.2)
Provision for income taxes (42.3)
Preferred dividend requirements of subsidiary 19.8
- ------------------------------------------------------------------------------------------------------
Net income (1,579.5)
Extraordinary item (net of taxes) -
Carrying amount over consideration
paid for redeemed preferred stock of subsidiary -
- ------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $(1,579.5)
- ------------------------------------------------------------------------------------------------------
Other information -
Depreciation $ 177.9 $ 25.7 $ - $ 203.6
- ------------------------------------------------------------------------------------------------------
Capital expenditures $ 285.6 $ 25.9 $ - $ 311.5
- ------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $ 4,843.3 $ 457.9 $ 25.8 $ 5,327.0
- ------------------------------------------------------------------------------------------------------
Nonutility plant and other investments 228.6
Assets utilized for overall operations 920.0
- ------------------------------------------------------------------------------------------------------
Total assets $ 6,475.6
- ------------------------------------------------------------------------------------------------------
</TABLE>
*1998: Utility plant, nuclear fuel, materials and supplies, prepaid and deferred
energy costs, and transition period cost recovery.
1997
<TABLE>
<CAPTION>
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------
1999
--------------------------------------------
Diversified Total
Electric Gas Enterprises Corporation
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operation information -
Operating revenues $ 1,420.0 $ 353.9 $ 735.6 $ 2,509.5
Operating expenses, excluding provision for
income taxes 1,081.3 311.5 792.3 2,185.1
Clinton plant impairment loss - - - -
- -------------------------------------------------------------------------------------------------------
Pre-tax operating income 338.7 42.4 (56.7) 324.4
AFUDC 4.9 0.1 - 5.0
- -------------------------------------------------------------------------------------------------------
Pre-tax operating income, including AFUDC $ 343.6 $ 42.5 $ (56.7) $ 329.4
- -------------------------------------------------------------------------------------------------------
Other deductions, net (21.0)
Interest charges 144.2
Income tax - Clinton impairment -
Provision for income taxes 80.3
Preferred dividend requirements of subsidiary 21.5
- -------------------------------------------------------------------------------------------------------
Net income 104.4
Extraordinary item (net of taxes) (195.0)
Carrying amount over consideration
paid for redeemed preferred stock of subsidiary 0.2
- -------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (90.4)
- -------------------------------------------------------------------------------------------------------
Other information -
Depreciation $ 171.5 $ 24.1 $ - $ 195.6
- -------------------------------------------------------------------------------------------------------
Capital expenditures $ 201.3 $ 22.6 $ - $ 223.9
- -------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $ 4,508.1 $ 453.8 $ 1.2 $ 4,963.1
- -------------------------------------------------------------------------------------------------------
Nonutility plant and other investments 184.0
Assets utilized for overall operations 435.9
- -------------------------------------------------------------------------------------------------------
Total assets $ 5,583.0
- -------------------------------------------------------------------------------------------------------
</TABLE>
*1997: Utility plant, nuclear fuel, materials and supplies, deferred Clinton
costs, and prepaid and deferred energy costs.
<PAGE>
NOTE 13 - 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 early-adopted FAS 133 due to the quasi-
reorganization in 1998. Accordingly, assets and liabilities were adjusted to
reflect current fair value. See "Note 3 - Clinton Impairment, Quasi-
Reorganization and Sale of Clinton" for more information.
