SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission Registrants; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-11327 Illinova Corporation 37-1319890
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62525
(217) 424-6600
1-3004 Illinois Power Company 37-0344645
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62525
(217) 424-6600
Indicate by check mark whether the registrants (1) have
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) have
been subject to such filing requirements for the past 90
days.
Illinova Yes X No
Corporation ---- ----
Illinois Power Yes X No
Company ---- ----
Indicate the number of shares outstanding of each of
the issuers' classes of common stock, as of the latest
practicable date:
Illinova Corporation Common stock, no par value, 73,721,037
shares outstanding at July 31, 1997
Illinois Power Company Common stock, no par value, 70,868,324
shares outstanding held by Illinova
Corporation at July 31, 1997
ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
This combined Form 10-Q is separately filed by Illinova
Corporation and Illinois Power Company. Information
contained herein relating to Illinois Power Company is filed
by Illinova Corporation and separately by Illinois Power
Company on its own behalf. Illinois Power Company makes no
representation as to information relating to Illinova
Corporation or its subsidiaries, except as it may relate to
Illinois Power Company.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Illinova Corporation
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Illinois Power Company
Consolidated Balance Sheets 7 - 8
Consolidated Statements of Income 9
Consolidated Statements of Cash Flows 10
Notes to Consolidated Financial Statements of
Illinova Corporation and
Illinois Power Company 11 - 14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations for Illinova Corporation
and Illinois Power Company 15 - 20
Part II. OTHER INFORMATION
Item 1: Legal Proceedings 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22 - 23
Exhibit Index 24
<TABLE>
PART I. FINANCIAL INFORMATION
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
<C> <C> <C>
JUNE 30, DECEMBER 31,
1997 1996
ASSETS (Unaudited)
(Millions of Dollars)
Utility Plant, at original cost
Electric (includes construction work
in progress of $197.0 million and
$212.5 million, respectively) $ 6,406.5 $ 6,335.4
Gas (includes construction work
in progress of $15.1 million and
$21.2 million, respectively) 652.8 646.1
---------- ----------
7,059.3 6,981.5
Less-Accumulated depreciation 2,497.0 2,419.7
---------- ----------
4,562.3 4,561.8
Nuclear fuel in process 5.8 5.3
Nuclear fuel under capital lease 111.9 96.4
---------- ----------
Total utility plant 4,680.0 4,663.5
---------- ----------
Investments and Other Assets 161.9 146.2
---------- ----------
Current Assets
Cash and cash equivalents 23.8 24.6
Accounts receivable (less allowance
for doubtful accounts of $3.0 million)
Service 144.5 138.8
Other 90.5 62.0
Accrued unbilled revenue 100.0 106.0
Materials and supplies, at average cost 126.6 113.2
Prepayments and other 44.8 24.1
---------- ----------
Total current assets 530.2 468.7
---------- ----------
Deferred Charges
Deferred Clinton costs 102.1 103.9
Recoverable income taxes 106.5 101.3
Other 241.9 229.2
---------- ----------
Total deferred charges 450.5 434.4
---------- ----------
$ 5,822.6 $ 5,712.8
========== ==========
</TABLE>
<TABLE>
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
<C> <C> <C>
JUNE 30, DECEMBER 31,
1997 1996
CAPITAL AND LIABILITIES (Unaudited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 200,000,000 shares
authorized; 75,681,937 shares issued,
stated at $ 1,425.7 $ 1,425.7
Less - Deferred compensation - ESOP 12.1 14.3
Retained earnings 261.7 233.0
Less - Capital stock expense 8.2 8.2
Less - 518,600, and 0 shares of common stock
in treasury, respectively, at cost 11.2 --
Preferred stock of subsidiary 96.2 96.2
Mandatorily redeemable preferred stock of
subsidiary 197.0 197.0
Long-term debt 100.0 --
Long-term debt of subsidiary 1,648.0 1,636.4
---------- ----------
Total capitalization 3,697.1 3,565.8
---------- ----------
Current Liabilities
Accounts payable 232.9 166.7
Notes payable 250.9 387.0
Long-term debt and lease obligations of
subsidiary maturing within one year 52.0 47.7
Other 136.7 146.6
---------- ----------
Total current liabilities 672.5 748.0
---------- ----------
Deferred Credits
Accumulated deferred income taxes 1,083.6 1,034.9
Accumulated deferred investment tax credits 212.1 215.5
Other 157.3 148.6
---------- ----------
Total deferred credits 1,453.0 1,399.0
---------- ----------
$ 5,822.6 $ 5,712.8
========== ==========
</TABLE>
<TABLE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
<C> <C> <C> <C> <C>
1997 1996 1997 1996
(Unaudited)
(Millions except per share)
Operating Revenues:
Electric $301.7 $282.6 $583.9 $561.3
Electric interchange 53.5 33.6 80.1 65.5
Gas 60.1 49.5 224.1 185.6
Diversified enterprises 127.6 7.7 225.2 14.1
