UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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, 69,919,287
shares outstanding at April 30, 1999
Illinois Power Company Common stock, no par value, 62,892,213
shares outstanding held by Illinova
Corporation at April 30, 1999
ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
This combined Form 10-Q/A 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/A FOR THE QUARTER ENDED March 31, 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 - 26
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations for Illinova Corporation
and Illinois Power Company 27 - 44
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 45 - 47
Part II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K and 8-K/A 48
Signatures 49 - 50
Exhibit Index 51
2
PART I. FINANCIAL INFORMATION
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS AS RESTATED
(See accompanying Notes to Consolidated Financial Statements)
MARCH 31, DECEMBER 31,
1999 1998
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant
Electric (includes construction work
in progress of $139.4 million and
$177.7 million, respectively) $5,496.0 $5,481.8
Gas (includes construction work
in progress of $14.8 million and
$15.3 million, respectively) 690.5 686.9
--------- --------
6,186.5 6,168.7
Less - Accumulated depreciation 1,736.6 1,713.7
--------- --------
4,449.9 4,455.0
Nuclear fuel under capital lease 20.3 20.3
--------- --------
Total utility plant 4,470.2 4,475.3
--------- --------
Investments and Other Assets 256.8 246.9
--------- --------
Current Assets
Cash and cash equivalents 65.7 518.1
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 116.6 105.9
Other 91.4 116.1
Accrued unbilled revenue 64.4 82.6
Materials and supplies, at average cost 80.2 90.8
Assets from commodity price risk
management activities 58.5 51.5
Prepayments and other 61.7 51.5
--------- --------
Total current assets 538.5 1,016.5
--------- --------
Deferred Charges
Transition period cost recovery 457.3 457.3
Other 347.0 279.6
--------- --------
Total deferred charges 804.3 736.9
--------- --------
$6,069.8 $6,475.6
========= ========
3
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS AS RESTATED
(See accompanying Notes to Consolidated Financial Statements)
MARCH 31, DECEMBER 31,
1999 1998
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 200,000,000 shares authorized;
75,681,937 shares issued, stated at $1,123.3 $1,123.2
Less - Deferred compensation - ESOP 5.3 6.8
Retained deficit - accumulated since 1/1/99 (3.4) -
Accumulated other comprehensive income 0.2 -
Less - Capital stock expense 7.3 7.3
Less - 5,762,650 shares of common stock
in treasury, at cost 138.7 138.7
-------- --------
Total common stock equity 968.8 970.4
Preferred stock of subsidiary 52.9 57.1
Company obligated mandatorily redeemable
preferred stock of subsidiary 194.5 199.0
Long-term debt 175.7 176.1
Long-term debt of subsidiary 2,078.7 2,158.5
-------- --------
Total capitalization 3,470.6 3,561.1
-------- --------
Current Liabilities
Accounts payable 216.4 256.5
Notes payable 263.5 147.6
Long-term debt and lease obligations
of subsidiary maturing within one year 182.0 506.6
Liabilities from commodity price
risk management activities 105.2 99.8
Other 170.6 203.8
-------- --------
Total current liabilities 937.7 1,214.3
-------- --------
Deferred Credits
Accumulated deferred income taxes 846.0 834.8
Accumulated deferred investment tax credits 39.2 39.6
Decommissioning liability 574.2 567.4
Other 202.1 258.4
-------- --------
Total deferred credits 1,661.5 1,700.2
-------- --------
$6,069.8 $6,475.6
======== ========
4
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED
MARCH 31,
1999 1998
(Unaudited)
(Millions except per share)
Operating Revenues:
Electric $ 255.2 $276.6
Electric interchange 94.0 96.3
Gas 123.1 116.6
Diversified enterprises 76.1 85.9
---------- ----------
Total 548.4 575.4
---------- ----------
Operating Expenses:
Fuel for electric plants 51.4 55.7
Power purchased 51.7 97.1
Gas purchased for resale 72.5 66.0
Diversified enterprises 81.5 94.7
Other operating expenses 110.4 79.8
Maintenance 41.3 29.0
Depreciation & amortization 44.5 50.7
Amortization of regulatory asset 1.5 -
General taxes 29.9 38.7
---------- ----------
Total 484.7 511.7
---------- ----------
Operating Income 63.7 63.7
---------- ----------
Other Income and Deductions:
Miscellaneous-net 10.9 (1.5)
Equity earnings in affiliates 0.5 5.5