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------------------
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nuclear decommissioning trust funds $ - $ - $ 84.1 $ 84.1
Cash and cash equivalents 49.7 49.7 518.1 518.1
Mandatorily redeemable
preferred stock of subsidiary 193.4 169.9 199.0 200.0
Long-term debt (including current portion) 2,297.3 2,206.9 2,709.2 2,721.3
Notes payable 641.2 641.2 147.6 147.6
Other Financial Instruments:
Trading assets (liabilities)
Energy futures and forward contracts
IEP 1.5 1.5 (12.7) (12.7)
IP - - (28.0) (28.0)
IPMI (0.6) (0.6) - -
Non-Trading assets (liabilities)
Energy futures and forward contracts
IP - - (5.4) (5.4)
IPMI 0.9 0.9 - -
Non-Trading/Emission Allowances assets (liabilities)
Forward Contracts - IP - - (2.0) (2.0)
Option Contracts - IP - - (0.2) (0.2)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The majority of the long-term debt relates to electric transmission and
distribution operations and the gas utility operations. Such operations are
subject to regulation; therefore, gains or losses on the redemption of long-term
debt may be included in rates over a prescribed amortization period, if in fact
settled at amounts approximating those in the above table.
<PAGE>
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 For 1998 the fair values of available-for-
sale marketable debt securities and equity investments held by the Nuclear
Decommissioning Trust were based on quoted market prices at the reporting date
for those or similar investments. The balance of the fund was transferred to
AmerGen with the sale of the Clinton Power Station in December, 1999. See "Note
3 - Clinton Impairment, Quasi-Reorganization and Sale of Clinton" for more
information.
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 are stated at market value in accordance with the
accounting prescribed in FAS 133 and EITF 98-10. See "Note 14 - Financial and
Other Derivative Instruments" for more information. Fair value is determined
using quoted market prices or indices.
NOTE 14 - FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
TRADING ACTIVITIES Illinova, through its subsidiaries, IP, IEP and IPMI,
engages in the brokering and marketing of electricity and natural gas. IP
engaged in the brokering and marketing of electricity and natural gas until
September 1999. Effective October 1, 1999, IP's fossil generating assets were
transferred to IPMI. Consequently, all trading activities for the last quarter
of 1999 were conducted by IEP and IPMI. For more information regarding the
transfer of the fossil generating assets, see "Note 2 - Illinova Subsidiaries."
The subsidiaries 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, 1999 and 1998, there were no natural gas derivative instruments in
use.
<PAGE>
As of December 31, 1998, Illinova and its subsidiaries adopted EITF 98-10. IP,
IEP, and IPMI 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." Derivative assets and liabilities
are recorded in the Consolidated Balance Sheets at fair value with unrealized
gains and losses shown net in the Consolidated Statements of Income. IP, IPMI,
and IEP recorded realized gains and losses as components of operating revenues
and operating expenses in the Consolidated Statements of Income.
The notional quantities and average terms of commodity instruments held for
trading purposes at December 31, 1999 and 1998, are presented below:
- ----------------------------------------------------------------
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
- ----------------------------------------------------------------
1999:
Electricity
IPMI 400 MW 300 MW 1 yr
IEP 2,529 MW 2,672 MW 1 yr
1998:
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, 1999 and 1998, are presented below:
- ---------------------------------------------------
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
- ---------------------------------------------------
1999:
Electricity
IPMI $ 0.5 $ 1.1
IEP 5.9 4.4
- ---------------------------------------------------
$ 6.4 $ 5.5
- ---------------------------------------------------
1998:
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.
<PAGE>
The weighted average term of the trading portfolio, based on volume, is less
than one year. The 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
and availability of electricity and related transmission, Illinova, through its
subsidiary IP, entered into forward transactions, swaps, and options (energy
derivatives) until September 30,1999. These instruments are used to mitigate
risk with purchases, sales, and transmission of electricity (a portion of which
are firm commitments at the inception of the contract). The weighted average
maturity of these instruments is less than one year. Effective October 1, 1999,
IP's fossil generating assets were transferred to IPMI. Consequently, all non-
trading activities were performed by IPMI during the last quarter of 1999. For
more information regarding the transfer of the fossil generating assets, see
"Note 2 - Illinova Subsidiaries."
As of December 31, 1998, Illinova and its subsidiaries adopted FAS 133.
Illinova'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. In 1999, hedge accounting was not applied, and unrealized gains
and losses are shown net in the Consolidated Statements of Income. Illinova
recorded realized gains and losses as components of operating revenues and
operating expenses in the Consolidated Statements of Income.
