UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission Registrants; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-11327 Illinova Corporation 37-1319890
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
1-3004 Illinois Power Company 37-0344645
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) have been subject to such
filing requirements for the past 90 days.
Illinova Yes X No
Corporation ---- ----
Illinois Power Yes X No
Company ---- ----
Indicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date:
Illinova Corporation Common stock, no par value, 69,939,337
shares outstanding at September 30, 1999
Illinois Power Company Common stock, no par value, 62,892,213
shares outstanding held by Illinova
Corporation at September 30, 1999
<PAGE>
ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
This combined Form 10-Q is separately filed by Illinova Corporation and Illinois
Power Company. Information contained herein relating to Illinois Power Company
is filed by Illinova Corporation and separately by Illinois Power Company on its
own behalf. Illinois Power Company makes no representation as to information
relating to Illinova Corporation or its subsidiaries, except as it may relate to
Illinois Power Company.
FORM 10-Q FOR THE QUARTER ENDED September 30, 1999
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 Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Illinois Power Company
Consolidated Balance Sheets 8 - 9
Consolidated Statements of Income 10
Consolidated Statements of Comprehensive Income 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements of
Illinova Corporation and
Illinois Power Company 13 - 32
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations for Illinova Corporation
and Illinois Power Company 33 - 54
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 55 - 57
Part II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 58
Signatures 59 - 60
Exhibit Index 61
2
<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant
<S> <C> <C>
Electric (includes construction work
in progress of $183.1 million and
$177.7 million, respectively) $5,570.8 $ 5,481.8
Gas (includes construction work
in progress of $16.6 million and
$15.3 million, respectively) 698.6 686.9
-------- ---------
6,269.4 6,168.7
Less - Accumulated depreciation 1,781.3 1,713.7
-------- ---------
4,488.1 4,455.0
Nuclear fuel 1.4 20.3
-------- ---------
Total utility plant 4,489.5 4,475.3
-------- ---------
Investments and Other Assets 269.5 246.9
-------- ---------
Current Assets
Cash and cash equivalents 55.0 518.1
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 136.8 105.9
Other 241.8 116.1
Accrued unbilled revenue 77.6 82.6
Materials and supplies, at average cost 98.0 90.8
Assets from commodity price risk
management activities 17.3 51.5
Prepayments and other 45.6 51.5
-------- ---------
Total current assets 672.1 1,016.5
-------- ---------
Deferred Charges
Transition period cost recovery 778.1 783.0
Other 307.9 279.6
-------- ---------
Total deferred charges 1,086.0 1,062.6
-------- ---------
$6,517.1 $ 6,801.3
======== =========
</TABLE>
3
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<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1999 1998
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
<S> <C> <C>
Capitalization
Common stock -
No par value, 200,000,000 shares authorized;
75,681,937 shares issued, stated at $1,319.9 $ 1,319.7
Less - Deferred compensation - ESOP 2.5 6.8
Retained earnings - accumulated since 1/1/99 13.0 -
Accumulated other comprehensive income 1.2 -
Less - Capital stock expense 7.2 7.3
Less - 5,742,600 shares of common stock
in treasury, at cost 138.3 138.7
-------- ---------
Total common stock equity 1,186.1 1,166.9
Preferred stock of subsidiary 46.5 57.1
Company obligated mandatorily redeemable
preferred stock of subsidiary 193.4 199.0
Long-term debt 175.1 176.1
Long-term debt of subsidiary 1,943.5 2,158.5
-------- ---------
Total capitalization 3,544.6 3,757.6
-------- ---------
Current Liabilities
Accounts payable 211.8 256.5
Notes payable 387.1 147.6
Long-term debt and lease obligations
of subsidiary maturing within one year 236.4 506.6
Liabilities from commodity price
risk management activities 19.0 99.8
Other 336.2 203.8
-------- ---------
Total current liabilities 1,190.5 1,214.3
-------- ---------
Deferred Credits
Accumulated deferred income taxes 989.4 964.0
Accumulated deferred investment tax credits 38.5 39.6
Decommissioning liability 520.2 567.4
Other 233.9 258.4
-------- ---------
Total deferred credits 1,782.0 1,829.4
-------- ---------
$6,517.1 $ 6,801.3
======== =========
</TABLE>
4
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<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(Unaudited)
(Millions of dollars except per share)
Operating Revenues:
<S> <C> <C> <C> <C>
Electric $ 385.9 $ 392.0 $ 917.8 $ 973.1
Electric interchange 247.7 285.1 397.9 494.1
Gas 42.7 38.2 211.0 204.6
Diversified enterprises 224.5 108.0 401.8 274.2
-------- -------- -------- --------
Total 900.8 823.3 1,928.5 1,946.0
-------- -------- -------- --------
Operating Expenses:
Fuel for electric plants 77.8 73.4 189.2 183.0
Power purchased 199.1 317.7 297.5 644.2
Gas purchased for resale 20.4 15.3 109.9 103.7
Diversified enterprises 232.0 115.5 428.0 295.2
Other operating expenses 145.5 92.0 336.9 259.7
Maintenance 24.1 41.0 91.5 105.0
Depreciation & amortization 43.3 51.0 132.7 152.2
Amortization of regulatory asset 1.5 - 9.2 -
General taxes 25.7 27.3 78.5 100.3
-------- -------- -------- --------
Total 769.4 733.2 1,673.4 1,843.3
-------- -------- -------- --------
Operating Income 131.4 90.1 255.1 102.7
-------- -------- -------- --------
Other Income and Deductions:
Miscellaneous-net 5.2 1.5 22.4 2.8
Equity earnings in affiliates 3.5 2.8 6.9 11.7
-------- -------- -------- --------
Total 8.7 4.3 29.3 14.5
-------- -------- -------- --------
Income Before Interest
Charges and Income Taxes 140.1 94.4 284.4 117.2
-------- -------- -------- --------
Interest Charges:
Interest expense 51.6 36.8 141.5 109.3
Allowance for borrowed funds
used during construction (0.8) (1.5) (4.0) (3.8)
Preferred dividend
requirements of subsidiary 4.7 5.0 14.4 14.9
-------- -------- -------- --------
Total 55.5 40.3 151.9 120.4
-------- -------- -------- --------
Income (Loss) Before Income Taxes 84.6 54.1 132.5 (3.2)
-------- -------- -------- --------
Income Taxes 33.9 27.5 55.9 (5.8)
-------- -------- -------- --------
Net Income 50.7 26.6 76.6 2.6
Carrying amount over
consideration paid for redeemed
preferred stock of subsidiary 1.0 - 1.5 -
-------- -------- -------- --------
Net Income Applicable to
Common Stock $ 51.7 $ 26.6 $ 78.1 $ 2.6
======== ======== ======== ========
Earnings per common share (basic
and diluted) $0.74 $0.37 $1.12 $0.04
Cash dividends declared per
common share $0.31 $0.31 $0.93 $0.93
Cash dividends paid per
common share $0.31 $0.31 $0.93 $0.93
Weighted average number of
common shares outstanding
during period 69,927,351 71,713,387 69,922,004 71,709,188
</TABLE>
5
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<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(Unaudited)
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net Income Applicable to Common Stock $51.7 $26.6 $78.1 $2.6
-------- -------- -------- --------
Other Comprehensive Income
Foreign currency translation adjustments - - (0.2) -
Unrealized gains (losses) on securities (0.9) - 2.4 -
-------- -------- -------- --------
Other comprehensive income, before tax (0.9) - 2.2 -
Income taxes on other comprehensive income 0.3 - (1.0) -
-------- -------- -------- --------
Other comprehensive income, net of tax (0.6) - 1.2 -
-------- -------- -------- --------
Comprehensive Income $51.1 $26.6 $79.3 $2.6
======== ======== ======== ========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
(Unaudited)
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 76.6 $ 2.6
Items not requiring cash, net 203.6 119.4
Changes in assets and liabilities (202.6) 99.3
-------- ---------
Net cash provided by operating activities 77.6 221.3
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (159.1) (190.5)
Other investing activities (37.5) (36.8)
-------- ---------
Net cash used in investing activities (196.6) (227.3)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (64.4) (66.7)
Reissuance of common stock 0.5 0.7
Capital lease payment (121.1) -
Redemptions -
Short-term debt (527.7) (372.4)
Long-term debt of subsidiary (596.4) (109.2)
Preferred stock of subsidiary (16.2) -
Issuances -
Short-term debt 767.1 213.5
Long-term debt 250.0 322.5
Other financing activities (35.9) (0.5)
-------- ---------
Net cash used in financing activities (344.1) (12.1)
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (463.1) (18.1)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 518.1 33.0
-------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 55.0 $ 14.9
======== =========
</TABLE>
7
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<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1999 1998
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
<S> <C> <C>
Utility Plant
Electric (includes construction work
in progress of $183.1 million and
$177.7 million, respectively) $5,570.8 $ 5,481.8
Gas (includes construction work
in progress of $16.6 million and
$15.3 million, respectively) 698.6 686.9
-------- ---------
6,269.4 6,168.7
Less - Accumulated depreciation 1,781.3 1,713.7
-------- ---------
4,488.1 4,455.0
Nuclear fuel 1.4 20.3
-------- ---------
Total utility plant 4,489.5 4,475.3
-------- ---------
Investments and Other Assets 2.4 2.6
-------- ---------
Current Assets
Cash and cash equivalents 34.6 504.5
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 136.8 105.9
Other 75.7 32.5
Accrued unbilled revenue 77.6 82.6
Materials and supplies, at average cost 96.8 90.4
Assets from commodity price risk
management activities 2.7 26.0
Prepayments and other 38.1 42.8
-------- ---------
Total current assets 462.3 884.7
-------- ---------
Deferred Charges
Transition period cost recovery 778.1 783.0
Other 307.3 284.2
-------- ---------
Total deferred charges 1,085.4 1,067.2
-------- ---------
$6,039.6 $ 6,429.8
======== =========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
SEPTEMBER 30, DECEMBER 31,
1999 1998
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
<S> <C> <C>
Capitalization
Common stock -
No par value, 100,000,000 shares
authorized; 75,643,937 shares issued,
stated at $1,382.4 $1,382.4
Retained earnings - accumulated since 1/1/99 49.1 -
Accumulated other comprehensive income 1.4 -
Less - Capital stock expense 7.2 7.3
Less - 12,751,724 shares of
common stock in treasury, at cost 286.4 286.4
-------- ---------
Total common stock equity 1,139.3 1,088.7
Preferred stock 46.5 57.1
Company obligated mandatorily
redeemable preferred stock 193.4 199.0
Long-term debt 1,943.4 2,158.5
-------- ---------
Total capitalization 3,322.6 3,503.3
-------- ---------
Current Liabilities
Accounts payable 188.9 216.2
Notes payable 330.1 147.6
Long-term debt and lease obligations
maturing within one year 236.4 506.6
Liabilities from commodity price
risk management activities 2.3 61.6
Other 168.3 150.5
-------- ---------
Total current liabilities 926.0 1,082.5
-------- ---------
Deferred Credits
Accumulated deferred income taxes 998.5 978.7
Accumulated deferred investment tax credits 38.5 39.6
Decommissioning liability 520.2 567.4
Other 233.8 258.3
-------- ---------
Total deferred credits 1,791.0 1,844.0
-------- ---------
$6,039.6 $6,429.8
======== =========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(Unaudited)
(Millions of dollars)
Operating Revenues:
<S> <C> <C> <C> <C>
Electric $385.9 $392.0 $ 917.8 $ 973.1
Electric interchange 247.7 285.1 397.9 494.1
Gas 42.7 38.2 211.0 204.6
------ ------ ------- -------
Total 676.3 715.3 1,526.7 1,671.8
------ ------ ------- -------
Operating Expenses and Taxes:
Fuel for electric plants 77.8 73.4 189.2 183.0
Power purchased 199.1 317.7 297.5 644.2
Gas purchased for resale 20.4 15.3 109.9 103.7
Other operating expenses 145.5 92.0 336.9 259.7
Maintenance 24.1 41.0 91.5 105.0
Depreciation & amortization 43.3 51.0 132.7 152.2
Amortization of regulatory asset 1.5 - 9.2 -
General taxes 25.7 27.3 78.5 100.3
Income taxes 45.8 31.1 82.5 5.2
------ ------ ------- -------
Total 583.2 648.8 1,327.9 1,553.3
------ ------ ------- -------
Operating Income 93.1 66.5 198.8 118.5
------ ------ ------- -------
Other Income and Deductions, Net 14.1 1.5 31.9 4.4
------ ------ ------- -------
Income Before Interest Charges 107.2 68.0 230.7 122.9
------ ------ ------- -------
Interest Charges and Other:
Interest expense 48.2 34.1 131.9 101.5
Allowance for borrowed funds
used during construction (0.8) (1.5) (4.0) (3.8)
------ ------ ------- -------
Total 47.4 32.6 127.9 97.7
------ ------ ------- -------
Net Income 59.8 35.4 102.8 25.2
Less - Preferred dividend
requirements 4.7 5.0 14.4 14.9
Plus - Carrying amount over
consideration paid for
redeemed preferred stock 1.0 - 1.5 -
------ ------ ------- -------
Net Income Applicable to
Common Stock $56.1 $30.4 $89.9 $10.3
====== ====== ======= =======
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
(Unaudited)
(Millions of Dollars)
<S> <C> <C> <C> <C>
Net Income Applicable to Common Stock $56.1 $30.4 $89.9 $10.3
----- ----- ----- -----
Other Comprehensive Income
Unrealized gains (losses) on securities (0.7) - 2.4 -
Income taxes on other comprehensive income 0.2 - (1.0) -
----- ----- ----- -----
Other comprehensive income, net of tax (0.5) - 1.4 -
----- ----- ----- -----
Comprehensive Income $55.6 $30.4 $91.3 $10.3
===== ===== ===== =====
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
(Unaudited)
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 102.8 $ 25.2
Items not requiring cash, net 199.0 127.9
Changes in assets and liabilities (213.7) 107.7
-------- ---------
Net cash provided by operating activities 88.1 260.8
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (159.1) (190.5)
Other investing activities (6.8) 2.0
-------- ---------
Net cash used in investing activities (165.9) (188.5)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred and common stock (54.8) (80.0)
Repurchase of common stock - (29.4)
Capital lease repurchase (121.1) -
Redemptions -
Short-term debt (459.7) (325.0)
Long-term debt (596.4) (109.2)
Preferred stock (16.2) -
Issuances -
Short-term debt 642.1 204.6
Long-term debt 250.0 252.5
Other financing activities (36.0) (0.7)
-------- ---------
Net cash used in financing activities (392.1) (87.2)
-------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (469.9) (14.9)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 504.5 17.8
-------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 34.6 $ 2.9
======== =========
</TABLE>
12
<PAGE>
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted from this Form 10-Q pursuant to the Rules and Regulations of
the Securities and Exchange Commission (SEC). However, in the opinion of
Illinova Corporation (Illinova) and Illinois Power Company (IP), the disclosures
and information contained in this Form 10-Q are adequate and not misleading. See
the consolidated financial statements and the accompanying notes in Illinova's
1998 Annual Report to Shareholders, (included in the Proxy Statement), the
consolidated financial statements and the accompanying notes in IP's 1998 Annual
Report to Shareholders (included in the Information Statement), Illinova's and
IP's 1998 Form 10-K filings to the SEC, and Illinova's and IP's 1998 Form 8-K
filings to the SEC for information relevant to the consolidated financial
statements contained herein, including information as to certain regulatory and
environmental matters and as to the significant accounting policies followed.