---------- ---------- ---------- ----------
Total 542.9 373.4 1,113.3 826.5
---------- ---------- ---------- ----------
Operating Expenses:
Fuel for electric plants 52.2 59.5 97.5 126.1
Power purchased 45.6 13.3 81.4 23.1
Gas purchased for resale 22.8 32.8 122.5 105.8
Diversified enterprises 150.8 20.6 259.2 30.8
Other operating expenses 63.6 53.3 123.0 119.0
Maintenance 30.5 24.3 50.2 44.8
Depreciation & amortization 49.3 48.3 98.3 96.4
General taxes 33.0 31.6 71.7 69.4
---------- ---------- ---------- ----------
Total 447.8 283.7 903.8 615.4
---------- ---------- ---------- ----------
Operating Income 95.1 89.7 209.5 211.1
---------- ---------- ---------- ----------
Other Income and Deductions:
Miscellaneous-net (0.5) 6.7 (1.5) (7.2)
Equity earnings in 2.4 2.4 6.4 5.1
subsidiaries ---------- ---------- ---------- ----------
Total 1.9 9.1 4.9 (2.1)
---------- ---------- ---------- ----------
Income Before Interest
Charges and Income Taxes 97.0 98.8 214.4 209.0
---------- ---------- ---------- ----------
Interest Charges:
Interest expense 34.1 33.7 70.5 67.7
Allowance for borrowed
funds used during
construction (1.3) (1.9) (2.7) (3.6)
Preferred dividend
requirements of
subsidiary 5.4 5.7 10.9 11.3
---------- ---------- ---------- ----------
Total 38.2 37.5 78.7 75.4
---------- ---------- ---------- ----------
Income Before Income Taxes 58.8 61.3 135.7 133.6
Income Taxes 27.4 24.6 60.3 53.6
---------- ---------- ---------- ----------
Net Income 31.4 36.7 75.4 80.0
Carrying amount under
consideration paid for
redeemed preferred
stock of subsidiary - (0.5) - (0.5)
---------- ---------- ---------- ----------
Net Income Applicable to
Common Stock $31.4 $36.2 $75.4 $79.5
========== ========== ========== ==========
Earnings per common share $0.42 $0.48 $1.00 $1.05
Cash dividends declared per
common share $0.31 $0.28 $0.62 $0.56
Cash dividends paid per
common share $0.31 $0.28 $0.62 $0.56
Weighted average number of
common shares outstanding
during period 75,648,456 75,681,937 75,665,104 75,678,225
</TABLE>
<TABLE>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial
Statements)
SIX MONTHS ENDED
JUNE 30,
1997 1996
(Unaudited)
(Millions of Dollars)
<C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 75.4 $ 79.5
Items not requiring cash, net 132.2 114.8
Changes in assets and liabilities (18.0) 12.6
-------- --------
Net cash provided by operating
activities 189.6 206.9
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (67.6) (86.9)
Other investing activities (23.2) (56.5)
-------- --------
Net cash used in investing
activities (90.8) (143.4)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on common stock (46.8) (42.4)
Exercise of stock options -- 1.1
Repurchase of common stock (11.2) --
Redemptions -
Short-term debt (188.5) (303.0)
Long-term debt of subsidiary (150.2) (74.1)
Preferred stock of subsidiary -- (21.2)
Issuances -
Short-term debt 52.4 284.9
Long-term debt 250.0 --
Preferred stock of subsidiary -- 100.0
Other financing activities (5.3) 1.9
--------- ---------
Net cash used in financing
activities (99.6) (52.8)
--------- ---------
NET CHANGE IN CASH AND
CASH EQUIVALENTS (.8) 10.7
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 24.6 11.3
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 23.8 $ 22.0
========= =========
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
<C> <C> <C>
JUNE 30, DECEMBER 31,
1997 1996
ASSETS (Unaudited)
(Millions of Dollars)
Utility Plant, at original cost
Electric (includes construction work
in progress of $197.0 million and
$212.5 million, respectively) $ 6,406.5 $ 6,335.4
Gas (includes construction work
in progress of $15.1 million and
$21.2 million, respectively) 652.8 646.1
------------ ------------
7,059.3 6,981.5
Less-Accumulated depreciation 2,497.0 2,419.7
------------ ------------
4,562.3 4,561.8
Nuclear fuel in process 5.8 5.3
Nuclear fuel under capital lease 111.9 96.4
------------ ------------
Total utility plant 4,680.0 4,663.5
------------ ------------
Investments and Other Assets 6.9 14.5
------------ ------------
Current Assets
Cash and cash equivalents 20.4 12.5
Accounts receivable (less allowance
for doubtful accounts of $3.0 million)
Service 144.5 138.8
Other 14.4 51.1
Accrued unbilled revenue 100.0 106.0
Materials and supplies,
at average cost 125.8 112.2
Prepayments and other 41.6 23.7
------------ ------------
Total current assets 446.7 444.3
------------ ------------
Deferred Charges
Deferred Clinton costs 102.1 103.9
Recoverable income taxes 106.5 101.3
Other 250.6 241.0
------------ ------------
Total deferred charges 459.2 446.2
------------ ------------
$ 5,592.8 $ 5,568.5
============ ============
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
<C> <C> <C>
JUNE 30, DECEMBER 31,
1997 1996
CAPITAL AND LIABILITIES (Unaudited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 100,000,000 shares
authorized; 75,643,937 shares
issued, stated at $ 1,424.6 $ 1,424.6
Retained earnings 294.7 245.9
Less - Capital stock expense 8.2 8.2