---------- ----------
Total 11.4 4.0
---------- ----------
Income Before Interest
Charges and Income Taxes 75.1 67.7
---------- ----------
Interest Charges:
Interest expense 43.1 36.6
Allowance for borrowed funds
used during construction (1.2) (1.1)
Preferred dividend
requirements of subsidiary 5.0 4.9
---------- ----------
Total 46.9 40.4
---------- ----------
Income Before Income Taxes 28.2 27.3
---------- ----------
Income Taxes 11.3 4.3
---------- ----------
Net Income 16.9 23.0
Carrying amount over
consideration paid for redeemed
preferred stock of subsidiary 0.8 -
---------- ----------
Net Income Applicable to
Common Stock $17.7 $23.0
========== ==========
Earnings per common share (basic
and diluted) $0.25 $0.32
Cash dividends declared per
common share $0.31 $0.31
Cash dividends paid per
common share $0.31 $0.31
Weighted average number of
common shares outstanding
during period 69,919,287 71,701,253
5
ILLINOVA
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED
MARCH 31,
1999 1998
(Unaudited)
(Millions of Dollars)
Net Income Applicable to Common Stock $17.7 $23.0
----- -----
Other Comprehensive Income
Foreign currency translation adjustments (0.1) -
Unrealized gains on securities 0.5 -
----- -----
Other comprehensive income, before tax 0.4 -
Income taxes on other comprehensive income (0.2) -
----- -----
Other comprehensive income, net of tax 0.2 -
----- -----
Comprehensive Income $17.9 $23.0
===== =====
6
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED
MARCH 31,
1999 1998
(Unaudited)
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $16.9 $23.0
Items not requiring cash, net 54.2 44.4
Changes in assets and liabilities (129.4) 62.0
------- -----
Net cash provided (used) by operating activities (58.3) 129.4
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (37.1) (47.8)
Other investing activities (17.4) (8.5)
------ ------
Net cash used in investing activities (54.5) (56.3)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (21.7) (22.2)
Reissuance of common stock - 0.7
Redemptions -
Short-term debt (123.4) (115.6)
Long-term debt of subsidiary (345.8) -
Preferred stock of subsidiary (8.6) -
Issuances -
Short-term debt 239.3 8.9
Long-term debt - 92.4
Other financing activities (79.4) 0.3
------- ------
Net cash used in financing activities (339.6) (35.5)
------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (452.4) 37.6
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 518.1 33.0
------- ------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $65.7 $70.6
======= ======
7
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS AS RESTATED
(See accompanying Notes to Consolidated Financial Statements)
MARCH 31, DECEMBER 31,
1999 1998
(Unaudited) (Audited)
(Millions of Dollars)
ASSETS
Utility Plant
Electric (includes construction work
in progress of $139.4 million and
$177.7 million, respectively) $5,496.0 $5,481.8
Gas (includes construction work
in progress of $14.8 million and
$15.3 million, respectively) 690.5 686.9
-------- --------
6,186.5 6,168.7
Less - Accumulated depreciation 1,736.6 1,713.7
-------- --------
4,449.9 4,455.0
Nuclear fuel under capital lease 20.3 20.3
-------- --------
Total utility plant 4,470.2 4,475.3
-------- --------
Investments and Other Assets 3.2 2.6
-------- --------
Current Assets
Cash and cash equivalents 49.3 504.5
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 116.6 105.9
Other 29.2 32.5
Accrued unbilled revenue 64.4 82.6
Materials and supplies, at average cost 79.0 90.4
Assets from commodity price risk
management activities 33.9 26.0
Prepayments and other 49.7 42.8
-------- --------
Total current assets 422.1 884.7
-------- --------
Deferred Charges
Transition period cost recovery 457.3 457.3
Other 350.5 284.2
-------- --------
Total deferred charges 807.8 741.5
-------- --------
$5,703.3 $6,104.1
======== ========
8
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS AS RESTATED
(See accompanying Notes to Consolidated Financial Statements)
MARCH 31, DECEMBER 31,
1999 1998
(Unaudited) (Audited)
(Millions of Dollars)
CAPITAL AND LIABILITIES
Capitalization
Common stock -
No par value, 100,000,000 shares
authorized; 75,643,937 shares issued,
stated at $1,186.0 $1,185.9
Retained earnings - accumulated since 1/1/99 19.4 -
Accumulated other comprehensive income 0.2 -
Less - Capital stock expense 7.3 7.3
Less - 12,751,724 shares of
common stock in treasury, at cost 286.4 286.4
-------- --------