In the opinion of Illinova, the accompanying unaudited September 30,
1999, and audited December 31, 1998, consolidated financial statements for
Illinova reflect all adjustments necessary to present fairly the Consolidated
Balance Sheets as of September 30, 1999, and December 31, 1998, the Consolidated
Statements of Income for the three and nine months ended September 30, 1999 and
1998, the Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 1999 and 1998, and the Consolidated Statements of
Cash Flows for the nine months ended September 30, 1999 and 1998. In addition,
it is Illinova's and IP's opinion that the accompanying unaudited September 30,
1999, and audited December 31, 1998, consolidated financial statements for IP
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheets as of September 30, 1999, and December 31, 1998, the Consolidated
Statements of Income for the three and nine months ended September 30, 1999 and
1998, the Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 1999 and 1998, and the Consolidated Statements of
Cash Flows for the nine months ended September 30, 1999 and 1998. Due to
seasonal and other factors which are characteristic of electric and gas utility
operations, interim period results are not necessarily indicative of results to
be expected for the year.
The consolidated financial statements of Illinova include the accounts
of Illinova, IP, Illinova Generating Company (IGC), Illinova Insurance Company
(IIC), Illinova Energy Partners, Inc. (IEP), and Illinova Business Enterprises,
Inc. (IBE). All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements. All transactions for
Illinova's unregulated subsidiaries are included in the sections titled
"Diversified Enterprises," "Interest Charges," "Income Taxes" and "Other Income
and Deductions" in Illinova's Consolidated Statements of Income.
The consolidated financial statements of IP include the accounts of
Illinois Power Capital, L.P., Illinois Power Financing I (IPFI), Illinois Power
Securitization Limited Liability Company, and Illinois Power Special Purpose
Trust (IPSPT). 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.
13
<PAGE>
REGULATORY AND LEGAL MATTERS
OPEN ACCESS AND COMPETITION
The Illinois Customer Choice and Rate Relief Act of 1997, P.A. 90-561,
Illinois electric utility restructuring legislation, was enacted in December
1997. P.A. 90-561 gives IP's residential customers a 15 percent decrease in base
electric rates beginning August 1, 1998, and an additional 5 percent decrease
effective May 1, 2002. The rate decreases result in revenue reductions of
approximately $35 million in 1998, and expected revenue reductions of
approximately $70 million in each of the years 1999 through 2001, approximately
$90 million in 2002, and approximately $100 million in 2003, based on 1997
levels of consumption and compared to rates in effect in 1997.
Under P.A. 90-561, customers with demand greater than 4 MW at a single
site and customers with at least 10 sites which aggregate at least 9.5 MW in
total demand will be free to choose their electric generation suppliers ("direct
access") starting October 1999. Direct access for the remaining non-residential
customers will occur in two phases: customers representing one-third of the
remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002. IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates and remains obligated to provide delivery service to all at
regulated rates. Rates for delivery services for non-residential customers were
established in 1999, in proceedings mandated by P.A.
90-561.
Although the specified residential rate reductions and the introduction
of direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
Illinois Commerce Commission (ICC). The transition charges are calculated
by subtracting from a customer's fully bundled rate an amount equal to: a)
delivery charges the utility will continue to receive from the customer, b)
the market value of the freed-up energy, and c) a mitigation factor, which
is the higher of a fixed rate per kwh or a percentage of the customer's
bundled base rate. The mitigation factor increases during the transition
period. By specifically preventing IP from being held completely harmless
with regard to revenue loss, the mitigation factor is designed to provide
incentive for management to continue cost reduction efforts and generate
new sources of revenue;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) Utilities are permitted to seek rate relief in the event that the change in
law leads to their return on equity falling below a specified minimum based
on a prescribed test. Utilities are also subject to an "over-earnings" test
which requires them, in effect, to share with customers earnings in excess
of specified levels.
The extent to which revenues are affected by P.A. 90-561 will depend on
a number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's service territory. The impact on
net income will depend on, among other things, actual revenues and the cost of
doing business.
14
<PAGE>
ACCOUNTING MATTERS
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." Because P.A. 90-561 provides for market-based
pricing of electric generation services, IP discontinued application of FAS 71
for its generating segment in December 1997, when P.A. 90-561 was enacted.
In December 1998, Illinova's and IP's Boards of Directors decided to exit
the nuclear business through sale or shutdown of Clinton Power Station
(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 costs to sell. Consequently, IP wrote off the
book value of Clinton and accrued Clinton-related exit costs, which resulted in
a $1,372.2 million loss, net of income taxes, and an accumulated deficit in
Illinova's consolidated retained earnings balance of $1,419.5 million.
Illinova's and IP's Boards of Directors also chose in December 1998 to
effect a quasi-reorganization. A quasi-reorganization is an accounting procedure
that eliminates an accumulated deficit in retained earnings and permits a
company to proceed on much the same basis as if it had been legally reorganized.
The Company's assets and liabilities are restated to their fair values. The net
amount of these adjustments is added to or deducted from the deficit. The
remaining deficit in retained earnings was then eliminated by a transfer from
paid-in capital, giving the Company a "fresh start" with a zero balance in
retained earnings. The quasi-reorganization eliminated Illinova's consolidated
accumulated deficit in retained earnings of $1,419.5 million.
IP recognized the impairment of Clinton-related assets and accrued
exit-related costs in December 1998, based on expected plant closure as of
August 31, 1999. As of September 30, 1999 the Company continued to present the
financial statements based on eventual plant closure even though the Company is
currently pursuing regulatory approvals that would permit the sale of Clinton.
If such approvals are received in the fourth quarter of 1999, IP will adjust its
accruals for exit-related costs in accordance with the terms of the sale. The
estimated effect of adjusting the accruals for exit-related costs is
approximately a $300 million decrease. Reduction of exit-related accruals will
not immediately impact earnings. The decrease in the accruals will result in a
decrease in the book value of IP's fossil generation assets, which were written
up to fair value in conjunction with the December 1998 quasi-reorganization. The
write-up occurred coincident with the establishment of such exit-related
accruals. The approximate $300 million decrease in the book value of IP's fossil
generation assets will result in an estimated annual decrease in depreciation of
the fair value adjustment of $9.5 million. A current effect of presenting the
financial statements under a plant closure scenario is that a portion of the
decommissioning liability is reclassified to current liabilities. This current
amount represents the decommissioning expenditures expected to be incurred
within the next 12 months should the pending sale of Clinton not occur. As of
September 30, 1999, $68.9 million of decommissioning liability was included as
other current liabilities.
Implementation of a quasi-reorganization 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
15
<PAGE>
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 rules.
Illinova and IP recognized other comprehensive income for the nine
months ended September 30, 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 and IP have adopted the two-statement approach,
as provided for by FAS 130 and present a separate statement of comprehensive
income in addition to the income statement. Items included in Illinova's other
comprehensive income for the three and nine months ended September 30, 1999,
include unrealized gains on securities, foreign currency translations, and
related income taxes. IP's other comprehensive income for the three and nine
months ended September 30, 1999, comprised unrealized gains on securities held
in IP's nuclear decommissioning trust and related income taxes. There were no
items reported as other comprehensive income in 1998.
MANUFACTURED GAS PLANT SITES
IP has recorded an estimated liability for Manufactured Gas Plant (MGP)
site remediation of $58.5 million. This amount represents IP's current estimate
of the costs it will incur to remediate the 24 MGP sites for which it is
responsible. Because of the unknown and unique characteristics at each site, IP
cannot currently determine its ultimate liability for remediation of the sites.
In October 1995, to offset the burden imposed on its customers, IP
initiated litigation against a number of insurance carriers. Settlements or
settlements in principle have been reached with all thirty of the carriers.
Settlement proceeds recovered from the carriers will offset a significant
portion of the MGP remediation costs and will be credited to customers through
the tariff rider mechanism which the ICC has previously approved. Cleanup costs
in excess of insurance proceeds will be fully recovered from IP's transmission
and distribution customers.
DIVERSIFIED BUSINESS ACTIVITIES
For more information, see "Diversified Business Activities" of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 35 of this report.
TREASURY STOCK
Through September 30, 1999, IP has purchased a total of 12,751,724
shares of its common stock from Illinova, all of which are held as treasury
stock and deducted from common equity at the cost of the shares purchased. No
shares of IP common stock were purchased during the first nine months of 1999.
In October 1998, the Illinova Board approved the repurchase of up to 12 million
shares of Illinova common stock over the next six to twelve months in
conjunction with IP's issuance of securitized debt. The total amount of shares
that have been repurchased is 1.8 million shares. No additional repurchases are
planned at present. For more information, see "Liquidity and Capital Resources"
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 35 of this report.
As part of the contemplated merger with Dynegy, on June 13, 1999,
Illinova entered into a forward purchase agreement allowing purchases on the
open market of up to 6.64 million shares of Illinova common stock over the next
two years. No shares were purchased under this agreement, and it has been
terminated.
16
<PAGE>
FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
Trading Activities- Illinova, through its subsidiaries, IP and IEP,
engages in the brokering and marketing of electricity and natural gas. IP and
IEP use a variety of instruments, including fixed-price swap agreements,
variable-price swap agreements, exchange-traded energy futures and options
contracts, and over-the-counter forwards, swaps, and options.
As of December 31, 1998, Illinova and its subsidiaries adopted EITF
98-10. For more information regarding Illinova's adoption of new accounting
pronouncements, see Accounting Matters in this section on page 15 of this
report. At September 30, 1999, IP's and IEP's derivative assets and liabilities
were recorded in the Consolidated Balance Sheets at fair value with unrealized
gains and losses shown net in the Consolidated Statements of Income. IP and IEP
record realized gains and losses as components of operating revenues and
operating expenses in the Consolidated Statements of Income.
The notional quantities and average terms of commodity instruments held
for trading purposes at September 30, 1999, are presented below:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 600 MW 850 MW 1 year
IEP 6,135 MW 5,971 MW 1 year
Gas
IEP (in thousands) 2,990 MMBtu 2,990 MMBtu 1 year
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 September 30, 1999, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $ 2.2 $ .9
IEP 12.7 15.4
---- ----
14.9 16.3
Gas
IEP 1.8 1.3
--- ---
$16.7 $17.6
The fair value was estimated using quoted prices and indices where
available and the liquidity of the market for the instrument was considered. The
fair values are subject to volatility based on changing market conditions.
The weighted average term of the trading portfolio, based on volume, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows as these positions may be modified by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and Illinova's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
17
<PAGE>
Non-Trading Activities- To reduce the risk from market fluctuations in the price
of electricity and related transmission, Illinova, through its subsidiary IP,
enters into forward transactions, swaps, and options (energy derivatives). These
instruments are used to hedge expected purchases, sales, and transmission of
electricity (a portion of which are firm commitments at the inception of the
hedge). The weighted average maturity of these instruments is less than one
year.
Periodically, IP has used interest rate derivatives (principally
interest rate swaps and caps) to adjust the portion of its overall borrowings
subject to interest rate risk. As of September 30, 1999, there were no interest
rate derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP has
entered into swap agreements and written put options with other utilities to
mitigate the risk from market fluctuations in the price of the allowances. At
September 30, 1999, the notional amount of two emission allowance swaps was
126,925 units, with a recorded liability of $18.7 million, based on fair value
at delivery date. The maximum maturity of the swap agreements is 10 years. These
swap agreements do not fall under the scope of FAS 133.
As of December 31, 1998, Illinova and its subsidiaries adopted FAS 133.
IP's derivative assets and liabilities are currently recorded on the
Consolidated Balance Sheets at fair value with unrealized gains and losses shown
net in the Consolidated Statements of Income. Hedge accounting was not applied.
In the future, if hedge accounting is applied, unrealized gains and losses will
be shown as a component of Comprehensive Income in the equity section of the
Consolidated Balance Sheets. IP records realized gains and losses as components
of operating revenues and operating expenses in the Consolidated Statements of
Income. As of September 30, 1999, all non-trading derivative instruments were
accounted for using mark-to-market accounting.
The notional quantities and the average term of energy derivative
commodity instruments held for other than trading purposes at September 30,
1999, follows:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 150 MW 700 MW 1 year
In addition to the fixed-price notional volumes above, IP recorded a $25
million liability in 1998 for three "commodity for commodity" energy swap
agreements totaling 3,800 MW which are not considered derivatives as defined by
FAS 133. As of September 30, 1999, the swap liability decreased to $18.4
million. The decrease in the liability is due to IP commencing repayment of one
energy swap in January 1999, and a second swap was repaid in July and August. As
part of the second swap, IP delivered an additional 200 MW to be returned to IP
in 2000. This resulted in a receivable of $8.8 million.
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.
18
<PAGE>
The estimated fair values of energy derivative commodity instruments,
held for non-trading purposes at September 30, 1999, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $0.6 $1.4
The fair value was estimated using quoted prices and indices where
available, and considering the liquidity of the market for the instrument. The
fair values are subject to significant volatility based on changing market
conditions.
The average maturity and fair values discussed above are not necessarily
indicative of likely future cash flows. These positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions, market liquidity, and Illinova's risk management portfolio
needs and strategies. Terms regarding cash settlements of these contracts vary
with respect to the actual timing of cash receipts and payments.
SUBSEQUENT EVENTS
FOSSIL ASSET TRANSFER
Effective October 1, 1999, IP's fossil generating assets were transferred
to Illinois Power Marketing, Inc. (IPMI).
Approximately $2.8 billion of assets and liabilities were transferred from
IP to Illinova in exchange for a note receivable. The note receivable from
Illinova to IP, in the amount of approximately $2.7 billion, matures September
30, 2009, and bears interest at a rate of 7.5% per annum, payable semiannually
on the first day of October and April each year. Illinova then transferred these
assets to IPMI as an equity investment. IP has entered into a power purchase
agreement with IPMI that is similar to a requirements contract. IP will meet its
native load energy requirements first from Clinton output and the remainder from
IPMI. IP must purchase a minimum of 55% of tier 1 capacity annually, with at
least 40% of the tier 1 capacity being purchased monthly. Monthly tier 1
capacity ranges from 3,812 MW to 3,907 MW throughout the year. The effects of
these intercompany transactions are eliminated during the consolidation process,
making the net effect of these transactions zero.
ILLINOVA - SEGMENTS OF BUSINESS
In 1997, the FASB issued FAS 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement superseded FAS 14, "Financial Reporting
for Segments of a Business Enterprise," and established new standards for
defining a company's segments and disclosing information about them. The new
statement requires that segments be based on the internal structure and
reporting of a company's operations.
The Illinova enterprise comprises six separate corporations and eight functional
business groups. The business groups and their principal activities are as
follows:
o IP Customer Service Business Group - transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas
in Illinois.
19
<PAGE>
o IP Wholesale Energy Business Group - fossil-fueled electric generation in
Illinois, wholesale electricity transactions throughout the United States,
and dispatching activities.
o IP Nuclear Generation Business Group - nuclear-fueled electric generation
in Illinois.
o Illinova Energy Partners - energy-related products and services throughout
the United States and Canada.
o Illinova Generating Company - independent power projects throughout the
world.
o IP Financial Business Group - financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
o IP Support Services Business Group - specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
o Corporate - Illinova Corporation, Illinova Insurance Company and Illinova
Business Enterprises - holding company; insurance and risk products; and
miscellaneous business lines.
Of the above-listed segments, the IP Financial Business Group, the IP Support
Services Business Group, and Corporate did not individually meet the minimum
threshold requirements for separate disclosure and are combined in the Other
category.