Less - 4,775,613 and 3,410,897
shares of common stock in treasury,
respectively, at cost 113.7 86.2
Preferred stock 96.2 96.2
Mandatorily redeemable preferred stock 197.0 197.0
Long-term debt 1,648.0 1,636.4
------------ ------------
Total capitalization 3,538.6 3,505.7
------------ ------------
Current Liabilities
Accounts payable 151.6 149.7
Notes payable 250.9 310.0
Long-term debt and lease
obligations maturing
within one year 52.0 47.7
Other 132.1 148.1
------------ ------------
Total current liabilities 586.6 655.5
------------ ------------
Deferred Credits
Accumulated deferred income taxes 1,098.2 1,048.0
Accumulated deferred investment
tax credits 212.1 215.5
Other 157.3 143.8
------------ ------------
Total deferred credits 1,467.6 1,407.3
------------ ------------
$ 5,592.8 $ 5,568.5
============ ============
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
(Unaudited)
(Millions of Dollars)
<C> <C> <C> <C> <C>
Operating Revenues:
Electric $301.7 $282.6 $583.9 $561.3
Electric interchange 53.5 33.6 80.1 65.5
Gas 60.1 49.5 224.1 185.6
---------- ---------- ----------- ---------- --
Total 415.3 365.7 888.1 812.4
---------- ---------- ----------- ---------- --
Operating Expenses and
Taxes:
Fuel for electric plants 52.2 59.5 97.5 126.1
Power purchased 45.6 13.3 81.4 23.1
Gas purchased for resale 22.8 32.8 122.5 105.8
Other operating expenses 63.6 53.3 123.0 119.0
Maintenance 30.5 24.3 50.2 44.8
Depreciation & amortization 49.3 48.3 98.3 96.4
General taxes 33.0 31.6 71.7 69.4
Income taxes 35.7 27.7 72.0 64.8
---------- ---------- ----------- ----------
Total 332.7 290.8 716.6 649.4
---------- ---------- ----------- ---------- --
Operating Income 82.6 74.9 171.5 163.0
---------- ----------- ---------- ----------
Other Income and (0.2) 5.6 (1.4) (1.3)
Deductions, Net ---------- ---------- ---------- -----------
Income Before Interest 82.4 80.5 170.1 161.7
Charges ---------- ---------- ---------- -----------
Interest Charges and Other:
Interest expense 32.3 33.7 66.4 67.5
Allowance for borrowed
funds used during
construction (1.3) (1.9) (2.7) (3.6)
---------- ---------- ---------- -----------
Total 31.0 31.8 63.7 63.9
---------- ---------- ---------- -----------
Net Income 51.4 48.7 106.4 97.8
Less-Preferred dividend
requirements 5.4 5.7 10.9 11.3
Plus-Carrying amount
under consideration
paid for redeemed
preferred stock - (0.5) - (0.5)
---------- ---------- ---------- -----------
Net Income applicable to
common stock $ 46.0 $ 42.5 $ 95.5 $ 86.0
========== ========== ========== ===========
</TABLE>
<TABLE>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
SIX MONTHS ENDED
JUNE 30,
1997 1996
(Unaudited)
(Millions of Dollars)
<C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $106.4 $ 97.8
Items not requiring cash, net 133.7 120.7
Changes in assets and
liabilities (14.5) (1.2)
------------- ------------
Net cash provided by
operating activities 225.6 217.3
------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Construction expenditures (67.6) (86.9)
Other investing activities -- 1.8
------------- ------------
Net cash used in investing (67.6) (85.1)
activities ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Dividends on preferred and
common stock (58.0) (51.4)
Repurchase of common stock (27.5) (18.9)
Redemptions -
Short-term debt (111.5) (303.0)
Long-term debt (150.2) (74.1)
Preferred stock -- (21.2)
Issuances
Short-term debt 52.4 238.9
Long-term debt 150.0 --
Preferred Stock -- 100.0
Other financing activities (5.3) 1.9
------------- ------------
Net cash used in financing (150.1) (127.8)
activities ------------- ------------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 7.9 4.4
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 12.5 4.3
------------- ------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $20.4 $8.7
============= ============
</TABLE>
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Financial Statement note disclosures, normally included
in financial statements prepared in conformity with
generally accepted accounting principles, have been omitted
from this Form 10-Q pursuant to the Rules and Regulations of
the Securities and Exchange Commission (SEC). However, in
the opinion of Illinova Corporation (Illinova) and Illinois
Power Company (IP), the disclosures and information
contained in this Form 10-Q are adequate and not misleading.
See the consolidated financial statements and the
accompanying notes in Illinova's 1996 Annual Report to
Shareholders (included in the Proxy Statement), the
consolidated financial statements and the accompanying notes
in IP's 1996 Annual Report to Shareholders (included in the
Information Statement), Illinova's and IP's 1996 Form 10-K
filings to the SEC, and Illinova's and IP's Report on Form
10-Q for the quarter ended March 31, 1997, for information
relevant to the consolidated financial statements contained
herein, including information as to certain regulatory and
environmental matters and as to the significant accounting
policies followed.