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, 1999 and 1998, there were no interest
rate derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP entered into
forward contracts 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 forward contracts was 32,000 emission allowances with a fair value
of $2 million. The maximum term of the forward contracts was five years,
commencing in 1993. Both contracts expired in January 1999. At December 31,
1999, there were no forward contracts outstanding.
The notional quantities and the average term of the energy derivative
commodity instruments held for other than trading purposes at December 31, 1999
and 1998, follows:
- -------------------------------------------------------------
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
- -------------------------------------------------------------
1999:
Electricity
IPMI 260 MW 510 MW 1 yr
1998:
Electricity
IP 1,450 MW 1,050 MW 1 yr
- -------------------------------------------------------------
<PAGE>
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, 1999 and 1998, are presented below:
- --------------------------------------------------------
Fair Value Fair Value
(Millions of Dollars) Assets Liabilities
- --------------------------------------------------------
1999:
Electricity
IPMI $1.2 $0.3
1998:
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 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.
<PAGE>
<TABLE>
<CAPTION>
Illinova Corporation
NOTE 15 - 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
1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $ 548.4 $ 479.3 $ 900.8 $ 496.3
Operating income (loss) 63.7 60.0 131.4 (26.2)
Net income (loss) 16.9 9.0 50.7 (36.0)
Net income (loss) applicable to common stock 17.7 8.7 51.7 (35.8)
Earnings (loss) per common share
(basic and diluted) $ 0.25 $ 0.12 $ 0.74 $ (0.51)
Common stock prices and dividends
High 25 1/2 28 5/8 33 1/2 34 7/8
Low 21 20 3/4 26 11/16 28
Dividends declared $ 0.31 $ 0.31 $ 0.31 $ 0.31
First Quarter Second Quarter Third Quarter Fourth Quarter
1998 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 575.4 $ 547.3 $ 823.3 $ 484.6
Operating income (loss) 63.7 (51.1) 90.1 (2,730.7)
Net income (loss) 23.0 (47.0) 26.6 (1,582.1)
Net income (loss) applicable to common stock 23.0 (47.0) 26.6 (1,582.1)
Earnings (loss) per common share
(basic and diluted) $ 0.32 $ (0.66) $ 0.37 $ (22.13)
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 $ 0.31 $ 0.31 $ 0.31 $ 0.31
</TABLE>
Illinova common stock was listed on the New York Stock Exchange and the
Chicago Stock Exchange during 1999. The stock prices above are the prices
reported on the Composite Tape. There were 28,399 registered holders of common
stock at February 1, 2000. See "Note 16 - Subsequent Event" for discussion of
Illinova's merger activity.
NOTE 16 - SUBSEQUENT EVENT
DYNEGY MERGER On February 1, 2000, Dynegy, a Delaware corporation since renamed
Dynegy Holdings Inc. (Old Dynegy), and Illinova merged in a transaction (the
Merger) in which each of Old Dynegy and Illinova became wholly owned
subsidiaries of Dynegy Inc., a newly formed Illinois corporation (New Dynegy).
This Merger, which was approved by shareholders of both Old Dynegy and Illinova
on October 11, 1999, resulted in each share of Illinova common stock, no par
value per share, being converted into one share of New Dynegy Class A common
stock, no par value per share. This Merger will be accounted for under the
purchase method of accounting and Old Dynegy will be the acquirer for accounting
purposes.
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined balance sheet and statement of
operations (the "statements") are presented to give effect to the merger between
Dynegy and Illinova. The preparation of the statements required management of
Dynegy and Illinova to develop estimates and make assumptions that affected the
pro forma financial position and results of operations contained therein. Actual
results could differ from those estimates. The pro forma information was
prepared based on the following assumptions:
. For reporting purposes, the statements assume that Dynegy is the acquiring
company.
. Dynegy accounted for the transaction as a purchase for financial reporting
purposes.