In 1998, three measures were used to judge segment performance: contribution
margin, cash flow, and return on net invested capital. In 1999, two measures are
used to judge segment performance: contribution margin and cash flow. Omission
of return on net invested capital provides for increased focus on near-term
financial needs.
20
<PAGE>
<TABLE>
<CAPTION>
Illinova Corporation
Three Months Ended September 30, 1999 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
199
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $427.1 $234.6 $14.6 $ - $ - $ - $ 676.3
Diversified enterprise revenue - - - 205.2 18.9 0.4 224.5
Intersegment revenue (1) - 97.9 61.3 - - - 159.2
-----------------------------------------------------------
Total Revenue 427.1 332.5 75.9 205.2 18.9 0.4 1,060.0
Depreciation and amortization
expense 17.3 25.7 1.8 - - - 44.8
Other operating expenses (1) 250.6 286.5 110.1 208.4 20.7 7.5 883.8
-----------------------------------------------------------
Operating income (loss) 159.2 20.3 (36.0) (3.2) (1.8) (7.1) 131.4
Interest expense 22.3 24.2 1.8 - - 3.3 51.6
AFUDC (0.2) (0.6) - - - - (0.8)
-----------------------------------------------------------
Income (loss) before taxes 137.1 (3.3) (37.8) (3.2) (1.8) (10.4) 80.6
Income tax expense (benefit) 53.6 (3.2) (14.2) (1.0) (0.5) (0.8) 33.9
Miscellaneous - net 0.2 1.8 (1.0) - (0.2) (0.8) -
Equity earnings in affiliates - - - (0.6) (2.9) - (3.5)
Interest revenue - - (0.9) - - (4.3) (5.2)
-----------------------------------------------------------
Net income (loss) after taxes 83.3 (1.9) (21.7) (1.6) 1.8 (4.5) 55.4
Preferred dividend requirement and
carrying amount over (under)
consideration paid for redeemed
preferred stock 2.6 2.8 (0.7) - - (1.0) 3.7
----------------------------------------------------------
Net income (loss) applicable
to common stock $80.7 $(4.7) $(21.0) $(1.6) $1.8 $(3.5) $51.7
- ------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,716.7 $3,092.1 $182.8 $168.2 $259.1 $98.2 $6,517.1
Subsidiary's investment in
equity method investees - - - 10.2 212.1 - 222.3
Total expenditures for additions
to long-lived assets 28.7 (21.4) - - - 2.2 9.5
- ------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $95.7 $11.3 $(20.1) $(1.6) $1.8 $(2.6) $84.5
Cash flow (4) 10.9 19.3 (4.8) 2.2 1.9 44.4 73.9
- -----------------------------------------------------------------------------------------------
Return on net invested capital(5) 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. Intersegment
expense is reflected in other operating expenses for Customer Service.
(2) Primary assets for Nuclear include decommissioning assets and nuclear fuel.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic activities.
(5) Return on net invested capital is no longer a corporate measure in 1999.
21
<PAGE>
<TABLE>
<CAPTION>
Illinova Corporation
Three Months Ended September 30, 1998 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1998
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $428.4 $285.1 $1.8 $ - $ - $ - $715.3
Diversified enterprise revenue - - - 104.3 1.8 1.9 108.0
Intersegment revenue (1) - 141.4 (0.6) - - - 140.8
------------------------------------------------------------
Total Revenue 428.4 426.5 1.2 104.3 1.8 1.9 964.1
Depreciation and amortization
expense 17.1 7.7 24.8 - - 1.4 51.0
Other operating expenses (1) 225.6 392.4 93.1 108.2 3.9 (0.2) 823.0
------------------------------------------------------------
Operating income (loss) 185.7 26.4 (116.7) (3.9) (2.1) 0.7 90.1
Interest expense 14.0 3.7 16.5 - - 2.6 36.8
AFUDC (0.2) (0.5) (0.7) - - (0.1) (1.5)
------------------------------------------------------------
Income (loss) before taxes 171.9 23.2 (132.5) (3.9) (2.1) (1.8) 54.8
Income tax expense (benefit) 71.0 9.1 (56.8) (1.2) (0.3) 5.7 27.5
Miscellaneous - net 0.1 (1.4) 0.1 - (0.2) 0.6 (0.8)
Equity earnings in affiliates - - - (0.8) (2.0) - (2.8)
Interest revenue - - - - - (0.7) (0.7)
------------------------------------------------------------
Net income (loss) after taxes 100.8 15.5 (75.8) (1.9) 0.4 (7.4) 31.6
Preferred dividend requirement 1.9 0.5 2.6 - - - 5.0
----------------------------------------------------------
Net income (loss) applicable
to common stock $98.9 $ 15.0 $(78.4) $(1.9) $0.4 $(7.4) $ 26.6
- ------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $1,834.9 $722.9 $2,756.1 $60.0 $206.0 $ 91.3 $5,671.2
Subsidiary's investment in
equity method investees - - - 10.0 177.2 - 187.2
Total expenditures for additions
to long-lived assets 29.5 32.0 13.9 - - 1.6 77.0
- ------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $107.8 $ 16.3 $(66.5) $(1.9) $0.4 $(5.9) $50.2
Cash flow (4) 48.9 (71.4) (80.1) (2.2) 1.5 14.1 (89.2)
- ------------------------------------------------------------------------------------------------
Return on net invested capital (5) 8.4% 3.6% N/A N/A 0.2% N/A 1.4%
</TABLE>
(1) Intersegment revenue priced at 2.5 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service.
Nuclear reflects a replacement power expense for the increment of market
price over the intersegment price.
(2) Primary assets for Nuclear include plant, decommissioning assets, and
nuclear fuel.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic activities.
(5) Return on net invested capital calculated as contribution margin divided by
net invested capital.
22
<PAGE>
ILLINOVA GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Third Quarter 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $897.2 $822.1
Foreign countries (Seven) 3.6 1.2
------ ------
$900.8 $823.3
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,539.4 $4,632.4
Foreign countries (Nine) 181.1 136.4
-------- --------
$4,720.5 $4,768.8
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
23
<PAGE>
<TABLE>
<CAPTION>
Illinova Corporation
Nine Months Ended September 30, 1999 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1999
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,124.6 $380.5 $21.6 $ - $ - $ - $1,526.7
Diversified enterprise revenue - - - 329.0 71.3 1.5 401.8
Intersegment revenue (1) - 352.7 97.8 - - - 450.5
-----------------------------------------------------------
Total Revenue 1,124.6 733.2 119.4 329.0 71.3 1.5 2,379.0
Depreciation and amortization
expense 59.5 77.0 5.4 - - - 141.9
Other operating expenses (1) 735.7 548.4 259.1 338.4 77.1 23.3 1,982.0
-----------------------------------------------------------
Operating income (loss) 329.4 107.8 (145.1) (9.4) (5.8) (21.8) 255.1
Interest expense 60.9 65.2 5.8 - - 9.6 141.5
AFUDC (1.0) (3.0) - - - - (4.0)
-----------------------------------------------------------
Income (loss) before taxes 269.5 45.6 (150.9) (9.4) (5.8) (31.4) 117.6
Income tax expense (benefit) 104.2 14.8 (57.4) (2.8) 0.7 (3.6) 55.9
Miscellaneous - net 0.4 - (3.1) - (6.9) (3.0) (12.6)
Equity earnings in affiliates - - - (2.2) (4.7) - (6.9)
Interest revenue - - (2.8) - - (7.0) (9.8)
-----------------------------------------------------------
Net income (loss) after taxes 164.9 30.8 (87.6) (4.4) 5.1 (17.8) 91.0
Preferred dividend requirement and
carrying amount over/(under)
consideration paid for redeemed
preferred stock 8.1 8.6 (2.3) - - (1.5) 12.9
----------------------------------------------------------
Net income (loss) applicable
to common stock $156.8 $22.2 $(85.3) $(4.4) $5.1 $(16.3) $78.1
- ------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,716.7 $3,092.1 $182.8 $168.2 $259.1 $98.2 $6,517.1
Subsidiary's investment in
equity method investees - - - 10.2 212.1 - 222.3
Total expenditures for additions
to long-lived assets 78.8 79.1 - - - 5.2 163.1
- ------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $198.2 $65.1 $(83.5) $(4.4) $5.1 $(12.1) $168.4
Cash flow (4) 71.1 (119.5) (137.5) (2.4) 23.4 131.7 (33.2)
- ------------------------------------------------------------------------------------------------
Return on net invested capital (5) 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.
(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) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic investments.
(5) Return on net invested capital is no longer a corporate measure in 1999.
24
<PAGE>
<TABLE>
<CAPTION>
Illinova Corporation
Nine Months Ended September 30, 1998 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1998
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $1,172.9 $494.1 $4.8 $ - $ - $ - $1,671.8
Diversified enterprise revenue - - - 265.6 5.2 3.4 274.2
Intersegment revenue (1) - 373.4 (1.8) - - - 371.6
------------------------------------------------------------
Total Revenue 1,172.9 867.5 3.0 265.6 5.2 3.4 2,317.6
Depreciation and amortization
expense 50.9 22.6 74.3 - - 4.4 152.2
Other operating expenses (1) 679.9 828.0 261.5 276.3 12.8 4.2 2,062.7
------------------------------------------------------------
Operating income (loss) 442.1 16.9 (332.8) (10.7) (7.6) (5.2) 102.7
Interest expense 40.5 12.3 48.8 - - 7.7 109.3
AFUDC (0.8) (1.2) (1.6) - - (0.2) (3.8)
------------------------------------------------------------
Income (loss) before taxes 402.4 5.8 (380.0) (10.7) (7.6) (12.7) (2.8)
Income tax expense (benefit) 165.4 (0.9) (163.0) (2.9) (1.6) (2.8) (5.8)
Miscellaneous - net 0.4 (0.8) 0.1 (0.1) (0.4) 0.1 (0.7)
Equity earnings in affiliates - - - (3.2) (8.5) - (11.7)
Interest revenue - - - - - (2.1) (2.1)
------------------------------------------------------------
Net income (loss) after taxes 236.6 7.5 (217.1) (4.5) 2.9 (7.9) 17.5
Preferred dividend requirement 5.4 1.8 7.6 - - 0.1 14.9
----------------------------------------------------------
Net income (loss) applicable
to common stock $231.2 $ 5.7 $(224.7) $(4.5) $2.9 $(8.0) $ 2.6
- ------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $1,834.9 $722.9 $2,756.1 $60.0 $206.0 $91.3 $5,671.2
Subsidiary's investment in
equity method investees - - - 10.0 177.2 - 187.2
Total expenditures for additions
to long-lived assets 90.4 59.4 40.1 - - 4.4 194.3
- ------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $256.8 $10.8 $(189.1) $(4.5) $2.9 $(3.7) $73.2
Cash flow (4) 175.8 49.8 (232.1) 1.3 4.5 33.2 32.5
- ------------------------------------------------------------------------------------------------
Return on net invested capital (5) 19.9% 2.4% N/A N/A 1.5% N/A 2.0%
</TABLE>
(1) Intersegment revenue priced at 2.5 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service.
Nuclear reflects a replacement power expense for the increment of market
price over the intersegment price.
(2) Primary assets for Nuclear include plant, decommissioning assets, and
nuclear fuel.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic activities.
(5) Return on net invested capital calculated as contribution margin divided by
net invested capital.
25
<PAGE>
ILLINOVA GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Year-To-Date September 30, 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $1,916.3 $1,942.7
Foreign countries (Seven) 12.2 3.3
-------- --------
$1,928.5 $1,946.0
======== ========
(Millions of dollars)
- --------------------------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,539.4 $4,632.4
Foreign countries (Nine) 181.1 136.4
-------- --------
$4,720.5 $4,768.8
======== ========
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include plant, equipment, and investments in subsidiaries.
IP - SEGMENTS OF BUSINESS
IP comprises five business groups. The business groups and their principal
services are as follows:
o IP Customer Service Business Group - transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas
in Illinois.
o IP Wholesale Energy Business Group - fossil-fueled electric generation in
Illinois, wholesale electricity transactions throughout the United States,
and dispatching activities.
o IP Nuclear Generation Business Group - nuclear-fueled electric generation
in Illinois.
o IP Financial Business Group - financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
o IP Support Services Business Group - specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
Of the above-listed segments, the IP Financial Business Group and the IP Support
Services Business Group did not individually meet the minimum threshold
requirements for separate disclosure and are combined in the Other category.
In 1998, three measures were used to judge segment performance: contribution
margin, cash flow, and return on net invested capital. In 1999, two measures are
used to judge segment performance; contribution margin and cash flow. Omission
of return on net invested capital provides for increased focus on near-term
financial needs.
26
<PAGE>
<TABLE>
<CAPTION>
Illinois Power
Three Months Ended September 30, 1999 (Millions of Dollars)
Customer Wholesale Total
1999 Service Energy Nuclear Other Company
<S> <C> <C> <C> <C> <C>
Revenues from external customers $427.1 $234.6 $14.6 $ - $676.3
Intersegment revenue (1) - 97.9 61.3 - 159.2
-------------------------------------------------------------------------
Total Revenue 427.1 332.5 75.9 - 835.5
Depreciation and amortization
expense 17.3 25.7 1.8 - 44.8
Other operating expenses (1) 250.6 286.5 110.1 4.7 651.9
-------------------------------------------------------------------------
Operating income (loss) 159.2 20.3 (36.0) (4.7) 138.8
Interest expense 22.3 24.2 1.8 (0.1) 48.2
AFUDC (0.2) (0.6) - - (0.8)
-------------------------------------------------------------------------
Income (loss) before taxes 137.1 (3.3) (37.8) (4.6) 91.4
Income tax expense (benefit) 53.6 (3.2) (14.2) 1.0 37.2
Miscellaneous-net 0.2 1.8 (1.0) (0.4) 0.6
Interest revenue - - (0.9) (5.3) (6.2)
-------------------------------------------------------------------------
Net income (loss) after taxes 83.3 (1.9) (21.7) 0.1 59.8
Preferred dividend requirement and
carrying amount over/(under) consideration
paid for redeemed preferred stock 2.6 2.8 (0.7) (1.0) 3.7
-------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 80.7 $(4.7) $ (21.0) $ 1.1 $ 56.1
- --------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,716.7 $3,092.1 $182.8 $ 48.0 $6,039.6
Total expenditures for additions
to long-lived assets 28.7 (21.4) - 2.2 9.5
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $ 95.7 $ 11.3 $ (20.1) $ - $86.9
Cash flow (4) 10.9 19.3 (4.8) 54.6 80.0
Return on net invested capital (5) 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.
(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) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic activities.
(5) Return on net invested capital is no longer a corporate measure in 1999.