In the opinion of Illinova, the accompanying unaudited
consolidated financial statements for Illinova reflect all
adjustments necessary to present fairly the Consolidated
Balance Sheets as of June 30, 1997 and December 31, 1996,
the Consolidated Statements of Income for the three months
and six months ended June 30, 1997 and 1996, and the
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996. In addition, it is Illinova's
and IP's opinion that the accompanying unaudited
consolidated financial statements for IP reflect all
adjustments necessary to present fairly the Consolidated
Balance Sheets as of June 30, 1997 and December 31, 1996,
the Consolidated Statements of Income for the three months
and the six months ended June 30, 1997 and 1996, and the
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996. Due to seasonal and other
factors which are characteristic of electric and gas utility
operations, interim period results are not necessarily
indicative of results to be expected for the year.
The consolidated financial statements of Illinova
include the accounts of Illinova, IP, Illinova Generating
Company (IGC), Illinova Insurance Company (IIC), and
Illinova Energy Partners, Inc. (IEPI). All significant
intercompany balances and transactions have been eliminated
from the consolidated financial statements. All non-utility
operating transactions are included in the sections titled
"Diversified enterprises", "Interest expense", "Income
taxes" and "Other Income and Deductions, Net" in Illinova's
Consolidated Statements of Income. This represents a format
change to Illinova's Consolidated Statements of Income and
subsequent reclassification of 1996 and previously stated
1997 amounts to conform to the new presentation.
The consolidated financial statements of IP include the
accounts of Illinois Power Capital, L.P. and Illinois Power
Financing I (IPFI). All significant intercompany balances
and transactions have been eliminated from the consolidated
financial statements. All non-utility operating transactions
are included in the section titled "Other Income and
Deductions, Net" in IP's Consolidated Statements of Income.
IP's consolidated financial position and results of
operations are currently the principal factors affecting
Illinova's consolidated financial position and results of
operations.
REGULATORY AND LEGAL MATTERS
OPEN ACCESS AND COMPETITION
IP continues to work with other interested parties in
the state on proposed legislation entitled the "Electric
Service Customer Choice and Rate Relief Law of 1997". IP
believes this legislation, as currently drafted (Senate Bill
55), will provide an orderly transition to direct access for
all customers, and balance financial stability for current
utility providers with customer choice.
Currently, Senate Bill 55 guarantees IP's residential
customers a ten percent decrease in electric rates beginning
January 1998 and an additional five percent decrease
effective in October 2000. Customers with demand at a
single site greater than 4 MW could choose their electric
generation supplier ("direct access") starting October 1999.
Customers with at least ten sites with at least 9.5 MW in
total demand could also have direct access starting October
1999. Direct access for the remaining non-residential
customers would occur in two phases: one-third in October
1999 and two-thirds on December 31, 2000. Direct access for
residential customers would be phased in in three stages:
10 percent in October 2000, 30 percent in 2001, and 60
percent in 2002. Although the specified residential rate
reductions and the introduction of direct access will lead
to lower electric service revenues, Senate Bill 55 is
designed to protect the financial integrity of electric
utilities in at least three ways: 1) departing customers
are obligated to pay transition charges, based on the
utility's lost revenue from that customer, adjusted to
deduct delivery charges the utility will continue to receive
from the customer, the market value of the freed-up energy,
and a mitigation factor to place some responsibility for
stranded cost mitigation on shareholders; 2) utilities are
provided the opportunity to lower their financing and
capital costs through the issuance of "securitized" bonds;
and 3) there is a provision for seeking rate relief in the
event that the change in law leads to the Company's interest
and preferred dividend coverage ratio falling below a
specified minimum based on a prescribed test. The extent
to which revenues are lowered will depend on a number of
factors including future market prices for wholesale and
retail energy, and load growth and demand levels in the
current IP service territory. The impact on net income will
depend on a number of factors including the ongoing costs of
doing business.
On May 30, the Illinois House of Representatives voted
to approve Senate Bill 55 and forwarded the bill to the
Senate for consideration. The bill is expected to go to the
Senate in the fall veto sessions scheduled for October 28-30
and November 12-14. Although Senate Bill 55 was approved by
a wide margin in the House, action on the bill by the Senate
cannot be predicted.
IP currently prepares its financial statements in
accordance with Statement of Financial Accounting Standards
No. 71, "Accounting for the Effects of Certain Types of
Regulation" (FAS 71). Reporting under FAS 71 allows
companies whose service obligations and prices are regulated
to maintain assets on their balance sheets representing
costs they reasonably expect to recover from customers,
through inclusion of such costs in their future rates. The
SEC has raised the issue of continued qualification to
report under FAS 71 for utilities in states that have
changed their utility laws to introduce competition, even if
the legislation provides for a transition to full
competition and for stranded cost recovery. The Emerging
Issues Task Force of the Financial Accounting Standards
Board (Task Force) concluded its deliberations regarding
application of FAS 71 accounting for regulatory transition
plans at its July 24 meeting. Their decision will require
the discontinuance of FAS 71 accounting at the date of
enactment of deregulation legislation for business segments
for which a plan of deregulation has been established.
However, the Task Force further concluded that regulatory
assets associated with a deregulated business segment which
will be recovered through tariffs charged to customers of a
regulated business segment should be associated with the
regulated segment from which the future cash recovery is
expected (not the segment from which the costs originated),
and can therefore continue to be carried on the regulated
entity's balance sheet. In addition, the Task Force
concluded that regulatory assets that may arise after the
date of enactment of deregulation legislation are also
eligible for regulatory asset accounting on the regulated
segment's balance sheet.