. The statements are based on the historical consolidated financial statements
of Dynegy and Illinova under the assumptions and adjustments set forth in the
accompanying notes to the pro forma statements.
. The pro forma balance sheet dated December 31, 1999 assumes the merger and
the sale of the Clinton nuclear facility were both consummated on December
31, 1999, and adjusts Illinova's quasi-reorganization from a plant closure
and decommissioning presentation to an asset sale presentation (including the
impact of the power purchase agreement with the purchaser of the Clinton
nuclear facility). This statement also assumes that certain qualifying
facilities were sold effective December 31, 1999.
. The statement of operations for the year ended December 31, 1999, assumes the
merger, Illinova's quasi-reorganization, the sale of the Clinton nuclear
facility and the sale of certain qualifying facilities were all consummated
on January 1, 1999. Further, the pro forma presentation assumes an asset sale
presentation for the restated quasi-reorganization.
. The statements assume the goodwill resulting from the merger will be
amortized over a forty-year period. We have considered the technology,
industry and financial considerations that we deemed relevant impacting this
decision and have concluded that there is no persuasive evidence indicating
that a material portion of the value creation resulting from the combination
will dissipate over a shorter period than forty years.
. We have not reflected any revenue enhancements or cost savings in the
statements. However, the combination of the two companies is estimated to
create annual pre-tax revenue enhancements and cost savings ranging from $125
million to $165 million. Approximately two-thirds of the total annual
synergies are attributable to revenue enhancement opportunities with the
remaining one-third of the total annual synergies attributable to cost
savings. A significant portion of these annual revenue enhancements and cost
savings is estimated to be realized in the first year of combined operations.
. The allocation of the purchase price is based upon certain assumptions,
valuations and other studies that have not been finalized. The respective
management of Dynegy and Illinova are continuing to assess the strategic
nature and fit of certain assets and operations of the combined entity in
order to identify opportunities to monetize its investment in non-strategic
operations. Further, the respective managements are assessing the long-term
direction it will take relative to the combined company's human resource
initiatives. Finally, Dynegy management continues to assess financial
exposure to litigation, environmental, regulatory and other similar
contingencies acquired as part of the merger. Consequently, the determination
and allocation of purchase price as presented in the statements is considered
preliminary.
. The statements assume that zero percent of Dynegy Holdings' public
shareholders elected a cash payment of $16.50 in exchange for their stake in
Dynegy Holdings. Shareholders that made elections for cash may not have
received what they elected because the amount of cash to be paid in the
merger was fixed. If you were a public shareholder of Dynegy Holdings, for
each 100 shares of Dynegy Holdings common stock for which you elected to
receive cash, you received cash consideration with respect to no less than 63
shares of Dynegy common stock and no more than 84 shares of Dynegy common
stock.
The statements and the notes thereto should be read in conjunction with the
historical consolidated financial statements and related notes of Dynegy and
Illinova. These statements were prepared in accordance with rules and
regulations established by the Securities and Exchange Commission and are not
necessarily reflective of the actual or future results of operations or
financial position of the combined company.
1
<PAGE>
<TABLE>
<CAPTION>
DYNEGY INC.