27
<PAGE>
<TABLE>
<CAPTION>
Illinois Power
Three Months Ended September 30, 1998 (Millions of Dollars)
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
<S> <C> <C> <C> <C> <C>
Revenues from external customers $428.4 $ 285.1 $ 1.8 $ - $715.3
Intersegment revenue (1) - 141.4 (0.6) - 140.8
-------------------------------------------------------------------------
Total Revenue 428.4 426.5 1.2 - 856.1
Depreciation and amortization
expense 17.1 7.7 24.8 1.4 51.0
Other operating expenses (1) 225.6 392.4 93.1 (3.6) 707.5
-------------------------------------------------------------------------
Operating income (loss) 185.7 26.4 (116.7) 2.2 97.6
Interest expense 14.0 3.7 16.5 (0.1) 34.1
AFUDC (0.2) (0.5) (0.7) (0.1) (1.5)
-------------------------------------------------------------------------
Income (loss) before taxes 171.9 23.2 (132.5) 2.4 65.0
Income tax expense (benefit) 71.0 9.1 (56.8) 7.2 30.5
Miscellaneous-net 0.1 (1.4) 0.1 (0.3) (1.5)
Interest revenue - - - 0.6 0.6
-------------------------------------------------------------------------
Net income (loss) after taxes 100.8 15.5 (75.8) (5.1) 35.4
Preferred dividend requirement 1.9 0.5 2.6 - 5.0
-------------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 98.9 $15.0 $ (78.4) $ (5.1) $ 30.4
- --------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $1,834.9 $ 722.9 $2,756.1 $ 32.3 $5,346.2
Total expenditures for additions
to long-lived assets 29.5 32.0 13.9 1.6 77.0
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $107.8 $16.3 $ (66.5) $(5.0) $ 52.6
Cash flow (4) 48.9 (71.4) (80.1) 68.8 (33.8)
Return on net invested capital (5) 8.4% 3.6% N/A N/A 1.4%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Intersegment revenue priced at 2.5 cents per kwh delivered for 1998.
Intersegment expense is reflected in other operating expenses for Customer
Service. Nuclear reflects a replacement power expense for the increment of
market price over the intersegment price for 1998.
(2) Primary assets for Nuclear include plant, decommissioning assets, and
nuclear fuel.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic activities.
(5) Return on net invested capital calculated as contribution margin divided by
net invested capital.
28
<PAGE>
ILLINOIS POWER GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Third Quarter 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $676.3 $715.3
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,473.6 $4,578.9
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
29
<PAGE>
<TABLE>
<CAPTION>
Illinois Power
Nine Months Ended September 30, 1999 (Millions of Dollars)
Customer Wholesale Total
1999 Service Energy Nuclear Other Company
<S> <C> <C> <C> <C> <C>
Revenues from external customers $1,124.6 $ 380.5 $ 21.6 $ - $1,526.7
Intersegment revenue (1) - 352.7 97.8 - 450.5
-------------------------------------------------------------------------
Total Revenue 1,124.6 733.2 119.4 - 1,977.2
Depreciation and amortization
expense 59.5 77.0 5.4 - 141.9
Other operating expenses (1) 735.7 548.4 259.1 10.9 1,554.1
-------------------------------------------------------------------------
Operating income (loss) 329.4 107.8 (145.1) (10.9) 281.2
Interest expense 60.9 65.2 5.8 - 131.9
AFUDC (1.0) (3.0) - - (4.0)
-------------------------------------------------------------------------
Income (loss) before taxes 269.5 45.6 (150.9) (10.9) 153.3
Income tax expense (benefit) 104.2 14.8 (57.4) 3.4 65.0
Miscellaneous-net 0.4 - (3.1) (0.7) (3.4)
Interest revenue - - (2.8) (8.3) (11.1)
-------------------------------------------------------------------------
Net income (loss) after taxes 164.9 30.8 (87.6) (5.3) 102.8
Preferred dividend requirement and
carrying amount over (under)
consideration paid for
redeemed preferred stock 8.1 8.6 (2.3) (1.5) 12.9
-------------------------------------------------------------------------
Net income (loss) applicable to
common stock $156.8 $ 22.2 $ (85.3) $ (3.8) $ 89.9
- --------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,716.7 $3,092.1 $182.8 $ 48.0 $6,039.6
Total expenditures for additions
to long-lived assets 78.8 79.1 - 5.2 163.1
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $198.2 $ 65.1 $ (83.5) $ (5.3) $174.5
Cash flow (4) 71.1 (119.5) (137.5) 141.2 (44.7)
Return on net invested capital (5) 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.
(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) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic investments.
(5) Return on net invested capital is no longer a corporate measure in 1999.
30
<PAGE>
<TABLE>
<CAPTION>
Illinois Power
Nine Months Ended September 30, 1998 (Millions of Dollars)
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
<S> <C> <C> <C> <C> <C>
Revenues from external customers $1,172.9 $ 494.1 $ 4.8 $ - $1,671.8
Intersegment revenue (1) - 373.4 (1.8) - 371.6
-------------------------------------------------------------------------
Total Revenue 1,172.9 867.5 3.0 - 2,043.4
Depreciation and amortization
expense 50.9 22.6 74.3 4.4 152.2
Other operating expenses (1) 679.9 828.0 261.5 (1.9) 1,767.5
-------------------------------------------------------------------------
Operating income (loss) 442.1 16.9 (332.8) (2.5) 123.7
Interest expense 40.5 12.3 48.8 (0.1) 101.5
AFUDC (0.8) (1.2) (1.6) (0.2) (3.8)
-------------------------------------------------------------------------
Income (loss) before taxes 402.4 5.8 (380.0) (2.2) 26.0
Income tax expense (benefit) 165.4 (0.9) (163.0) 1.2 2.7
Miscellaneous-net 0.4 (0.8) 0.1 (0.2) (0.5)
Interest revenue - - - (1.4) (1.4)
-------------------------------------------------------------------------
Net income (loss) after taxes 236.6 7.5 (217.1) (1.8) 25.2
Preferred dividend requirement 5.4 1.8 7.6 0.1 14.9
-------------------------------------------------------------------------
Net income (loss) applicable to
common stock $231.2 $ 5.7 $(224.7) $(1.9) $ 10.3
- --------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $1,834.9 $ 722.9 $2,756.1 $ 32.3 $5,346.2
Total expenditures for additions
to long-lived assets 90.4 59.4 40.1 4.4 194.3
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $256.8 $10.8 $(189.1) $ (2.0) $ 76.5
Cash flow (4) 175.8 49.8 (232.1) 78.8 72.3
Return on net invested capital (5) 19.9% 2.4% N/A N/A 2.1%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Intersegment revenue priced at 2.5 cents per kwh delivered for 1998.
Intersegment expense is reflected in other operating expenses for Customer
Service. Nuclear reflects a replacement power expense for the increment of
market price over the intersegment price for 1998.
(2) Primary assets for Nuclear include plant, decommissioning assets, and
nuclear fuel.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirements.
(4) Cash flow before financing activities and strategic activities.
(5) Return on net invested capital calculated as contribution margin divided by
net invested capital.
31
<PAGE>
ILLINOIS POWER GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Year-To-Date September 30, 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $1,526.7 $1,671.8
======== ========
(Millions of dollars)
- --------------------------------------------------------------------------------
September 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,473.6 $4,578.9
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
32
<PAGE>
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information contained in this report is forward-looking
information based on current expectations and plans that involve risks and
uncertainties. Forward-looking information includes, among other things,
statements concerning the impact of regulatory changes, plans for the Clinton
facility, and success in addressing Year 2000 issues; as well as those that
include the words "expect," "intend," "predict," "estimate," "believe" or
similar language. Although Illinova and IP believe these forward-looking
statements are accurate, their businesses are dependent on various regulatory
issues, general economic conditions and future trends, and these factors can
cause actual results to differ materially from the forward-looking statements
that have been made.
The following factors, in addition to those discussed elsewhere in this
report and in the Annual Report on Form 10-K for the fiscal year ended December
31, 1998, and subsequent securities filings could cause results to differ
materially from management expectations as suggested by such forward-looking
statements: the outcome of state and Federal regulatory proceedings affecting
the restructuring of the electric and utility industry; the impact on IP of
current regulations providing for rate reductions and the phasing in of the
opportunity for some customers to choose alternative energy suppliers; the
effects of increased competition in the future due to, among other things,
deregulation of certain aspects of IP's business at both the state and Federal
levels, and the increasing popularity of alternative sources of electricity,
such as co-generation facilities; the effects of the implementation of
Illinova's various strategies to best respond to its changing business and
regulatory environment, including potential acquisitions, focused growth of
unregulated businesses and other options; the fluctuating electricity supply
demands of IP customers, which, if increased beyond IP's generation capacity,
might result in unplanned outages forcing IP to acquire additional supplies in
the electricity marketplace at uncertain and often volatile prices and
availability; changes in prices and costs of fuel; various financial risks
attendant to selling or shutting down Clinton; ongoing nuclear operational
exposures until Clinton is sold or shut down; the effect of events that can
occur in Illinova's or IP's business operations or in general economic
conditions that could negatively impact its financial flexibility and costs of
financing; the impact of the sale or shutdown of Clinton on IP's ability to
issue indebtedness under its existing mortgages; the impact of current
environmental regulations on utilities and the expectation that more stringent
requirements will be introduced over time, which are likely to have a negative
financial effect; various factors affecting non-utility investments, such as
IGC's investments in foreign countries, which are subject to currency
fluctuations, cyclical and sustained economic downturns and political risks; the
inherent risks of active purchases and sales by Illinova, through IEP and IP, of
electricity and natural gas futures and similar contracts; and the ability of
Illinova and IP, their vendors and others to manage Year 2000 issues.
All forward-looking statements in this report are based on information
that currently is available. Illinova and IP disclaim any obligation to update
any forward-looking statement.
33
<PAGE>
ILLINOVA SUBSIDIARIES
IP, a subsidiary of Illinova, engages in the generation, transmission,
distribution and sale of electric energy and the distribution, transportation
and sale of natural gas in the State of Illinois. IP has publicly traded
preferred shares outstanding but its common stock is wholly-owned by Illinova.
IGC is Illinova's wholly-owned independent power subsidiary. IGC invests
in energy supply projects throughout the world and competes in the independent
power market. IGC's strategy is to invest in and develop "greenfield" power
plants, acquire existing generation facilities and provide power plant
operations and maintenance.
IEP is a wholly-owned subsidiary of Illinova. IEP develops and markets
energy-related products and services to the unregulated energy market throughout
the United States and Canada and engages in the brokering and marketing of
electric power and gas.
IIC is a wholly-owned subsidiary of Illinova and was licensed by the
State of Vermont as a captive insurance company. The primary business of IIC is
to insure certain risks of Illinova and its subsidiaries.
IBE is a wholly-owned subsidiary of Illinova and was created to account
for miscellaneous business activities not regulated by the ICC or the Federal
Energy Regulatory Commission (FERC) and not falling within the business scope of
other Illinova subsidiaries.
IBE is currently inactive.
IPMI is a wholly-owned subsidiary of Illinova created in April 1999,
which became the wholesale generation and power marketing company to which IP's
fossil generating assets were transferred effective October 1, 1999. The ICC
approved the transfer of generation assets to IPMI on July 8, 1999. On August
24, 1999, the FERC approved a power purchase agreement between IP and IPMI, and
on September 10, 1999, the FERC issued final approval for the transfer of all
IP's fossil generating assets to IPMI.
MERGER AGREEMENT
On June 14, 1999, Illinova and Dynegy Inc. (Dynegy) announced the
execution of a definitive agreement for the merger of Illinova and Dynegy,
creating a full service provider of energy products and services. The
combination brings together Illinova's strategically positioned Midwest
generating facilities and developing national energy services and products with
Dynegy, a leading marketer of energy products and services in the country. Both
Illinova and Dynegy are leading independent power developers and producers. The
combined company is expected to own more than 15,000 megawatts of domestic
generating capacity, representing the world's most geographically diverse
generating asset portfolio.
Under terms of the merger agreement, which were approved unanimously by
each company's board of directors, a newly established parent company will
acquire all of the shares of Dynegy and Illinova for a combination of stock and
cash, subject to the satisfaction of certain pre-closing conditions. On October
11, 1999, Illinova shareholders approved the merger. Eighty-five (85) percent of
the Illinova shares were voted, and of those voting, 83.44 percent voted for the
merger. Dynegy's shareholders also approved the merger on October 11, 1999.
Also, during the third quarter, the Federal Trade Commission granted early
termination of the Hart-Scott-Rodino waiting period. However, the merger is
still conditioned, among other things, on completion of the pending sale of
Clinton to AmerGen, and approvals from the FERC and the ICC.
Chuck Watson, Chairman and Chief Executive Officer of Dynegy, will
retain that title in the combined company. Charles Bayless, Chairman, President
34
<PAGE>
and Chief Executive Officer of Illinova, will continue as a non-executive
director of the company. The Board of Directors of the new company, which will
be incorporated in Illinois and headquartered in Houston, Texas, will consist of
seven members of the current Illinova Board and seven members of the current
Dynegy Board, including three designees of Chevron U.S.A., which currently owns
an approximate 25% interest in Dynegy. Illinova's regulated utility, IP, will be
a subsidiary and remain headquartered in Decatur, Illinois.
Details regarding the merger are discussed more fully in the Form S-4
filed by Energy Convergence Holding Company (the interim name for the combined
entity of Dynegy and Illinova) on August 11, 1999, SEC File No. 333-84965, which
is incorporated herein by reference.
DIVERSIFIED BUSINESS ACTIVITIES
In February 1999, IEP, a wholly-owned subsidiary of Illinova, purchased
the Indiana-based natural gas management operations of Equitable Resources
Marketing Company. Equitable Resources Marketing (ERM) was a subsidiary of
Equitable Resources, Inc., (ERI) of Pittsburgh, PA. ERI is an integrated energy
company that produces, markets, and distributes natural gas and oil.
In April 1999, IEP also purchased Quality Energy Services (QES), a
Tempe, Arizona-based natural gas marketing company.
In May 1999, IEP purchased the Chicago, IL based holdings of Energy
Dynamics, Inc., (EDI) an independent natural gas marketing firm based in Rolling
Meadows, Illinois.
The 1998 combined revenues of ERM, QES, and EDI were approximately $67
million.
Several IGC projects are experiencing uncertainties in operational and/or
financial performance, as a result of such events or trends as breach of
contract, adverse government action, and adverse market conditions. In those
instances where IGC has clear legal remedies, the remedies may not be
enforceable. The uncertainties could lead to significant adverse affects on
IGC's financial condition and results of operations, if worst case scenarios
prevail in every project, but the uncertainties, and their potential
consequences, are too variable to quantify or predict at this time.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES AND REQUIREMENTS
Cash flows from operations during the first nine months of 1999,
supplemented by external financing and cash on hand, were sufficient to meet
ongoing operating requirements and to service existing common and preferred
stock dividends, debt requirements, IP's construction requirements and
Illinova's investments in its subsidiaries.
Illinova expects to use future operating cash flows, supplemented by
external financing, to meet operating requirements and to continue to service
existing debt, IP's preferred and Illinova common stock dividends, and
Illinova's and IP's anticipated subsidiary investments and construction
requirements for the remainder of 1999.
Illinova currently has authority to issue an additional $130 million in
debt securities under an existing $300 million shelf registration. Illinova also
has in place a $130 million Revolving Credit Agreement. However, covenants in
the Illinova Revolving Credit Facility limit total Illinova debt. The Illinova
Revolving Credit Agreement was amended in September 1999, raising the debt limit
from $350 million to $400 million. At September 30, 1999, $56.3 million of new
35
<PAGE>
debt capacity was available. Illinova has entered into an agreement for the
repurchase of $20 million of the 6.46% Illinova Medium Term Notes due 2002. This
repurchase is expected to close November 15, 1999. IP pays Illinova dividends on
the IP common stock held by Illinova to provide Illinova cash for operations. IP
is limited in its payment of dividends by the Illinois Public Utilities Act,
which requires retained earnings equal to or greater than the amount of any
proposed dividend declaration or payment, and by the Federal Power Act, which
precludes declaration or payment of dividends by electric utilities "out of
money properly stated in a capital account." In the first quarter of 1999, IP
did not declare or pay dividends on its common stock. In June 1999, IP declared
and paid a common stock dividend of $19.5 million. In August 1999, IP declared
and paid a common stock dividend of $21.4 million. Based on the Board's current
dividend policy, management expects IP's retained earnings to be sufficient to
pay Illinova a common stock dividend. IP's common stock dividend paid to
Illinova is expected to be sufficient to support Illinova common stock
dividends. In light of the pending merger, the Illinova fourth quarter dividends
declaration will be reviewed by the Board of Directors at the December meeting.