Based on the provisions of Senate Bill 55 and
projections of future cash flows, management believes that
IP's regulatory assets which are currently associated with
its generation segment would be recoverable through rates
charged to transmission and distribution customers. In
addition, management believes that the provisions of Sentate
Bill 55 provide IP a means to recover a portion of its
generating plant investment during a transition period in
preparation for this business segment's entrance into a
competitive marketplace. IP's ultimate ability to recover
its full investment in generating plant will depend on the
interaction of all the provisions of the bill, and future
sales, expenses and cash flows. If regulatory reform
legislation substantially different from Senate Bill 55 is
passed in Illinois, management will assess the provisions of
the new law to determine its impact on the recoverability of
regulatory assets and plant investment currently associated
with its generation segment.
MANUFACTURED GAS PLANT SITES
IP's liability for Manufactured Gas Plant (MGP) site
remediation is $68.6 million. This amount represents IP's
best estimate of its remaining costs to remediate the 24 MGP
sites for which it is responsible. Because of the unknown
and unique characteristics of each site, IP is not able to
determine its ultimate liability for remediation. IP is
recovering MGP site cleanup costs from its customers through
tariff riders approved by the ICC in March 1996. In
anticipation of full recovery of MGP site costs, IP has
recorded a regulatory asset equivalent to its liability.
IP is continuing settlement discussions with its
insurance carriers regarding the recovery of estimated MGP
site remediation costs. Settlement agreements have been
reached with several carriers, and settlement negotiations
with other carriers are ongoing. Litigation related to a
lawsuit filed by IP in October 1995 seeking a declaratory
judgment and damages regarding insurance coverage for four
MGP sites is in progress. The trial has been scheduled for
January 1998. Any insurance recoveries received will cause
the regulatory asset to be reduced by the amount of the
recovery.
TREASURY STOCK
On June 10, 1997, the Illinova Board of Directors
approved the repurchase of up to four million shares of its
common stock. The shares may be acquired in the open
market through private negotiations and other transactions
in conformity with the rules of the SEC. Illinova has
repurchased 518,600 shares of its common stock in the open
market through June 30, 1997, at a cost of $11.2 million.
All repurchased shares are held as treasury stock and are
deducted from common equity at the cost of the shares
purchased.
IP repurchased 201,194 shares of its common stock from
Illinova on March 30, 1997, at a cost of $4.3 million and
1,163,522 shares on June 30, 1997, at a cost of $23.2
million. Through June 30, 1997, IP has purchased a total of
4,775,613 shares of its common stock, all of which are held
as treasury stock and are deducted from common equity at the
cost of the shares purchased.
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the Notes to the Consolidated
Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations
presented in Illinova's 1996 Annual Report to Shareholders
(included in the Proxy Statement), the Consolidated
Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations
presented in IP's 1996 Annual Report to Shareholders
(included in the Information Statement), and Illinova's and
IP's Form 10-K for the year ended December 31, 1996, and
Illinova's and IP's Report on Form 10-Q for the quarter
ended March 31, 1997.
ILLINOVA SUBSIDIARIES
IP is the primary business and subsidiary of Illinova
and engages in the generation, transmission, distribution
and sale of electric energy and the distribution,
transportation and sale of natural gas in the State of
Illinois.
IGC is a wholly-owned independent power subsidiary of
Illinova and invests in energy supply projects throughout
the world. IGC's strategy is to invest in and develop
"greenfield" power plants, acquire existing generation
facilities and provide power plant operations and
maintenance services.
IEPI is a wholly-owned subsidiary of Illinova formed in
May 1996. IEPI develops and markets energy-related services
to the unregulated energy market throughout the United
States and engages in the brokering and marketing of
electric power and gas.
IIC is a wholly-owned subsidiary of Illinova and was
licensed by the State of Vermont as a captive insurance
company in August 1996. The primary business of IIC is to
insure certain risks of Illinova and its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES AND REQUIREMENTS
Cash flows from operations during the first six months
of 1997 provided sufficient working capital to meet ongoing
operating requirements, to service existing common and IP
preferred stock dividends and debt requirements and all of
IP's construction requirements. Additionally, Illinova
expects 1997 cash flows will enable it to meet operating
requirements and continue to service IP's existing debt,
IP's preferred and Illinova's common stock dividends, IP's
sinking fund requirements and IP's anticipated construction
requirements. IP periodically repurchases shares of its
common stock from Illinova to provide Illinova cash for
operations, in accordance with authority granted by the ICC.
For more information, see "Treasury Stock" of the "Notes to
Consolidated Financial Statements" on page 13 of this
report.
On April 10, 1997, IP issued $150 million of Adjustable
Rate Pollution Control Revenue Refunding Bonds, due April 1,
2032. The proceeds were used on June 2, 1997, to retire
$150 million of IP's 7 5/8% Pollution Control First Mortgage
Bonds due 2016. IP issued a call notice on April 28, 1997,
to retire the 7 5/8% bonds at a premium of 103. The
transaction will allow IP to amend the 1943 Mortgage and
Deed of Trust to be generally consistent with the 1992
General Mortgage Indenture and Deed of Trust.
IP's capital requirements for construction were
approximately $68 million and $87 million during the six
months ended June 30, 1997 and 1996, respectively.