UNAUDITED PRO FORMA BALANCE SHEET
==================================================================================================================================
DECEMBER 31, 1999
---------------------------------------------------------------------------------------
HISTORICAL PRO FORMA
----------------------------- --------------------------------------------------------
DYNEGY ILLINOVA ADJUSTMENTS CLINTON (F) COMBINED
-------------- ------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
(in millions)
CURRENT ASSETS:
Cash and cash equivalents $ 45.2 $ 49.7 $ --- $ --- $ 94.9
Accounts receivable, net 2,041.5 291.0 --- --- 2,332.5
Inventories 271.9 99.4 --- --- 371.3
Assets from risk-management activities 379.8 7.6 (1.2)(h) --- 386.2
Prepayments and other assets 66.7 111.8 40.5 (n) --- 219.0
-------- -------- --------- ---------- ---------
2,805.1 559.5 39.3 --- 3,403.9
-------- -------- --------- ---------- ---------
PROPERTY PLANT AND EQUIPMENT, NET 2,017.9 4,589.1 (160.6) (g) --- 6,446.4
-------- -------- --------- ---------- ---------
OTHER ASSETS:
Investment in unconsolidated affiliates 627.3 291.3 (188.1) (g) (n) --- 730.5
Assets from risk-management activities 452.9 --- --- --- 452.9
Transition period cost recovery --- 320.3 --- --- 320.3
Goodwill and other intangibles, net 357.8 --- 795.7 (a) (g) (n) --- 1,153.5
Other assets 264.2 172.9 --- --- 437.1
-------- -------- --------- ---------- ---------
1,702.2 784.5 607.6 --- 3,094.3
-------- -------- --------- ---------- ---------
TOTAL ASSETS $6,525.2 $5,933.1 $ 486.3 $ --- $12,944.6
======== ======== ========= ========== =========
CURRENT LIABILITIES:
Accounts payable $1,828.7 $ 178.7 $ --- $ --- $ 2,007.4
Accrued liabilities 184.0 185.6 84.5 (a) (l) --- 454.1
Liabilities from risk-management activities 334.1 5.8 (0.3)(h) --- 339.6
Notes payable --- 641.2 --- --- 641.2
Current portion of long-term debt 191.7 236.4 --- --- 428.1
-------- -------- --------- ---------- ---------
2,538.5 1,247.7 84.2 --- 3,870.4
LONG-TERM DEBT 1,333.9 2,060.9 538.0 (b) (c) (g) --- 3,932.8
OTHER LIABILITIES:
Liabilities from risk-management activities 321.3 --- --- --- 321.3
Deferred income taxes 335.2 1,063.4 1.8 (m) --- 1,400.4
Other long-term liabilities 486.8 299.9 91.9 (a) --- 878.6
-------- -------- --------- ---------- ---------
TOTAL LIABILITIES 5,015.7 4,671.9 715.9 --- 10,403.5
-------- -------- --------- ---------- ---------
COMPANY OBLIGATED PREFERRED SECURITIES OF
SUBSIDIARY TRUST 200.0 239.2 --- --- 439.2
STOCKHOLDERS' EQUITY:
Preferred stock 75.4 --- (14.4) (b) (d) --- 61.0
Class A common stock 1.6 --- 1,114.1 (a) (c) (d) (e) --- 1,115.7
Class B common stock --- --- 648.1 (b) --- 648.1
Additional paid-in capital 973.0 1,204.0 (2,177.0) (a) (c) (d) (e) --- ---
Other comprehensive income --- (0.2) 0.2 (e) --- ---
Retained earnings (deficit) 277.1 (44.5) 44.5 (e) (h) (l) --- 277.1
Less: treasury stock (17.6) (137.3) 154.9 (e) --- ---
-------- -------- --------- ---------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,309.5 1,022.0 (229.6) --- 2,101.9
-------- -------- --------- ---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,525.2 $5,933.1 $ 486.3 $ --- $12,944.6
======== ======== ========= ========== =========
========================================================================================================================+========
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
DYNEGY INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
==================================================================================================================================
YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------ ------------------------------------------------
DYNEGY ILLINOVA ADJUSTMENTS CLINTON (F) COMBINED
------------- ----------- ------------- --------------------------------
<S> <C> <C> <C> <C> <C>
(in millions, except per share data)