IP will continue to pay a preferred dividend as scheduled. IP also is allowed
periodically to repurchase its common stock from Illinova in accordance with
authority granted by the ICC, contingent on IP meeting certain cash flow tests.
IP currently does not satisfy this cash flow test and it is anticipated that it
will not satisfy the test throughout 1999. This test would not interfere with
the repurchases, if any, of Illinova equity shares using securitization
proceeds. Illinova's current capacity under the existing revolving credit
agreement and shelf registration should meet its cash requirements through the
fourth quarter of 1999. Illinova is developing additional financing capabilities
to meet future needs, including the use of proceeds from a planned $900 million
bridge financing by IPMI. This financing is expected to close in November, 1999.
See "Fossil Generation Filing" under "Regulatory Matters" later in this section
on page 39 for further information regarding the IPMI wholesale generation
transfer.
From the beginning of 1999, through November 3, 1999, IP redeemed $57.1
million of 8.75% First Mortgage Bonds due 2021, $229 million of 8.00% New
Mortgage Bonds due 2023, $22.9 million of 7.95% First Mortgage Bonds due 2004,
$36.8 million of 6.50% First Mortgage Bonds due 1999, $79.1 million of 7.50% New
Mortgage Bonds due 2025, $10 million of 6.00% New Mortgage Bonds due 2003, $4.3
million of 6.25% new mortgage bonds due 2002, along with 154,900 shares of
Monthly Income Preferred Securities (MIPS) and 217,285 shares of various serial
preferred stock series. These securities were retired using funds from
securitization proceeds received in December 1998.
On July 20, 1999, Illinois Power'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 $84.2 million with a
coupon rate of 7.4% 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 6.50% First Mortgage Bonds due 1999, $16.1 million of 7.95%
First Mortgage Bonds due 2004 and $84.7 million of 7.375% First Mortgage Bonds
due 2021. On September 1, 1999, the $35.2 million of 6.50% First Mortgage Bonds
matured.
IP's capital requirements for construction were approximately $159
million and $190 million during the nine months ended September 30, 1999 and
1998, respectively. Through 2000, IPMI plans to complete improvements in its
generation facilities including pollution control equipment. Illinova estimates
that it will spend approximately $380 million for IP and IPMI construction
expenditures in 1999. IP and IPMI construction expenditures for 1999 through
2003 are expected to total approximately $1.4 billion. In light of the December
1998 decision to exit Clinton and the resulting Clinton impairment, Clinton
36
<PAGE>
capital expenditures are expensed as incurred and are not included in the above
estimates. On March 2, 1999, in accordance with a lease agreement between IP and
IP Fuel Company, IP paid $62.1 million for partially depleted nuclear fuel in
the Clinton reactor to IP Fuel Company as a result of Clinton Nuclear Station
failing to restart by January 31, 1999. The liability for the nuclear fuel was
accrued as of December 31, 1998. As part of the Clinton impairment entries at
year end, nuclear fuel was written down to the expected consumption through
August 31, 1999. As a result of IP's guarantee of IP Fuel Company debt, on July
15, 1999, IP paid off all $73.1 million of IP Fuel Company commercial paper. On
September 7, 1999, IP paid an additional $400,000 to IP Fuel Company to ensure
payment at maturity to the noteholders of the IP Fuel $60 million 6.59% note, in
return for release of the lien on the remaining portions of nuclear fuel. The
$60 million IP Fuel note matures December 1, 1999. Following payment of the $60
million on December 1, 1999, IP will have no remaining obligations under its
lease obligation with IP Fuel.
Additional expenditures may be required during this period to
accommodate the transition to a competitive environment, environmental
compliance, system upgrades, and other costs which cannot be determined at this
time.
In addition to IP and IPMI construction expenditures, Illinova's capital
expenditures for 1999 through 2003 are expected to include $486 million for
mandatory debt retirement. In addition, IPSPT has long-term debt maturities of
$86.4 million in each of the above years.
On June 29, 1999, IP issued $250 million of Mortgage Bonds due 2009 with
an interest rate of 7.50%. Proceeds were used to reduce outstanding short-term
borrowings. IP currently has the authority to issue $500 million in short-term
debt, which includes $354 million in committed bank lines of credit. Of these
authorized amounts, IP had $168.6 million at September 30, 1999, in remaining
capacity that may be utilized to issue commercial paper and extend floating rate
notes. IP anticipates that this liquidity will be sufficient to address its
requirements through the fourth quarter of 1999. IP is developing additional
financial capabilities to meet future needs.
Following the merger announcement, several rating agencies responded
with favorable outlooks on IP and Illinova credit quality. Standard & Poor's has
changed its outlook from stable to positive, and presently rates ILN at BBB- and
IP at BBB. Duff & Phelps has placed IP on Credit Watch-Up, with a present rating
of BBB+. Moody's, which rates IP bonds at Baal and ILN notes at Baa3, affirmed
its present ratings.
ACCOUNTING MATTERS
For further information on accounting issues, see "Accounting Matters"
under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial
Statements" on page 15 of this report.
Effective October 1, 1999, all generating activity will be accounted for
in the financial statements of IPMI rather than those of IP. For further
information on IPMI, see "Fossil Generation Filing" under "Regulatory Matters"
on page 39 in this section.
CLINTON POWER STATION
In September 1996, a leak in a recirculation pump seal caused IP
operations personnel to shut down Clinton. Clinton returned to service May 27,
1999.
The prolonged outage at Clinton has had an adverse effect on Illinova's
and IP's financial condition, through higher operating and maintenance and
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capital costs, lost opportunities to sell energy, and higher replacement power
costs. In addition, in March 1999, due to the failure of Clinton to restart by
January 31, 1999, a provision in the lease agreement between IP and the Fuel
Company required IP to pay $62.1 million cash for the acquisition of core fuel
in March 1999, to the Fuel Company Trustee for the benefit of investors in
secured Notes of the Fuel Company.
PECO AND AMERGEN AGREEMENT
On April 15, 1999, IP announced that it had reached an interim agreement
with AmerGen Energy Company (AmerGen), whereby AmerGen would purchase and
operate Clinton and IP would buy at least 80 percent in 1999 and at least 75
percent during the years 2000 through 2004 of the plant's electricity output.
AmerGen is jointly owned by PECO Energy Company (PECO) and British Energy. IP
also announced on April 15, 1999, the execution of a revised management
agreement (Agreement) with PECO for the operation of Clinton retroactive to
April 1, 1999.
On July 1, 1999, IP announced that it had signed a definitive asset
purchase agreement with AmerGen. Basic terms for the sale remain essentially
unchanged from the framework proposed in the interim agreement. The asset
purchase agreement, signed June 30, 1999, provides that IP will purchase at
least 75 percent of Clinton's electricity output for its customers through 2004
at fixed prices which exceed current and projected wholesale prices.
Terms of the interim agreement between PECO and IP will remain in effect
until the transaction closes. Specifically, PECO is responsible for Clinton's
direct operating and capital expenses and continues to assist with the
management of the station under the existing management services contract, while
IP compensates PECO for management services based on the amount of electricity
the station produces. This eliminates IP's exposure to the uncertainty regarding
the costs associated with Clinton's operations. In return for transferring this
financial risk, IP has agreed to pay PECO a management fee calculated by
multiplying a fixed dollar amount per MWH times 80 percent of the electricity
generated at Clinton during the interim period and to allow PECO to retain 20
percent of power generation for its own use at no cost. The financial impact of
this obligation is contingent on two variables: (1) the capacity levels at which
Clinton operates and (2) the prices at which the electricity can be sold from
time to time. Based on the terms of the revised management agreement, the fees
payable to PECO during the interim period have exceeded the 1999 Clinton-related
O&M and capital costs for which PECO assumed full responsibility commencing
April 1, 1999.
Under terms of the definitive asset purchase agreement, AmerGen will pay
up to $20 million for the plant and property and will assume full responsibility
and liability for operating and ultimately decommissioning the nuclear station.
IP will transfer to AmerGen the existing decommissioning trust funds, expected
to total approximately $95 million at the end of 1999. IP will also make
additional payments to the decommissioning trust funds intended to be sufficient
to provide for the actual decommissioning of Clinton by 2026, when the plant's
operating license is scheduled to expire. These payments may be in the form of a
single payment of up to $145 million at closing or one payment of up to $124.2
million at closing plus five annual payments of $5 million.
Significant income tax issues related to the funding of decommissioning
costs, similar to those being addressed with the Internal Revenue Service by
parties to other pending sales of nuclear generating stations, must be resolved
to the mutual satisfaction of IP and AmerGen. The sale to AmerGen has been
approved by the ICC. Additional approvals must be obtained from various other
regulatory agencies including the NRC and the FERC. Approvals for transfer of
permits and licenses must also be granted by numerous agencies, including the
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Illinois Environmental Protection Agency, the Illinois Department of Nuclear
Safety, the Illinois Department of Natural Resources, and others. Until all
approvals are obtained and the parties close on the sale, IP will continue to
maintain the license for Clinton's operation and retain the ultimate operating
authority over the plant. The parties anticipate that closing will occur before
the end of 1999.
REGULATORY MATTERS
FOSSIL GENERATION FILING
On August 24, 1999, the FERC, under Part 205 of the Federal Power Act,
approved IP's filing to put into place a Power Purchase Agreement (PPA) between
IP and IPMI. Also, on September 10, 1999, the FERC, under Part 203 of the
Federal Power Act, approved IP's filing to transfer all of IP's non-nuclear
generating facilities to its affiliate, IPMI. These approvals, along with the
previously received approval from the ICC, satisfied all regulatory requirements
related to the formation of IPMI and the transfer to IPMI of IP's non-nuclear
generating assets. On October 1, 1999, IP sold all of its non-nuclear generating
facilities to Illinova which contributed these assets to IPMI.
ATTORNEY GENERAL COMPLAINT
On July 17, 1998, a complaint against IP was filed at the ICC by the
office of the Illinois Attorney General. The complaint alleges that IP failed to
meet its statutory obligations to provide adequate and reliable service in
connection with last summer's electric supply situation (for further disclosure,
see "Power Supply and Reliability" on page 46). It asked the ICC to conduct a
management audit of IP and sought an order requiring IP to offer compensation to
customers for voluntary conservation and service interruptions. IP provided the
Attorney General with a reliability report. The Attorney General and IP agreed
on an independent committee of two outside experts to review the report. In
June, the Attorney General and IP signed a settlement agreement in which IP
agrees to provide three annual updates to the reliability report it submitted in
response to the complaint, and agrees to maintain and in some cases moderately
enhance existing systems and maintenance practices. The parties filed a joint
motion to dismiss the complaint on the basis of this agreement, which the ICC
unanimously approved on July 28, 1999. There are no significant costs resulting
from the agreement. Although there were limited calls for voluntary
conservation, and interruptible customers were curtailed, no firm load was
interrupted or curtailed during 1998.
SOYLAND POWER COORDINATION AGREEMENT
In March 1999, Soyland and IP signed a new Power Coordination Agreement
(PCA) and filed this agreement with the FERC. The new agreement no longer
obligates IP to provide capacity and energy to Soyland with the exception of a
small amount of capacity for the purpose of supplying Soyland's load within the
IP Control Area. Therefore, the new PCA triggered the immediate recognition of
deferred revenue from the previous Soyland prepayment of the base capacity
charge. This resulted in an increase in interchange revenues of $61 million in
the first quarter of 1999.
UNIFORM FUEL ADJUSTMENT CLAUSE (UFAC)
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
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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 $27 million during
the first nine months of 1999. These refunds complete the process of eliminating
the UFAC at IP.
DEREGULATION RULEMAKINGS AND TARIFFS
The Illinois Public Utilities Act was significantly modified in 1997 by
P.A. 90-561, but the ICC continues to have broad powers of supervision and
regulation with respect to the rates and charges of IP, its services and
facilities, extensions or abandonment of service, classification of accounts,
valuation and depreciation of property, issuance of securities and various other
matters. Before a significant plant addition may be included in IP's rate base,
the ICC must determine that the addition is reasonable in cost, prudent and
useful in providing utility service to customers. IP must continue to provide
bundled retail electric service to all who choose to continue to take service at
tariff rates, and IP must provide unbundled electric distribution services to
all eligible customers as defined by P.A. 90-561 at rates to be determined by
the ICC. During 1998, pursuant to authority granted in P.A. 90-561, the ICC
issued rules associated with (i) transactions between the utility and its
affiliates; (ii) service reliability; (iii) environmental disclosure; and (iv)
alternative retail electric supplier certification criteria and procedures.
Through the third quarter of 1999, the ICC ruled on (i) the rates and terms
associated with the provision of delivery services for commercial and industrial
customers; (ii) established the neutral fact finder price utilized in (a)
calculating competitive transition costs and (b) IP's power purchase tariff; and
(iii) determined the competitive transition cost methodology. During the fourth
quarter of 1999, it is expected that the ICC will rule on guidelines regarding
standards of conduct and functional separation. A proceeding was opened in
September 1999 to address the issue of unbundling billing, metering, and
customer handling with a final decision to be rendered prior to the third
quarter of the year 2000.
Under the new rules, Illinois utilities must keep records identifying
service interruptions experienced by each customer. Illinois utilities must also
file an annual report detailing the reliability of its service and explaining
its plans for reliability improvements. In addition, each utility must also
report the number and causes of service interruptions that were due to causes
within the utility's control. Outage targets were established for service to
individual customers and for system performance. IP's first Electric Service
Reliability Policy Annual Report was filed with the ICC's Chief Clerk's Office
on June 1, 1999. Subsequent reliability reports will be filed in June of each
year.
The extent to which revenues are affected by P.A. 90-561 will depend on
a number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's existing service territory. The
impact on net income will depend on, among other things, the amount of revenues
earned and the cost of doing business.
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OPEN TRANSMISSION ACCESS AND COMPETITION
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with the FERC for all approvals necessary to create and
implement the Midwest Independent Transmission System Operator, Inc. (MISO). On
September 16, 1998, the FERC issued an order authorizing the creation of a MISO.
The MISO has elected a seven-person independent board of directors. The goals of
this joint undertaking are to: 1) put in place a tariff allowing easy and
nondiscriminatory access to transmission facilities in a multi-state region, 2)
enhance regional reliability and 3) establish an entity that operates
independently of any transmission owner(s) or other market participants, thus
furthering competition in the wholesale generation market consistent with the
objectives of the FERC's Order No. 888. Since January 1998, four other
transmission-owning entities joined the MISO. Participation in an ISO by
utilities serving retail customers in Illinois was one of the requirements
included in P.A. 90-561, enacted in 1997. The MISO has a stated goal to be fully
operational by January 1, 2001.
As an MISO member, IP is providing guarantees of up to $10 million to
facilitate MISO access to bank lines of credit during MISO startup phase for
buildings, personnel and startup capital.