Illinova and IP currently have total lines of credit
represented by bank commitments of $150 million and $354
million, respectively. Both Illinova and IP have adequate
short- and intermediate-term bank borrowing capacity.
Currently, Illinova is reviewing additional financing
alternatives to provide cash for operations and has
remaining shelf authority with the SEC to issue $200 million
in debt securities.
Presently, IP's mortgage bonds are rated Baa1 by
Moody's, BBB+ by Duff & Phelps, and BBB by Standard &
Poor's. IP's preferred stock is rated Baa2 by Moody's and
BBB- by both Duff & Phelps and Standard & Poor's.
Illinova's $100 million senior notes issued February 5,
1997, have a rating of Baa3 and BBB- from Moody's and
Standard & Poor's, respectively.
ACCOUNTING ISSUES
IP is considering seeking regulatory approval to
increase the rate at which its generation-related assets are
expensed. Because, under current rulemaking, this change is
viewed as discretionary, and subject to regulatory approval,
the rate of such increase, if any, will be based on then
current conditions and financial performance. The increase
in expense could begin as early as the third quarter of 1997
and could amount to at least $400 million in the aggregate
through the year 2001, and potentially more thereafter,
depending on changes in regulation, the marketplace and
financial performance. This reduction in the net book value
of IP's generating assets should help position the Company
to operate competitively and profitably in the changing
business environment. This acceleration of expense would
have a direct impact on earnings but not on cash flow.
If Senate Bill 55 is enacted in substantially its
current form, an acceleration in the rate at which any
utility-owned assets are expensed can be undertaken without
regulatory approval provided such changes are consistent
with generally accepted accounting principles. Under this
legislation, up to an aggregate of $1 billion in expense
could be accelerated through the year 2008.
For further information on accounting issues, see "Open
Access and Competition" under "Regulatory and Legal Matters"
of the "Notes to Consolidated Financial Statements" on page
12 of this report.
REGULATORY MATTERS
ASSUMPTION OF CLINTON POWER STATION FROM SOYLAND
On March 13, 1997, the Nuclear Regulatory Commission
(NRC) issued an order approving transfer of the Clinton
Power Station (Clinton) operating license related to Soyland
Power Cooperative's (Soyland) 13.21% ownership, to IP, in
connection with the transfer from Soyland to IP of all of
Soyland's interest in Clinton pursuant to an agreement
reached in 1996. Soyland's title to the plant and directly
related assets such as nuclear fuel were transferred to IP
on May 1, 1997. Soyland's nuclear decommissioning trust
assets were transferred to IP on May 19, 1997, consistent
with IP's assumption of all of Soyland's ownership
obligations including those related to decommissioning. On
February 21, 1997, and as updated on May 28, 1997, IP filed
with the Federal Energy Regulatory Commission (FERC) an
amended Power Coordination Agreement (PCA) between Soyland
and IP entered into in furtherance of the transfer. FERC
approved the amended PCA on July 25, 1997. The Agreement
obligates Soyland to purchase all of its capacity and energy
needs from IP for at least ten years.
SOYLAND PCA
The amended and restated PCA provides that a contract
cancellation fee will be paid by Soyland to IP in the event
that a Soyland Cooperative member terminates its membership
from Soyland. On May 31, 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 the second quarter. Fee proceeds
of $2.3 million will be used to offset the costs of
acquiring Soyland's share of Clinton with the remaining
$18.5 million recorded as interchange revenue.
OPEN ACCESS AND COMPETITION
See "Open Access and Competition" under "Regulatory and
Legal Matters" of the "Notes to Consolidated Financial
Statements" on page 12 of this report.
ENVIRONMENTAL MATTERS
GAS MANUFACTURING SITES
See "Manufactured Gas Plant Sites" under "Regulatory
and Legal Matters" of the "Notes to Consolidated Financial
Statements" on page 13 of this report.
NITROGEN OXIDE
Regulators are continuing to examine potential
approaches for compliance with current federal ozone level
requirements impacted by nitrogen oxide (NOx) emissions. A
regulatory initiative by the Ozone Transport Assessment
Group (OTAG) to examine recommendations on reducing the
amount of ozone allegedly transported to the eastern United
States released its findings in June 1997. In addition to
fuel and vehicle emission suggestions, OTAG recommended the
United States Environmental Protection Agency (USEPA)
consider drastic cuts in midwestern utility NOx emissions.
The USEPA is expected to initiate a rulemaking in September
1997. By the year 2007, utilities are expected to install
additional NOx controls. Legislative action implementing
the initiative's findings could have a material adverse
impact on the financial position of Illinova and IP.
CLINTON POWER STATION
On September 6, 1996, leakage at a recirculation pump
seal caused IP operations personnel to shut down Clinton.
Clinton has not resumed operation because of, among other
things, a refueling, implementation of a new transformer
design, equipment performance problems, and the need to
maintain strict compliance with thousands of interrelated
procedures. While management now expects that Clinton may
start up in August, the electrical, mechanical, and nuclear
engineering aspects of such a power plant are complex, and
this complexity, combined with a regulatory and managerial
intolerance of procedural non-compliance, makes accurate
predictions on start-up difficult, and the length of the
ongoing outage uncertain.