Revenues $15,430.0 $2,424.8 $(172.3) (g) $ (27.8) $17,654.7
Cost of sales 14,886.1 1,787.2 (125.4) (g) (h) (146.6) 16,401.3
--------- -------- ------- --------- ---------
OPERATING MARGIN 543.9 637.6 (46.9) 118.8 1,253.4
Depreciation 129.5 207.8 15.0 (g) (k) --- 352.3
General and administrative expenses 200.7 200.9 (43.7) (g) (i) (l) (1.4) 356.5
--------- -------- ------- --------- ---------
OPERATING INCOME 213.7 228.9 (18.2) 120.2 544.6
Equity in earnings of unconsolidated affiliates 79.9 12.9 (12.2) (g) --- 80.6
Other income, net 73.3 18.7 --- 4.6 96.6
Minority interest in income of subsidiaries (16.6) (19.2) --- --- (35.8)
Interest expense (78.2) (159.3) (36.5) (g) (j) --- (274.0)
Other expenses, net (45.5) --- --- --- (45.5)
--------- -------- ------- --------- ---------
INCOME BEFORE INCOME TAXES 226.6 82.0 (66.9) 124.8 366.5
Income tax provision 74.7 41.4 (17.3) (m) 49.9 148.7
--------- -------- ------- --------- ---------
NET INCOME $ 151.9 $ 40.6 $ (49.6) $ 74.9 $ 217.8
========= ======== ======= ========= =========
EARNINGS PER SHARE: PRO FORMA
Net Income (Loss) $ 151.9 $ 40.6 $ 217.8
Plus: Carrying amount over consideration
paid for redeemed preferred stock of a
subsidiary --- 1.7 ---
Less: preferred stock dividends (0.4) --- (24.7)
--------- -------- ---------
Net Income (Loss) applicable to common
stockholders $ 151.5 $ 42.3 $ 193.1
========= ======== =========
Basic Earnings (Loss) Per Share $ 0.98 $ 0.60 $ 1.40
========= ======== =========
Diluted Earnings Per Share $ 0.91 $ 0.60 $ 1.35
========= ======== =========
Basic Shares Outstanding 154.2 69.9 138.1
========= ======== =========
Diluted Shares Outstanding 167.0 69.9 143.0
========= ======== =========
===================================================================================================================================
</TABLE>
3
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) To reflect the purchase price allocation to goodwill. The adjustments
include the step-up applied to Illinova's common stock, estimated merger
costs incurred and capitalized by Dynegy Holdings and reserves related
to valuing certain contractual obligations to current market value and
recognition of certain other obligations, including the cost to register
certain shares issued in the transaction. The significant adjustments
comprising the purchase price allocated to goodwill are as follows (in
millions, except share prices):
Share price $ 23.913
Illinova common stock outstanding at December 31, 1999 69.980
---------
Fair value of stock issued 1,673.4
Less: Illinova's net equity at December 31, 1999 1,022.0
---------
Consideration in excess of Illinova's net book value 651.4
Reserves for contractual and other obligations 164.4
Merger costs 29.9
---------
Allocable purchase price 845.7
Less: other adjustments to goodwill (see note (g) and (n)) 50.0
---------
Goodwill value $ 795.7
=========
Concurrent with its decision to exit the Clinton nuclear facility,
Illinova effected a quasi-reorganization initially reflected in its
December 31, 1998 historical financial statements. 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. As a result, we assumed that the fair values
assigned to Illinova's assets and liabilities as part of the quasi-
reorganization remain materially correct and therefore the entire
purchase price in excess of Illinova's historical net book value was
allocated to goodwill. Dynegy continues to review the carrying value of
Illinova's assets and liabilities. The ultimate purchase price allocated
to Illinova's regulated and unregulated assets and liabilities by Dynegy
may vary from the Illinova assigned values as a result of various
factors, including market movements through the date of the acquisition,
differences in long-term business plans and varying conclusions
resulting from assessment of factors impacting valuation decisions.