In September 1999, IP made a revised Open Access Transmission Tariff (OATT)
filing with the FERC, requesting a rate decrease for transmission service based
on a reclassification of transmission assets to distribution using the FERC
seven factor test. The reclassification of assets and changes in terms and
conditions are necessary to facilitate retail access in Illinois. This
reclassification decreased transmission assets by approximately $89 million. In
conjunction with the seven factor reclassification, the OATT filing also
included changes to the Company's ancillary service charges. IP requested an
effective date of October 1, 1999. IP is awaiting FERC approval.
See "Open Access and Competition" under "Regulatory and Legal Matters" of
the "Notes to Consolidated Financial Statements" on page 14 of this report for
additional information.
YEAR 2000 DATA PROCESSING
Passing from 1999 into 2000 creates a risk that computer-dependent
processes will fail because the date will be read as "1900." Illinova began its
Year 2000 (Y2K) project in November 1996. The project scope encompasses all of
Illinova's subsidiaries including IP, IPMI, IGC, and IEP. A central organization
provides overall project guidance and coordination among the business groups,
meeting monthly to share information, conducting internal project reviews, and
producing monthly status reports to all levels of Illinova management.
Bi-monthly Year 2000 readiness reports are provided to the Illinova Board of
Directors.
The Year 2000 project involves evaluation and testing of software,
hardware, and business processes, including mainframe and personal computer
software and hardware, process computer software and hardware, end user
computing, telecommunications and networks, vendor purchased packages, embedded
systems, facility control systems, vendors/supplies, financial institutions, and
electronic interfaces with outside agencies.
The project is divided into two focus areas. The first focus area deals
with information technology (IT) software, hardware, and infrastructure. This
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includes such items as the billing system, payroll system, accounts payable
system, personal computers, telecommunications, networks, and mainframes.
The second focus area targets non-IT operational systems and processes
which encompass most of the systems and business processes actually used to
deliver electricity and gas to customers. This is also the area where embedded
systems and microprocessors are found. Included in this focus area are power
plant facilities, transportation systems such as railways and barges, fuel
suppliers, electric and gas transmission and distribution facilities,
substations and transformers, meters, building systems such as HVAC and
security, and financial institutions.
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The overall status of Illinova's Y2K project is illustrated in the table below.
Illinova Status
October 1999
IT Non-IT
% Completion * % Completion *
Complete Date Complete Date
Awareness 100 02/01/97 a 100 05/31/98 a
Inventory 100 01/20/97 a 100 02/28/99 a
Assessment 100 05/09/97 a 100 02/28/99 a
Process Analysis 100 11/30/98 a 100 03/31/99 a
Implementation -
(Mission Critical) 100 06/30/99 a 100 09/30/99 a
Implementation -
(Important to
Operations) 100 05/31/99 a 100 10/29/99 a
Contingency Planning 100 07/31/99 a 100 10/29/99 a
*"a" = Actual Completion Date
IP has completed all phases of its Year 2000 project. The table below
provides further details differentiating between IT and non-IT for IP alone.
IP Status
October 1999
IT Non-IT
% Completion * % Completion *
Complete Date Complete Date
Awareness 100 02/01/97 a 100 04/29/98 a
Inventory 100 01/20/97 a 100 07/31/98 a
Assessment 100 05/09/97 a 100 09/30/98 a
Process Analysis 100 11/30/98 a 100 02/28/99 a
Implementation -
(Mission Critical) 100 06/30/99 a 100 07/19/99 a
Implementation -
(Important to
Operations) 100 05/31/99 a 100 10/29/99 a
Contingency Planning 100 07/31/99 a 100 06/30/99 a
*"a" = Actual Completion Date
IT systems (such as billing, payroll, etc.) and infrastructure were
completed June 30, 1999. The customer billing system, materials management
system, accounts payable system, power plant maintenance system, payroll system,
and shareholder system have been remediated and are now year 2000 ready. Year
2000 work has not caused any IT projects to be delayed, and thus no maintenance
costs have been deferred.
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The United States Department of Energy (DOE) has charged the North
American Electric Reliability Council (NERC) with taking the lead in
facilitating North American-wide coordination of electric utilities' Year 2000
efforts. The collective efforts of the industry will minimize risks imposed by
Year 2000 to the reliable supply of electricity. NERC has in turn assigned the
regional reliability councils the responsibility of assessing their respective
networks to ensure reliable electric supply. IP is taking an active role within
its regional council (MAIN) in assessment and renovation of the grid and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.
Illinois Power also participated in NERC drills. IP's power plants and
transmission and distribution mission critical items are believed to be fully
Year 2000 ready.
The total cost for achieving Year 2000 readiness for Illinova is
estimated to be approximately $19.3 million through 1999. Through the end of
September 1999, $16.2 million, or 84% of the total $19.3 million had been spent.
Contingency plans focus on Illinova's "mission critical" business
processes. Contingency plans were developed in accordance with industry
guidelines, such as NERC and the General Accounting Office, and involved senior
management review and approval. These plans address business continuity and the
ability to deliver essential products and services to customers in the event of
unexpected Year 2000 problems. Drills are being conducted to test these
contingency plans.
Illinova has assessed potential worst-case scenarios and determined its
most reasonably likely worst-case scenario to be a severe winter storm coupled
with a loss of a major telecommunications carrier causing disruptions in
dispatching generation, dispatching emergency response crews, and communicating
with financial institutions.
Contingency plans address the above scenarios as well as other potential
scenarios that could affect the ability to serve our customers and maintain the
financial viability of Illinova.
ENVIRONMENTAL MATTERS
U.S. ENVIRONMENTAL PROTECTION AGENCY COMPLAINT
On November 3, 1999, the U.S. Environmental Protection Agency (EPA)
issued a Notice of Violation (NOV) against IP and, with the Department of
Justice (DOJ), filed a Complaint against IP in the U.S. District Court, Southern
District of Illinois, No. 99C833. Similar notices and lawsuits have been 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 Baldwin Station generating
units 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. Illinova has analyzed each of the activities
covered by the EPA's allegations and believes each is something that is
regularly done throughout the utility industry as necessary to maintain the
operational efficiency and safety of the equipment. As such Illinova believes
that each of these activities is covered by the exemption for routine repair,
replacement and maintenance and that the EPA is changing, or attempting to
change through enforcement actions, the intent and meaning of its regulations.
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Illinova also believes that, even if some of 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 EPA has officially requested information concerning activities at IP's
Vermilion, Wood River and Hennepin plants. It is likely that the EPA will
eventually commence enforcement actions against those plants as well.
The 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 EPA
also will be seeking installation of "best available control technology" (BACT)
(or equivalent) at the Baldwin Station and possibly at the other three plants as
well. Illinova's estimates of the cost to install BACT are only preliminary at
this time. However, a significant portion of the cost of BACT is already
included in Illinova's capital budget in connection with previously planned
pollution control upgrades.
Illinova believes that EPA's and DOJ's claims are totally without merit
and, furthermore believes, based on its current assessment including the advice
of its expert advisors, that there is no likely outcome that would have a
material adverse affect on Illinova's operations or its financial performance.
GAS MANUFACTURING SITES
See "Manufactured Gas Plant Sites" under "Regulatory and Legal Matters"
of the "Notes to Consolidated Financial Statements" on page 16 of this report.
NITROGEN OXIDE
On October 27, 1998, the U.S. EPA finalized air pollution rules that
will require substantial reductions of NOx emissions in Illinois and 21 other
states. This rule will require the installation of NOx controls by May 2003,
with each Illinois utility's exact reduction requirement to be specified in
2000. Preliminary estimates of the capital expenditures required by IPMI in 2000
through 2003 to comply with these new NOx limitations range from $60 million to
$140 million. NOx estimates are included in forecasted capital expenditures. The
legality of this proposal, along with its technical feasibility, is being
successfully challenged by a number of states, utility groups, and utilities,
including IP.
EMISSION ALLOWANCE EXCHANGES
The value of emission allowances expected to be given up in future
periods as the result of exchange agreements was recorded in the third quarter
1998 at the current market price and a liability of $9.8 million was recognized.
This obligation will be adjusted as price fluctuates until the allowances are
surrendered. The market value and recorded liability of the allowances at
September 30, 1999, was $9.8 million.
GLOBAL WARMING
On December 11, 1997, international negotiations to reduce greenhouse
gas emissions concluded with the adoption of the Kyoto Protocol. This Protocol
requires the United States to reduce greenhouse gas emissions to 7% below 1999
levels during the years 2008 through 2012 and to make further reductions
thereafter. Before it can take effect, this protocol must be ratified by the
United States Senate. However, United States Senate Resolution 98 which passed
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95-0 in July 1997, says the Senate would not ratify an agreement that fails to
include commitments for all countries or would damage the economy of the United
States. Since the Protocol does not contain these key elements, ratification
would be a major political issue. It is anticipated that a ratification vote
will be delayed until the current administration feels the Protocol could pass,
or an attractive alternative to the Kyoto Protocol is found.
IPMI will face major changes in the way it generates electricity if the
Kyoto Protocol is ratified, or if the Protocol's reduction goals are
incorporated into other environmental regulations. IPMI would have to repower
some generating units and change from coal to natural gas in other units to
reduce greenhouse gas emissions. IPMI estimates that compliance with these
proposed regulations may require significant capital outlays and annual
operating expenses which could have a material adverse impact on Illinova and
IP.
POWER SUPPLY AND RELIABILITY
Electricity was in short supply during the 1998 summer cooling season
because of an unusually high number of plant outages in the Midwest region. IP
bought generation and transmission capacity to prevent firm load curtailment and
took additional steps to avoid power outages, including upgrading transmission
lines and equipment, readying emergency procedures, and returning to service
five units that had been in cold shutdown. This resulted in a material adverse
financial impact on Illinova and IP.
The electric energy market experienced unprecedented prices for power
purchases during the last week of June 1998. IP's power purchases for 1998 were
$517 million higher than 1997 due to summer price spikes resulting in a $274
million increase in power purchased, additional purchases of $215 million to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts as part of the wholesale
trading business. Income from interchange sales was $382 million higher than in
1997 due to increased sales volumes and higher prices.
Excluding Clinton, IP has in excess of 400 MW of additional generation
on line beginning the summer of 1999 as compared to 1998. This includes
approximately 235 MW from five oil-fired units which were brought up from cold
shutdown during the summer of 1998 and 176 MW from four natural gas turbines
that IP installed which became operational in June 1999. Total cost for the two
projects is approximately $87 million. IP also refurbished nine gas turbines
already in service at an approximate cost of $13 million. In addition, the
restructuring of the Soyland PCA agreement freed up an additional 287 MW of
capacity. Clinton returned to full power operation on June 2, 1999, providing
additional generating capacity to serve firm load.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Electric Operations - Electric revenues for the third quarter of 1999
decreased $6.0 million compared to the third quarter of 1998 primarily due to
the 15% residential rate decrease effective August 1, 1998, and the
reclassification of revenue-related taxes mandated by deregulation legislation.
Revenue-related taxes are no longer accounted for in revenues or general taxes,
with no resultant impact on net income. The rate decrease resulted in revenue
reductions of $27.5 million and $18.5 million in the third quarter of 1999 and
1998, respectively. The impact of the reclassification of $13.7 million and $8.5
million in revenue-related taxes from revenue negatively impacted electric
revenues in the third quarter of 1999 and 1998, respectively. Wheeling revenues
increased approximately $5 million due to increased capacity. Electric
interchange revenues decreased $37.4 million. This decrease is attributable to a
decrease in interchange volume offset by $40.6 million of income to reflect
mark-to-market for forward contracts and options. Power purchased decreased
$118.6 million due largely to decreased interchange volume. During the quarter,
fuel for electric plants increased $4.4 million due to increased generation.
These factors combined to increase electric margin $70.8 million for the
quarter.
Kilowatt hour (kwh) sales to ultimate consumers decreased 0.6% for the
quarter due to decreases of 0.8% and 2.0% in the residential and the industrial
markets, respectively, offset by an increase of 2.4% in the commercial market.
Cooling degree days decreased approximately 20% from 1998 which contributed to
the decrease in sales to the temperature-sensitive markets.
The equivalent availability of Clinton was 96.4% and 0.0% for the three
months ended September 30, 1999 and 1998, respectively, due to the return of
Clinton to full power on June 2, 1999. Clinton was previously unavailable due to
an outage which began September 6, 1996. The equivalent availability for IP's
coal-fired plants was 90.2% and 87.3% for the three months ended September 30,
1999 and 1998, respectively.
Gas Operations - For the quarter, gas margin decreased $0.6 million.
Gas revenues increased $4.5 million due to increased therm sales (excluding
transport) of 2.1%. Gas purchased costs increased $5.1 million due to the higher
gas prices and additional therms purchased.
Operation and Maintenance Expenses - The current quarter increase of
$36.6 million is primarily due to the Clinton management fees paid to PECO,
partially offset by PECO's assumption of Clinton's direct operating and capital
expenses. For more information, see "PECO and AmerGen Agreement" of the
"Management's Discussion and Analysis" on page 38 of this report.
Depreciation and amortization - The decrease in depreciation and
amortization for the third quarter of 1999 compared to 1998 was $6.1 million.
Due to the Clinton impairment, nuclear depreciation decreased approximately
$23.7 million but was offset by approximately $16.5 million for the depreciation
of the adjustment to fair value for the fossil generation assets. In addition,
approximately $1.5 million in expense related to the amortization of the
decommissioning regulatory asset created as part of the 1998 Clinton impairment
was recognized in the third quarter.
Diversified enterprises - Diversified enterprise revenues increased
$116.5 million for the third quarter of 1999, which was offset by an increase in
diversified enterprise expenses of $116.5 million.
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Miscellaneous - net - Of the current quarter increase of $3.7 million,
$2.8 million is attributed to the adjustment in the net present value of the
decommissioning regulatory asset. Miscellaneous interest revenues increased,
including $2.1 million of interest received on a tax refund. These items were
partially offset by lower revenues from non-utility operations in the third
quarter.
Interest expense - The increase in interest expense of $14.8 million in
the third quarter of 1999 is primarily the result of interest on increased
long-term debt of $8.2 million and the adjustment in the net present value of
the decommissioning liability of $7.6 million, offset by decreased interest on
short-term debt of $1.4 million.
Earnings per Common Share - The increase in earnings per common share
for Illinova during the third quarter of 1999 and 1998 resulted from the
interaction of all the factors discussed herein as well as fewer shares of
common stock outstanding.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Electric Operations - Electric revenues for the first nine months of
1999 decreased $55.3 million as compared to the first nine months of 1998
primarily due to the 15% residential rate decrease effective August 1, 1998, and
the reclassification of revenue-related taxes mandated by deregulation
legislation. Revenue-related taxes are no longer accounted for in revenues or
general taxes. The rate decrease resulted in revenue reductions of $59.6 million
and $18.5 million in the first nine months of 1999 and 1998, respectively. The
impact of the reclassification of $34.8 million and $8.5 million in
revenue-related taxes from revenue for the first nine months of 1999 and 1998
respectively, negatively impacted revenues. Wheeling revenues increased
approximately $5 million due to increased capacity. Electric interchange
revenues decreased $96.2 million. This decrease is attributable to a decrease in
interchange volume offset by $60.1 million of revenue recognition resulting from
the restructuring of a Soyland Power Cooperative power supply contract and
decreased interchange volume. Power purchased decreased $346.7 million due
largely to decreased interchange volume. During the first nine months, fuel for
electric plants increased $6.2 million due to increased generation. These
factors combined to increase electric margin $189.1 million.