On June 10, 1997, the NRC notified IP that violations
found during five assessments of Clinton's operations would
result in a $450,000 fine. The violations were found during
assessments of the reactor recirculation pump seal failure,
operations and engineering activities supporting operations,
Division III emergency diesel generator inoperability,
feedwater containment isolation check valve inoperability,
and the radiation protection program.
On June 25, 1997, the NRC requested a diagnostic
inspection of Clinton to diagnose both strong and weak areas
at the plant and document the effect of recent corrective
actions on employee performance. This inspection is a
result of the NRC's semi-annual update that named Clinton
among plants with declining performance. The Institute of
Nuclear Power Operations will help IP select a team of
independent inspectors from the nuclear industry to do the
study. The evaluation likely will begin in late August, and
should take about six weeks to complete. The impact of this
study on operations, and on start-up, is uncertain.
WOOD RIVER POWER STATION
On December 18, 1996, the control and computer rooms
for Wood River units 4 and 5 were damaged by an in-plant
fire. Unit 4 was returned to service on June 14, 1997. The
current estimate for Unit 5 returning to service is late
September 1997. The cost associated with restoring the
units to service is not expected to have a material adverse
impact on Illinova and IP.
POWER SUPPLY AND RELIABILITY
Electricity has been in short supply throughout
Illinois and Wisconsin this summer because of an unusually
high number of plant outages in this region. IP has
purchased replacement power, and has secured generation and
transmission capacity in order to minimize disruptions in
service. Recovery of the added energy and transmission
expense so incurred is subject to ICC approval in the annual
reconciliation of the Uniform Fuel Adjustment Clause (UFAC)
cost recovery mechanism, and a disallowance of such costs
could have a material adverse impact. IP has also incurred
additional expense by reactivating older power plants in
cold storage and upgrading electric transmission facilities
to maintain reliability.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Electric Operations - Electric revenues for the second
quarter of 1997 increased $19.1 million (a 6.7% increase)
compared to the second quarter of 1996. An increase in UFAC
recoveries accounted for $18.6 million of the increase in
revenues. In addition, electric interchange sales increased
$19.9 million primarily due to the receipt of an opt-out fee
from Soyland per the amended PCA. For more information, see
"Soyland PCA" under "Regulatory Matters" of the
"Management's Discussion and Analysis" on page 17 of this
report. Power purchased increased $32.3 million and fuel for
electric plants decreased $7.3 million due to lower
equivalent availability at nuclear and fossil facilities.
These factors combined to create a net increase in electric
margin of $14.0 million for the quarter.
Cooling degree days decreased approximately 72% during
the second quarter of 1997 compared to the same time frame
in 1996, resulting in a 9.5% decrease in kilowatt hour (kwh)
sales to the temperature-sensitive residential market.
Sales to the industrial and commercial markets remained
relatively stable.
The equivalent availability of Clinton was 0.0% and
92.4% for the three months ended June 30, 1997 and 1996,
respectively. Clinton was unavailable in the second quarter
of 1997 due to the continued outage which began September 6,
1996. The equivalent availability for IP's coal-fired
plants was 68.3% and 79.6% for the three months ended June
30, 1997 and 1996, respectively. The lower equivalent
availability for the fossil plants in 1997 was primarily due
to the fire and subsequent shut-down of the Wood River
fossil station in December 1996 and the scheduled 44 day
maintenance outage of Baldwin Unit 1.
Gas Operations - Gas revenues increased $10.6 million
(21.5%) although total therm sales (excluding transport)
decreased approximately 24 million (23%) during the second
quarter of 1997 compared to the same period last year. This
increase in gas revenues was primarily due to higher prices
($25.3 million) resulting from increases in the cost of gas
and collection of prior period underrecoveries. This
increase was partially offset by lower sales volumes ($15.2
million). For the quarter, gas costs decreased $10.0 million
largely due to a decrease in therms delivered to the system
as a result of milder weather.
Operation and Maintenance Expense - The current quarter
increase of $16.5 million dollars is primarily due to
operating and maintenance expenses associated with the
Clinton outage. In addition, the fossil plants have incurred
more expenses this quarter than the same period a year ago
due to start-up costs and alternative fuel modifications.
Diversified enterprises revenues increased $119.9
million for the second quarter of 1997 due to increased
activity at IEPI (formerly Illinova Power Marketing, Inc.).
However, diversified enterprises expenses increased $130.2
million which offsets the growth in revenues. IEPI buys and
sells electricity in the Western region of the United
States. In the normal course of doing business, IEPI is
required to incur price exposure on the electricity bought
or sold. Where the markets allow, IEPI hedges such exposure
through the use of electricity futures contracts or through
swaps with qualified counterparties. During 1996, IEPI
entered into electricity purchase and sale contracts with
delivery commencing in 1997. In June 1997, IEPI recognized
a loss of $13.8 million related to these contracts.
Miscellaneous - Net - The increase in deductions of
$7.2 million is largely a result of a second quarter 1996
change in an estimate relating to accruals previously
established for the planned disposition of property.