(b) To recognize the estimated $200 million cash infusion by Chevron, the
exchange of Chevron's 7,815,363 shares of Dynegy Holdings Series A
Preferred Stock and the conversion of Chevron's 38,789,876 Dynegy
Holdings common stock shares into Class B common stock of Dynegy. The
value of the Class B common stock is calculated as follows (in millions,
except share numbers):
Historical cost basis of 7,815,363 shares of Series A
Preferred Stock $ 75.4
Par value of 38,789,876 shares of Dynegy Holdings common stock 0.4
Historical paid-in capital cost basis of 38,789,876 shares of
Dynegy Holdings common stock 372.3
Assumed Chevron cash infusion (reduction of long-term debt) 200.0
--------
Class B common stock value $ 648.1
========
(c) To recognize the re-purchase of an aggregate 65.6 million shares of
common stock (consisting of 32.8 million shares each from BG Holdings
and NOVA) at $16.50 per share. The pro ration assumed zero percent of
the identified Dynegy Holdings' public shareholders exercised their
right to a cash payment of $16.50 per share of Dynegy Holdings common
stock. The value deducted from the par value common stock and paid-in
capital of Dynegy Holdings is calculated as follows (in millions, except
share prices):
4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Share price $ 16.50
Aggregate BG Holdings and NOVA shares assumed exchanged
for cash 65.65
--------
Cash distribution (increase in long-term debt) 1,083.2
Less: par value of aggregate shares assumed exchanged
for cash 0.7
--------
Value deducted from paid-in capital $1,082.5
========
(d) To recognize the exchange of the remaining Dynegy Holdings common shares
owned by BG Holdings and NOVA, aggregating 11.9 million Dynegy Holdings
common shares, for shares of Dynegy Series A preferred stock shares
pursuant to the terms of the merger agreement (in millions, except share
prices).
Aggregate average cost basis of remaining BG Holdings
and Nova common shares $ 5.11
Assumed remaining common stock shares held by BG Holdings
and NOVA 11.93
-------
Value classified as Series A Preferred Stock 61.0
Value deducted from par value common stock 0.1
-------
Value deducted from paid-in capital $ 60.9
=======
(e) To reflect the reclassification of the net remaining common stock, paid-
in-capital and treasury stock values to Class A common stock due to
Dynegy's common stock being without a par value.
(f) To recognize the impact of the sale of the Clinton nuclear facility to
AmerGen. The year-end 1999 Illinova historical financial statements
reflect the impact of the sale of the Clinton nuclear facility to
Amergen, pursuant to the Purchase and Sale Agreement executed by
Illinova and AmerGen dated June 30, 1999. The pro forma adjustments
eliminate items of income and expense (principally operation and
maintenance expense) related to the facility and incurred by Illinova
during 1999 based on the assumption that the facility was sold on
January 1, 1999.
(g) To recognize the estimated financial impact of the sale of certain
qualifying facilities by Dynegy Holdings pursuant to requirements
mandated by the Public Utility Regulatory Polices Act of 1978.
(h) To eliminate the effect of Illinova's adoption of Statement of
Accounting Standard No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in order to standardize accounting policies of the
merged company.
(i) To recognize the elimination of compensation expense related to the
vesting of certain stock options held by Dynegy Holdings' employees
pursuant to the acceleration of vesting terms contained in the Merger
Agreement.
(j) To adjust historical interest expense to reflect the cost of the
increased indebtedness resulting from consummation of the merger. The
pro forma statements assume a 7 percent per annum interest rate on the
indebtedness incurred to consummate the merger under the terms
contemplated herein. A one-eighth percent variance from the assumed rate
would alter pre-tax interest expense by approximately $800,000 per
annum. The pro forma statements do not include an estimate of costs
associated with the merger financing as such costs are not considered
material to Dynegy's pro forma financial position or pro forma results
of operations.
(k) To adjust historical depreciation and amortization expense for the
preliminary purchase price allocation reflected herein.
5
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(l) To recognize the estimated pro forma merger expenses incurred (and
expensed) by Illinova.
(m) To recognize the estimated pro forma tax provision on the combined pro
forma adjustments.
(n) To adjust the historical cost of certain Illinova assets to estimated
fair market value.
6