Kilowatt hour (kwh) sales to ultimate consumers increased 1.6% for the
first nine months primarily due to increases of 1.5% and 3.6% in the residential
and the commercial markets, respectively. Cooling degree days decreased
approximately 25% from 1998 which contributed to the decrease in
temperature-sensitive markets, which was offset by an increase of 11% in heating
degree days.
The equivalent availability of Clinton was 45.2% and 0.0% for the nine
months ended September 30, 1999 and 1998, respectively, due to the return of
Clinton to full power on June 2, 1999. Clinton was previously unavailable due to
an outage which began September 6, 1996. The equivalent availability for IP's
coal-fired plants was 79.1% and 84.1% for the nine months ended September 30,
1999 and 1998, respectively.
Gas Operations - For the nine months ended September 30, 1999, gas
margin increased $0.2 million. Gas revenues increased $6.5 million due to
increased therm sales of 6.9% (excluding transport), caused by colder winter
weather. Gas purchased costs increased $6.2 million due to higher consumption
and higher gas prices.
Operation and Maintenance Expenses - Of the $63.7 million increase for
the first nine months of 1999, $29 million occurred during the first quarter of
48
<PAGE>
1999 due to higher operating and maintenance expenses associated with the
Clinton outage. This $29 million includes $12.4 million of costs which would
have been considered capital additions had Clinton not been impaired. During the
third quarter operating and maintenance expenses increased $36.6 million due to
Clinton management fees paid to PECO, partially offset by direct operating and
capital expenses assumed by PECO. For more information, see "PECO and AmerGen
Agreement" of the "Management's Discussion and Analysis" on page 38 of this
report.
Depreciation and Amortization - The decrease in depreciation and
amortization for the first nine months of 1999 as compared to 1998 was $10.3
million. Due to the Clinton impairment, nuclear depreciation decreased
approximately $71 million, but was offset by approximately $53 million for the
depreciation of the adjustment to fair value for the fossil generation assets.
In addition, approximately $5 million in expense related to the amortization of
the transition period cost recovery asset and approximately $4.2 million in
expense related to the amortization of the decommissioning regulatory asset,
created as part of the Clinton impairment, was recognized through the third
quarter.
Diversified enterprises - Diversified enterprise revenues increased
$127.6 million for the first nine months of 1999, which was offset by an
increase in diversified enterprise expense of $132.8 million. The net increase
of diversified enterprise expense over diversified enterprise revenues is due
primarily to merger related transaction costs.
Miscellaneous - net - Of the first nine months increase of $19.6
million, $6.5 million is income from IGC investments not accounted for under the
equity method. Interest income increased $6.1 million primarily due to the
investment of the proceeds of the transitional funding trust notes issued in
December 1998, the adjustment in the net present value of the decommissioning
regulatory asset, and miscellaneous interest receivables. Miscellaneous interest
receivables included $2.1 million of interest income associated with a tax
refund. A $4.9 million increase in miscellaneous non-operating income is
attributable to the recognition of nontaxable income related to the
decommissioning trust. Revenues from non-utility operations also increased
during the first nine months of 1999.
Interest expense - The increase in interest expense of $32.2 million in
the first nine months of 1999 is the result of additional interest of $13.8
million on increased long-term debt, the adjustment in the net present value of
the decommissioning liability of $22 million, and increased amortization of debt
expense and loss on reacquired debt of $2.6 million, offset by decreased
interest on short term debt of $6.2 million.
Earnings per Common Stock - The increase in earnings per common share
for Illinova during the first nine months of 1999 and 1998 resulted from the
interaction of all the factors discussed herein as well as fewer shares of
common stock outstanding.
RESULTS OF OPERATIONS - ILLINOVA SEGMENTS OF BUSINESS
THREE MONTHS ENDED SEPTEMBER 30, 1999
Customer Service
For the three months ended September 30, 1999, both the contribution margin and
cash flow measures were lower than for the corresponding period in 1998.
Contribution margin is lower for the quarter by approximately $12 million,
primarily due to higher internal charges paid to the Wholesale Energy Group and
Nuclear Group for the purchase of electricity.
49
<PAGE>
Cash flow also reflected a decrease of $38 million from 1998, primarily due to
lower net income and a negative variance in working capital.
Transmission, Distribution and Sale of Electric Energy
The Customer Service Business Group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy Group and the Nuclear
Group; electricity was provided to the Customer Service Business Group at a
fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the three months
ended September 30, 1999, were approximately 1.5% lower than the corresponding
period in 1998.
Transmission, Distribution and Sale of Natural Gas
Revenues are derived through regulated tariffs. During the three months ended
September 30, 1999, revenues from gas sales and transportation were up by about
11.7%, due primarily to an increase in PGA revenues over 1998. The margin on gas
sales and transportation decreased 2.7% during the period, reflecting the higher
revenues and higher cost of gas purchases during the period.
Wholesale Energy
Contribution margin during the three months ended September 30, 1999, is $5
million lower than during the corresponding period in 1998, primarily due to
higher depreciation due to the write-up to market value of the fossil assets.
Cash flow increased approximately $91 million, primarily due to the sale and
lease-back of approximately $80 million of gas turbines at the Tilton Energy
Center.
Wholesale Energy provided power to the Customer Service Business Group at 2.9
cents per kwh during the three months ended September 30, 1999, compared to 2.5
cents per kwh during the corresponding period in 1998.
Nuclear
Both the contribution margin and cash flow measures are higher in 1999 compared
to 1998. Contribution margin is higher than 1998 due to higher intersegment
revenues in 1999 related to the plant operation in 1999 along with lower
depreciation, partially offset by higher operating expenses.
The net income increase in 1999 and the elimination of construction expenditures
in 1999 positively impacted cash flow.
Illinova Energy Partners, Inc.
For the three months ended September 30, 1999, the contribution margin is
comparable to the same period in 1998. Cash flow increased $4 million, primarily
due to a positive change in working capital.
Illinova Generating Company
For the three months ended September 30, 1999, the contribution margin variance
from 1998 is a positive $1.4 million. Cash flow for three months ended September
30, 1999 was comparable to the same period in 1998.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure. Collectively, cash flow
50
<PAGE>
is the total of changes in assets and liabilities not directly assignable to the
business segments and the non-cash portion of income taxes (deferred).
See "Illinova Segments of Business" in the footnotes to the financial statements
on pages 19 - 26 for additional information.
RESULTS OF OPERATIONS - ILLINOIS POWER SEGMENTS OF BUSINESS
THREE MONTHS ENDED SEPTEMBER 30, 1999
Customer Service
For the three months ended September 30, 1999, both the contribution margin and
cash flow measures were lower than for the corresponding period in 1998.
Contribution margin is lower for the quarter by approximately $12 million,
primarily due to higher internal charges paid to the Wholesale Energy Group and
Nuclear Group for the purchase of electricity.
Cash flow also reflected a decrease of $38 million from 1998, primarily due to
lower net income and a negative variance in working capital.
Transmission, Distribution and Sale of Electric Energy
The Customer Service Business Group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy Group and the Nuclear
group; electricity was provided to the Customer Service Business Group at a
fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the three months
ended September 30, 1999, were approximately 1.5% lower than the corresponding
period in 1998.
Transmission, Distribution and Sale of Natural Gas
Revenues are derived through regulated tariffs. During the three months ended
September 30, 1999, revenues from gas sales and transportation were up
approximately 11.7%, due primarily to an increase in PGA revenues over 1998. The
margin on gas sales and transportation decreased 2.7% during the period,
reflecting the higher revenues and higher cost of gas purchases during the
period.
Wholesale Energy
Contribution margin during the three months ended September 30, 1999, is $5
million lower than during the corresponding period in 1998, primarily due to
higher depreciation related to the write-up to market value of the fossil assets
and lower revenues, partially offset by higher purchased power costs in 1998
when the Company purchased high-priced electricity to meet system requirements
and off-system sale obligations.
Cash flow increased about $91 million, primarily due to the sale and lease-back
of approximately $80 million of gas turbines at the Tilton Energy Center.
The Wholesale Energy Group provided power to the Customer Service Business Group
at 2.9 cents per kwh during the three months ended September 30, 1999, compared
to 2.5 cents per kwh during the corresponding period in 1998.
Nuclear
Both the contribution margin and cash flow measures are higher in 1999 compared
to 1998. Contribution margin is higher than 1998 due to higher intersegment
revenues in 1999 related to the plant operation in 1999 along with lower
depreciation, partially offset by higher operating expenses.
51
<PAGE>
The net income increase in 1999 and the elimination of construction expenditures
in 1999 positively impacted cash flow.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and other corporate functions. These segments did not
individually meet the minimum threshold requirements for separate disclosure.
Collectively, cash flow for other is the total of changes in assets and
liabilities not directly assignable to the business segments and the non-cash
portion of income taxes (deferred).
See "Illinois Power Segments of Business" in the footnotes to the financial
statements on pages 26 - 32 for additional information.
RESULTS OF OPERATIONS - ILLINOVA SEGMENTS OF BUSINESS
NINE MONTHS ENDED SEPTEMBER 30, 1999
Customer Service
For the nine months ended September 30, 1999, both the contribution margin and
cash flow measures were lower than for the corresponding period in 1998.
Contribution margin is lower by approximately $59 million, primarily due to
decreased electric revenues as discussed below; higher internal charges paid to
the Wholesale Energy Group and the Nuclear Group due to higher usage and higher
internal pricing, higher depreciation expenses, including regulatory asset
amortization, and higher operating expenses. Partially offsetting these
variances is a decrease in general taxes in 1999 compared to 1998 as a result of
a reclassification of revenue-related taxes due to deregulation legislation.
Revenue-related taxes are now accounted for as a liability, and both revenues
and general taxes are reduced in 1999.
Cash flow is lower by $105 million, due to decreased net income and a negative
variance in working capital, partially offset by lower construction
expenditures.
Transmission, Distribution and Sale of Electric Energy
The Customer Service Business Group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy Group and the Nuclear
group; electricity was provided to the Customer Service Business Group at a
fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the nine months ended
September 30, 1999, decreased 5.7% over the corresponding period in 1998 due to
the 15% residential decrease mandated by P.A. 90-561, which became effective
July 15, 1998, voluntarily advanced by IP from the statutory effective date of
August 1, partially offset by increased kwh sales to customers.
Transmission, Distribution and Sale of Natural Gas
Revenues are derived through regulated tariffs. During the nine months ended
September 30, 1999, revenues from gas sales and transportation were up 3.1%,
while therms sold and transported were up 4.6%. The increase in therm sales was
caused by a return to normal weather after the milder-than-usual weather
experienced in 1998. There was .2% change in gas margin during the period.
Wholesale Energy
Contribution margin during the nine months ended September 30, 1999, is $54
million higher than during the corresponding period in 1998, due to
significantly fewer power purchases in 1999 than in 1998 when IP purchased
52
<PAGE>
extremely high-priced electricity to meet system requirements. Partially
offsetting this major variance in power purchases are lower interchange sales in
1999, and higher depreciation to reflect the write-up of fossil assets in
December 1998.
Cash flow is significantly less than 1998 ($169 million) primarily due to a
negative variance in working capital, which is partially offset by higher net
income and the sale and lease-back of approximately $80 million of gas turbines
at the Tilton Energy Center.
Wholesale Energy provided power to the Customer Service Business Group at 2.9
cents per kwh during the nine months ended September 30, 1999 compared to 2.5
cents per kwh during the corresponding period in 1998.
Nuclear
Both contribution margin and cash flow are higher in 1999 than 1998. Net income
increased over last year due to increased intersegment revenues in 1999 related
to the operation of the plant in 1999 and lower depreciation in 1999 as a result
of the write-off of nuclear facilities.
Cash flow was positively impacted by net income.
Illinova Energy Partners, Inc.
For the nine months ended September 30, 1999, the contribution margin is
comparable to the same period in 1998. Cash flow decreased about $4 million,
primarily related to changes in working capital.
Illinova Generating Company
For the nine months ended September 30, 1999, the contribution margin was higher
than 1998 by about $2 million. Cash flow decreased approximately $19 million,
primarily due to changes in working capital.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure. Collectively, cash flow
for other is the total of changes in assets and liabilities not directly
assignable to the business segments and the non-cash portion of income taxes
(deferred).
See "Illinova Segments of Business" in the footnotes to the financial statements
on pages 19 - 26 for additional information.
RESULTS OF OPERATIONS - ILLINOIS POWER SEGMENTS OF BUSINESS
NINE MONTHS ENDED SEPTEMBER 30, 1999
Customer Service
For the nine months ended September 30, 1999, both the contribution margin and
cash flow measures were lower than for the corresponding period in 1998.
Contribution margin is lower by $59 million, primarily due to decreased electric
revenues as discussed below; higher internal charges paid to the Wholesale
Energy Group and the Nuclear Group due to higher usage and higher internal
pricing, higher depreciation expenses, including regulatory asset amortization,
and higher operating expenses. Partially offsetting these variances is a
decrease in general taxes in 1999 compared to 1998 as a result of a
reclassification of revenue-related taxes due to deregulation legislation.
Revenue-related taxes are now accounted for as a liability, and both revenues
and general taxes are reduced in 1999.
53
<PAGE>
Cash flow is lower by $105 million, due to decreased net income and a negative
variance in working capital, partially offset by lower construction
expenditures.
Transmission, Distribution and Sale of Electric Energy
The Customer Service Business Group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy Group and the Nuclear
group; electricity was provided to the Customer Service Business Group at a
fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the nine months ended
September 30, 1999 decreased 5.7% over the corresponding period in 1998 due to
the 15% residential decrease mandated by P.A. 90-561, which became effective
July 15, 1998, voluntarily advanced by IP from the statutory effective date of
August 1, partially offset by increased kwh sales to customers.
Transmission, Distribution and Sale of Natural Gas
Revenues are derived through regulated tariffs. During the nine months ended
September 30, 1999, revenues from gas sales and transportation were up 3.1%,
while therms sold and transported were up 4.6%. The increase in therm sales was
caused by a return to normal weather after the milder-than-usual weather
experienced in 1998. There was .2% change in gas margin during the period.
Wholesale Energy
Contribution margin during the nine months ended September 30, 1999, is $54
million higher than during the corresponding period in 1998, due to
significantly fewer power purchases in 1999 than in 1998 when IP purchased
high-priced electricity to meet system requirements. Partially offsetting this
major variance in power purchases are lower interchange sales in 1999, and
higher depreciation to reflect the write-up of fossil assets in December 1998.
Cash flow is significantly less than 1998 ($169 million) primarily due to a
negative variance in working capital, which is partially offset by higher net
income and the sale and lease-back of approximately $80 million of gas turbines
at the Tilton Energy Center.
Wholesale Energy provided power to the Customer Service Business Group at 2.9
cents per kwh during the nine months ended September 30, 1999, compared to 2.5
cents per kwh during the corresponding period in 1998.
Nuclear
Both contribution margin and cash flow are higher in 1999 than 1998. Net income
increased over last year due to increased intersegment revenues in 1999 related
to the operation of the plant in 1999 and lower depreciation in 1999 as a result
of the write-off of nuclear facilities.
Cash flow was positively impacted by net income.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure. Collectively, cash flow
for other is the total of changes in assets and liabilities not directly
assignable to the business segments and the non-cash portion of income taxes
(deferred).
See "Illinois Power Segments of Business" in the footnotes to the financial
statements on pages 26 - 32 for additional information.
54
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
RISK MANAGEMENT
Illinova is exposed to both trading and non-trading market risks. The
non-trading market risks to which Illinova is exposed include interest rate
risk, equity price risk, foreign currency risks, and commodity price risks. The
market risk due to trading consists primarily of commodity price risk.