Total common stock equity 911.9 892.2
Preferred stock 52.9 57.1
Company obligated mandatorily
redeemable preferred stock 194.5 199.0
Long-term debt 2,078.7 2,158.5
-------- --------
Total capitalization 3,238.0 3,306.8
-------- --------
Current Liabilities
Accounts payable 228.7 216.2
Notes payable 197.5 147.6
Long-term debt and lease obligations
maturing within one year 182.0 506.6
Liabilities from commodity price
risk management activities 71.0 61.6
Other 108.9 150.5
-------- --------
Total current liabilities 788.1 1,082.5
-------- --------
Deferred Credits
Accumulated deferred income taxes 861.7 849.5
Accumulated deferred investment tax credits 39.2 39.6
Decommissioning liability 574.2 567.4
Other 202.1 258.3
-------- --------
Total deferred credits 1,677.2 1,714.8
-------- --------
$5,703.3 $6,104.1
======== ========
9
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED
MARCH 31,
1999 1998
(Unaudited)
(Millions of Dollars)
Operating Revenues:
Electric $255.2 $276.6
Electric interchange 94.0 96.3
Gas 123.1 116.6
------ ------
Total 472.3 489.5
------ ------
Operating Expenses and Taxes:
Fuel for electric plants 51.4 55.7
Power purchased 51.7 97.1
Gas purchased for resale 72.5 66.0
Other operating expenses 110.4 79.8
Maintenance 41.3 29.0
Depreciation & amortization 44.5 50.7
Amortization of regulatory asset 1.5 -
General taxes 29.9 38.7
Income taxes 13.7 10.7
------ ------
Total 416.9 427.7
------ ------
Operating Income 55.4 61.8
------ ------
Other Income and Deductions, Net 6.2 1.6
------ ------
Income Before Interest Charges 61.6 63.4
------ ------
Interest Charges and Other:
Interest expense 39.8 34.1
Allowance for borrowed funds
used during construction (1.2) (1.1)
------ ------
Total 38.6 33.0
------ ------
Net Income 23.0 30.4
Less-Preferred dividend
requirements 5.0 4.9
Plus - Carrying amount over
consideration paid for
redeemed preferred stock 0.8 -
------ ------
Net Income Applicable to
Common Stock $18.8 $25.5
====== ======
10
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED
MARCH 31,
1999 1998
(Unaudited)
(Millions of Dollars)
Net Income Applicable to Common Stock $18.8 $25.5
----- -----
Other Comprehensive Income
Unrealized gains on securities 0.4 -
Income taxes on other comprehensive income (0.2) -
----- -----
Other comprehensive income, net of tax 0.2 -
----- -----
Comprehensive Income $19.0 $25.5
===== =====
11
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED
MARCH 31,
1999 1998
(Unaudited)
(Millions of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $22.9 $30.4
Items not requiring cash, net 55.5 47.4
Changes in assets and liabilities (105.6) 61.7
------- -----
Net cash provided (used) by operating activities (27.2) 139.5
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (37.1) (47.8)
Other investing activities (2.7) 0.6
------- ------
Net cash used in investing activities (39.8) (47.2)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred and common stock (4.3) (27.2)
Redemptions -
Short-term debt (123.4) (77.1)
Long-term debt (345.8) -
Preferred stock (8.6) -
Issuances -
Short-term debt 173.3 -
Long-term debt - 52.4
Other financing activities (79.4) -
------- ------
Net cash used in financing activities (388.2) (51.9)
------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (455.2) 40.4
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 504.5 17.8
------- ------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $49.3 $58.2
======= ======
12
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 March 31, 1999,
and audited December 31, 1998, consolidated financial statements for Illinova
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheets as of March 31, 1999, and December 31, 1998, the Consolidated Statements
of Income for the three months ended March 31, 1999 and 1998, and the
Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 1998. In addition, it is Illinova's and IP's opinion that the accompanying
unaudited March 31, 1999, and audited December 31, 1998, consolidated financial
statements for IP reflect all adjustments necessary to present fairly the
Consolidated Balance Sheets as of March 31, 1999, and December 31, 1998, the
Consolidated Statements of Income for the three months ended March 31, 1999 and
1998, and the Consolidated Statements of Cash Flows for the three months ended
March 31, 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
13
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.