Earnings per Common Share - The earnings per common
share for Illinova during the second quarter of 1997 and
1996 resulted from the interaction of all of the factors
discussed herein.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Electric Operations - Electric margin increased $7.4
million for the first six months of 1997 compared to the
same time frame in 1996. Electric revenues increased $22.6
million as a result of an increase to the UFAC of $26.5
million. In addition, electric interchange sales increased
$14.6 million primarily due to the receipt of an opt-out fee
from Soyland per the amended PCA. For more information, see
"Soyland PCA" under "Regulatory Matters" of the
"Management's Discussion and Analysis" on page 17 of this
report.
Cooling degree days decreased 72% for the six month
period which resulted in a 5% decrease in kwh sales to the
temperature-sensitive residential market. There was also a
2.8% decrease in industrial kwh sales that partially offset
the UFAC increase. Industrial sales decreased due to
certain industrial customers purchasing electricity from
suppliers other than IP as part of an open-access experiment
that began in late April 1996. Sales to the commercial
market remained stable.
The equivalent availability of Clinton was 0% and 96.1%
for the six months ended June 30, 1997 and 1996,
respectively. Clinton was unavailable for the first six
months of 1997 due to the extended outage which began
September 6, 1996. The equivalent availability for IP's
coal-fired plants was 69% and 81.8% for the six months ended
June 30, 1997 and 1996, respectively. The decreased
availability is due to the fire and subsequent shut-down of
Wood River fossil station in December 1996 and the scheduled
44 day maintenance outage of Baldwin Unit 1.
Gas Operations - Gas revenues increased $38.5 million
in the first half of 1997. The increase in gas revenues was
primarily due to significantly higher Purchased Gas
Adjustment (PGA) revenues ($35.1 million), resulting from
increases in the cost of gas and collection of prior period
underrecoveries. This increase more than offset the
decrease caused by lower sales volumes. Therm sales
decreased a total of 15.8% (66.7 million therms). This
decrease represents a 12.1% (31.3 million) decrease in therm
sales to the residential sector, a 9.2% (9.9 million)
decrease in therm sales to the commercial sector, and a
44.8% (25.5 million) decrease to the industrial market.
Therms transported increased 41.8% (51.6 million) resulting
in a $1.9 million increase for the first six months compared
to last year. Gas purchased for resale increased $16.7
million during the first six months of 1997. Gas costs
increased due to higher prices charged by suppliers ($8.4
million) and the amortization of prior period
underrecoveries ($26.0 million). This increase was
partially offset by $17.7 million due to a decrease in the
amount of therms purchased and reduced storage costs.
Operation and Maintenance Expense - The increase of
$9.4 million is primarily due to increased company and
contractor labor at the fossil and nuclear plants due to
scheduled and unscheduled outages. These expenses were
partially offset by a decrease in customer accounts
expenses.
Miscellaneous - Net - The decrease in deductions of
$5.7 million is primarily a result of 1996 accruals recorded
for the planned disposition of property.
Earnings per Common Share - The earnings per common
share for Illinova during the first six months of 1997 and
1996 resulted from the interaction of all other factors
discussed herein.
PART II. OTHER INFORMATION
ITEM 1.
Legal Proceedings
See "Notes to Consolidated Financial Statements" in
Part I for a discussion of certain legal proceedings related
to manufactured gas plant sites.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed with this 10-Q are listed
on the Exhibit Index.
(b) Reports on Form 8-K since March 31, 1997:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
ILLINOVA CORPORATION
(Registrant)
By /s/ Leah Manning Stetzner
----------------------
Leah Manning Stetzner,
General Counsel and
Corporate Secretary
on behalf of
Illinova Corporation
Date: August 13, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
ILLINOIS POWER COMPANY
(Registrant)
By /s/ Leah Manning Stetzner
----------------------
Leah Manning Stetzner,
Vice President, General
Counsel, and Corporate
Secretary on behalf of
Illinois Power Company
Date: August 13, 1997
EXHIBIT INDEX
PAGE NO. WITHIN
SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
27 Financial Data Schedule UT
(filed herewith)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet, income statement, and cash flow statement of Illinova Corporation and is
qualified in its entirety by reference to the balance sheet, income statement,
and cash flow statement of Illinova Corporation.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4680
<OTHER-PROPERTY-AND-INVEST> 162
<TOTAL-CURRENT-ASSETS> 530
<TOTAL-DEFERRED-CHARGES> 451
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5823
<COMMON> 1394
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 262
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1656
197
96
<LONG-TERM-DEBT-NET> 1677
<SHORT-TERM-NOTES> 50
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 201
<LONG-TERM-DEBT-CURRENT-PORT> 11
0
<CAPITAL-LEASE-OBLIGATIONS> 71
<LEASES-CURRENT> 41
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1823
<TOT-CAPITALIZATION-AND-LIAB> 5823
<GROSS-OPERATING-REVENUE> 1113
<INCOME-TAX-EXPENSE> 60
<OTHER-OPERATING-EXPENSES> 904
<TOTAL-OPERATING-EXPENSES> 964
<OPERATING-INCOME-LOSS> 149
<OTHER-INCOME-NET> 5
<INCOME-BEFORE-INTEREST-EXPEN> 154
<TOTAL-INTEREST-EXPENSE> 79
<NET-INCOME> 75
0
<EARNINGS-AVAILABLE-FOR-COMM> 75
<COMMON-STOCK-DIVIDENDS> 47
<TOTAL-INTEREST-ON-BONDS> 59
<CASH-FLOW-OPERATIONS> 190
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0
</TABLE>