Illinova's risk management policy allows the use of financial derivative
products, like futures, swaps, and certain types of options to manage its
positions. Illinova uses various approaches to measure and monitor market risk,
which include Value-at-Risk (VaR) and position sensitivity measures to market
factors. VaR is the maximum potential loss that may be incurred on a portfolio
due to adverse movements in market factors, given a confidence level and
specified holding period. VaR does not represent the expected nor the maximum
loss that may actually occur since gains and losses may differ from those
estimated, based on actual fluctuations in market factors and changes in the
composition of the portfolio during a given evaluation period.
INTEREST RATE RISK
Illinova is exposed to interest rate risk from its financing activities,
through issuance of fixed or variable-rate debt and acquisition of bank notes.
IP is likewise exposed to interest rate risk resulting from its issuance of
fixed or variable-rate debt, commercial paper, and bank notes. Interest rate
exposure is managed in accordance with policy by limiting the variable-rate
exposure to a certain percentage of capitalization. Interest rate derivative
instruments are also used when deemed appropriate to change the composition of
variable to fixed-rate component. In addition, the sensitivity of the portfolio
to changes in market factors like interest rate levels and volatility are also
monitored. At September 30, 1999, there was no interest rate derivative
instrument in use.
Interest rate VaR is calculated based on a variance-covariance approach
using the RiskMetrics FourFifteen(TM) model. A 95 percent confidence level and a
one-day holding period is currently used. The interest rate risk as measured by
VaR at September 30, 1999, June 30, 1999, March 31, 1999, and December 31, 1998,
is given below.
- --------------------------------------------------------------------------------
Sep 30, 1999 Jun 30, 1999 Mar 31,1999 Dec 31,1998
- --------------------------------------------------------------------------------
(Millions of Dollars) VaR VaR VaR VaR
Illinova,
including IP debt $9.4 $7.9 $9.2 $14.9
IP debt only $8.9 $7.3 $8.7 $14.2
- --------------------------------------------------------------------------------
Contributing factors to the decrease in VaR since December 31, 1998,
were the retirement of high coupon debt with maturities extending past the year
2020 and an increase in commercial paper levels from that at year end. At
December 31, 1998, VaR was unusually high due to the issuance of securitized
debt with the removal of called bonds not occurring until after year end. The
securitized debt has shorter maturities than the called bonds, which further
contributed to the decrease in VaR.
55
<PAGE>
COMMODITY PRICE RISK
Trading Positions
Illinova is exposed to commodity price risk through IEP's and IP's
trading activities. Effective October 1, 1999, IP's trading activity will be
accounted for in the new generation subsidiary, IPMI. IEP uses a
variance-covariance approach to calculate VaR, similar to the RiskMetrics(TM)
model, to monitor and control its market risk positions. IP measures, monitors,
and manages its commodity price risk using a proprietary VaR model employing a
Monte Carlo simulation technique. IP and IEP both use a 95 percent confidence
level and a five-day holding period to monitor their daily trading market risk
positions. During the first quarter of 1999, the Board approved a change in the
risk management policy, to use a five day holding period instead of a four-day
period. IP's and IEP's trading VaR at September 30, 1999, June 30, 1999, March
31, 1999, and December 31, 1998, as restated using a five day holding period
follow:
- --------------------------------------------------------------------------------
Sep 30, 1999 Jun 30, 1999 Mar 31,1999 Dec 31,1998
- --------------------------------------------------------------------------------
(Millions of Dollars) VaR VaR VaR VaR
IP $0.7 $0.3 $0.6 $1.4
IEP 0.1 0.1 0.1 0.1
- --------------------------------------------------------------------------------
IP and IEP both use stress and scenario testing to control "event risk,"
(i.e., the risk that certain stressful market events will occur and result in a
loss). In addition, option positions are monitored using sensitivity limits such
as delta (sensitivity to price change), gamma (sensitivity of delta to price
change), and vega (sensitivity to change in implied volatility).
Non-Trading Positions
IP is also exposed to non-trading commodity price risk through its
energy generation business. Effective October 1, 1999, IP's non-trading activity
will be accounted for in the new generation subsidiary, IPMI. IP uses physical
contracts and is authorized to use financial derivative instruments to manage
its native load requirements. To measure, monitor, and control the commodity
price risk of its non-trading portfolio, IP uses the same proprietary Monte
Carlo model used in the trading portfolio.
The Monte-Carlo simulation process used in this VaR model generates the
power price, fuel price and load series that are used to value the generation
assets, fuel assets, and contracts entered into by IP (e.g., tolling, forward,
call and put options). A sophisticated process is used to generate daily and
hourly prices based on historical price series and volatility, wherein "price
spikes," a recent phenomenon in the electricity markets, are modeled into the
price series. The VaR calculated by this model represents the maximum reduction
in operating margin given a 95 percent confidence level. This means that there
is only a 5 percent probability that the reduction in operating margin from the
expected margin will be greater than what is provided by the VaR number. In this
model, a sufficient number of scenarios are generated, whereby each scenario
simulates a one-year margin (one-year holding period). The expected margin is
obtained by averaging the margins calculated from all the simulation scenarios.
The VaR is obtained by sorting the simulation results from the lowest to highest
value and taking the 95th percentile worst case value.
Since the new VaR methodology was implemented at the beginning of March
1999, there is no comparable VaR number at December 31, 1998. The VaR for the
non-trading portfolio at September 30, 1999, June 30, 1999 and March 31, 1999,
using a five-day holding period is $5.6 million, $4.9 million, and $11.6
million, respectively.
56
<PAGE>
The overall IP electricity portfolio is also controlled using quarterly
expected margin reduction limits. In this process, the difference between the
current expected margin and last quarter's expected margin is monitored against
the quarterly limits. To control "event risk," IP measures the "Stress-VaR,"
i.e., the VaR calculated using assumptions similar to the events that led to the
electricity price spikes in June 1998. The "Stress-VaR" is monitored against
stress limits that were approved by the Board of Directors.
FOREIGN OPERATIONS RISK
Illinova's foreign operations risk is its inherent risk of loss due to
the potential volatility of emerging countries and fluctuations in foreign
currency exchange rates in relation to the U.S. dollar. At September 30, 1999,
IGC had invested $190 million in several international operations, many of which
are joint ventures. Primarily, these investments are with affiliates owning
energy-related production, generation, and transmission facilities.
IGC is exposed to foreign currency risk, sovereign risk, and other
foreign operations risks, primarily through investments in affiliates of $48
million in Asia and $139 million in South and Central America. To mitigate risks
associated with foreign currency fluctuations, the majority of contracts entered
into by IGC or its affiliates are denominated in or indexed to the U.S. dollar.
OTHER MARKET RISK
Illinova is exposed to equity price risk primarily through IP. IP
maintains trust funds, as required by the NRC, to fund certain costs of nuclear
decommissioning. As of September 30, 1999, these funds were invested in domestic
and international equity securities, fixed income securities, and cash and cash
equivalents. By maintaining a portfolio that includes equity investments, IP is
maximizing the return to be used to fund nuclear decommissioning, which in the
long term will correlate better with inflationary increases in decommissioning
costs. The equity securities included in the Corporation's portfolio are exposed
to price fluctuations in equity markets as a result of fluctuations in interest
rates and other macroeconomic variables. Since the domestic equity portion of
the Nuclear Decommissioning Trust portfolio is highly correlated to the S&P 500
index, Illinova has sold S&P 500 futures contracts to mitigate the risk of this
portion of the portfolio against a precipitous drop in the equity markets. At
September 30, 1999, approximately 30 percent of the total domestic equity
portfolio had been mitigated. As of November 1, 1999, 100 percent of the total
domestic equity portfolio has been mitigated. Illinova will continue to
opportunistically mitigage the remaining portion of the equity portfolio when a
more favorable market level is reached.
IP actively monitors its portfolio by benchmarking the performance of its
investments against equity and fixed-income indexes. It maintains and
periodically reviews established target allocations of the trust assets approved
in the investment policy statement. Excluding the S&P 500 futures mitigation,
the VaR at September 30, 1999, June 30, 1999, and March 31, 1999, calculated
based on a 95 percent confidence level and a one day holding period follows:
- --------------------------------------------------------------------------------
Sep 30, 1999 Jun 30, 1999 Mar 31, 1999
- --------------------------------------------------------------------------------
(Millions of Dollars) VaR VaR VaR
IP $1.3 $1.4 $1.4
- --------------------------------------------------------------------------------
57
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed with this 10-Q are listed on the Exhibit Index.
(b) Reports on Form 8-K since June 30, 1999:
Report filed on Form 8-K on July 12, 1999
Item 5, Other Events: Press release: IP/
AmerGen sign Definitive Agreement for
Sale of Clinton. ICC approval of fossil
generating subsidiary.
Report filed on Form 8-K on July 16, 1999
Item 5, Other Events: Press release:
Illinova Releases 1999 Second Quarter
Earnings.
Item 7, Exhibits: Illinova Consolidated
Income Statements.
Report filed on Form 8-K on October 15, 1999
Item 5, Other Events: Press Release:
Illinova Releases 1999 Third Quarter
Earnings
Item 7, Exhibits: Illinova Consolidated
Income Statements.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOVA CORPORATION
(Registrant)
---------------------------
Larry F. Altenbaumer
Senior Vice President,
Chief Financial Officer,
Treasurer and Controller
On behalf of Illinova
Corporation
Date: November 15, 1999
59
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOIS POWER COMPANY
(Registrant)
---------------------------
Larry F. Altenbaumer
President on behalf of
Illinois Power Company
Date: November 15, 1999
60
<PAGE>
EXHIBIT INDEX
PAGE NO. WITHIN
SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
12.1 Computation of ratio of earnings to fixed
charges for Illinova Corporation. 62
12.2 Computation of ratio of earnings to fixed
charges for Illinois Power Company. 63
27 Financial Data Schedule UT
(filed herewith)
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit 12.1
ILLINOVA CORPORATION
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
Twelve Nine
Months Ended Months Ended
September September
(Thousands of Dollars) 1999 1999 ** 1999
---------------------------- --------------
Earnings Available for Fixed Charges:
<S> <C> <C> <C>
Net Income (Loss) ($1,289,628) ($1,289,628) $91,070
Add:
Income Taxes:
Current 2,045 2,045 19,196
Deferred - Net 48,481 48,481 64,300
Allocated income taxes (26,886) (26,886) (26,547)
Investment tax credit - deferred (4,180) (4,180) (1,094)
Income tax effect of CPS impairment (1,014,047) (1,014,047) -
Equity earnings in subsidiaries (17,778) (17,778) (6,921)
Interest on long-term debt 131,340 131,340 100,106
Amortization of debt expense and
premium-net, and other interest charges 46,837 46,837 41,344
One-third of all rentals (Estimated to be
representative of the interest component) 3,956 3,956 2,703
Interest on in-core fuel 5,401 5,401 4,424
CPS Impairment - 2,341,185 -
----------- ------------ ---------
Earnings (loss) available for fixed charges ($2,114,459) $226,726 $288,581
=========== ============ =========
Fixed charges:
Interest on long-term debt $131,340 $131,340 $63,375
Amortization of debt expense and
premium-net, and other interest charges 54,534 54,534 46,983
One-third of all rentals (Estimated to be
representative of the interest component) 3,956 3,956 2,703
Preferred stock dividend requirements 19,324 20,742 15,477
----------- ------------ ---------
Total Fixed Charges $209,154 $210,572 $128,538
=========== ============ =========
Ratio of earnings to fixed charges N/A * 1.08 2.25
=========== ============ =========
* Earnings are inadequate to cover fixed charges. Additional earnings (thousands) $2,323,613 are required to
attain a one-to-one ratio of Earnings to Fixed Charges.
** Supplemental ratio of earnings to fixed charges presented to exclude write-off related to Clinton Impairment.
62
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 12.2
ILLINOIS POWER COMPANY
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
Twelve Nine
Months Ended Months Ended
September September
(Thousands of Dollars) 1999 1999 ** 1999
---------------------------- --------------
Earnings Available for Fixed Charges:
<S> <C> <C> <C>
Net Income (Loss) ($1,278,238) ($1,278,238) $102,883
Add:
Income Taxes:
Current 2,045 2,045 19,196
Deferred - Net 48,481 48,481 64,300
Allocated income taxes (18,325) (18,325) (17,361)
Investment tax credit - deferred (4,180) (4,180) (1,094)
Income tax effect of CPS impairment (1,014,047) (1,014,047) -
Interest on long-term debt 120,760 120,760 92,419
Amortization of debt expense and
premium-net, and other interest charges 44,630 44,630 39,483
One-third of all rentals (Estimated to be
representative of the interest component) 3,956 3,956 2,703
Interest on in-core fuel 5,401 5,401 4,424
CPS Impairment - 2,341,185 -
----------- ------------ ---------
Earnings (loss) available for fixed charges ($2,089,517) $251,668 $306,953
=========== ============ =========
Fixed charges:
Interest on long-term debt $120,760 $120,760 $92,419
Amortization of debt expense and
premium-net, and other interest charges 52,327 52,327 45,123
One-third of all rentals (Estimated to be
representative of the interest component) 3,956 3,956 2,703
----------- ------------ ---------
Total Fixed Charges $177,043 $177,043 $140,245
=========== ============ =========
Ratio of earnings to fixed charges N/A * 1.42 2.19
=========== ============ =========
* Earnings are inadequate to cover fixed charges. Additional earnings (thousands) $2,266,560 are required to
attain a one-to-one ratio of Earnings to Fixed Charges.
** Supplemental ratio of earnings to fixed charges presented to exclude write-off related to Clinton Impairment.
63
<PAGE>
</TABLE>
<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>
<CIK> 0000914755
<NAME> Illinova Corporation
<SUBSIDIARY>
<NUMBER> 0
<NAME> 0
<MULTIPLIER> 1,000,000
<CURRENCY> Default
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<EXCHANGE-RATE> 1
<BOOK-VALUE> Per-book
<TOTAL-NET-UTILITY-PLANT> 4489
<OTHER-PROPERTY-AND-INVEST> 270
<TOTAL-CURRENT-ASSETS> 672
<TOTAL-DEFERRED-CHARGES> 1086
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6517
<COMMON> 1172
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 14
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1186
193
47
<LONG-TERM-DEBT-NET> 1944
<SHORT-TERM-NOTES> 107
<LONG-TERM-NOTES-PAYABLE> 175
<COMMERCIAL-PAPER-OBLIGATIONS> 280
<LONG-TERM-DEBT-CURRENT-PORT> 236
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2349
<TOT-CAPITALIZATION-AND-LIAB> 6517
<GROSS-OPERATING-REVENUE> 1928
<INCOME-TAX-EXPENSE> 56
<OTHER-OPERATING-EXPENSES> 1673
<TOTAL-OPERATING-EXPENSES> 1673
<OPERATING-INCOME-LOSS> 255
<OTHER-INCOME-NET> 29
<INCOME-BEFORE-INTEREST-EXPEN> 284
<TOTAL-INTEREST-EXPENSE> 152
<NET-INCOME> 77
1
<EARNINGS-AVAILABLE-FOR-COMM> 78
<COMMON-STOCK-DIVIDENDS> 64
<TOTAL-INTEREST-ON-BONDS> 96
<CASH-FLOW-OPERATIONS> 77
<EPS-BASIC> 1.12
<EPS-DILUTED> 1.12
</TABLE>