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 current
consumption.
Under P.A. 90-561, customers with demand greater than 4 MW at a single
site and customers with at least 10 sites which aggregate at least 9.5 MW in
total demand 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 will
be established in 1999, in proceedings mandated by P.A. 90-561. The transition
charges departing customers must pay to IP are not designed to hold IP
completely harmless from resulting revenue loss because of the mitigation factor
described below. IP will be able to estimate the revenue impact of customer
choice more accurately when the various components of the transition charges
calculation have been established.
Although the specified residential rate reductions and the introduction
of direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
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 and is designed to provide incentive for management to continue cost
reduction efforts and generate new sources of revenue;
14
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, and load growth and demand levels in the current IP service territory,
and success in marketing to customers outside IP's service territory. The impact
on net income will depend on, among other things, the amount of revenues earned
and the cost of doing business.
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 portion of the business by either 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 value of Clinton and accrued Clinton-related exit
costs, which resulted in a $1,523.7 million, net of income taxes, charge against
retained earnings and an accumulated deficit in Illinova's consolidated retained
earnings balance of $1,616.0 million.
Illinova's and IP's Boards of Directors also chose in December 1998 to
effect a quasi-reorganization. The quasi-reorganization is an accounting
procedure that eliminated the accumulated deficit in retained earnings and
permitted the Company to proceed on much the same basis as if it had been
legally reorganized by restating the Company's assets and liabilities to their
fair values, with the net amount of these adjustments 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 $1,616.0 million.
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," EITF Issue 98-10,
15
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities", SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use", and SOP 98-5, "Reporting on the Costs of Start-Up
Activities."
Illinova and IP recognized other comprehensive income for the three
months ended March 31, 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 months ended March 31, 1999, include
unrealized gains on securities, foreign currency translations, and related
income taxes. IP's March 31, 1999, other comprehensive income was comprised of
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's estimated liability for Manufactured Gas Plant (MGP) site
remediation is $61 million. This amount represents IP's current estimate of the
costs it will incur to remediate the 24 MGP sites for which it is responsible.
Because of the unknown and unique characteristics at each site, IP cannot
currently determine its ultimate liability for remediation of the sites.
In October 1995, to offset the burden imposed on its customers, IP
initiated litigation against a number of insurance carriers. As of June 1998,
settlements or settlements in principle have been reached with all thirty of the
carriers. Settlement proceeds recovered from the carriers will offset a
significant portion of the 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.
TREASURY STOCK
Through March 31, 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 are
deducted from common equity at the cost of the shares purchased. No shares of IP
common stock were purchased during the first three months of 1999. At the
October 14, 1998, Illinova Board of Director's meeting, the 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, although
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 28 of this report.
16
FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
Trading Activities- Illinova, through its subsidiaries, IP and IEP,
engages in the brokering and marketing of electricity and natural gas. IP and
IEP use a variety of instruments, including fixed-price swap agreements,
variable-price swap agreements, exchange-traded energy futures and options
contracts, and over-the-counter forwards, swaps, and options.
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 of this section on page 15 of this
report. At March 31, 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 March 31, 1999, are presented below:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 2,300 MW 1,950 MW 1 year
IEP 11,388 MW 11,053 MW 1 year
Gas
IEP (in thousands) 2,350 MMBtu 2,350 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 March 31, 1999, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $27.2 $52.1
IEP 24.6 34.0
---- ----
51.8 86.1
Gas
IEP 2.2 1.2
--- ---
$54.0 $87.3
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.
17
The weighted average term of the trading portfolio, based on volume, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows as these positions may be modified by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and Illinova's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Non-Trading Activities- To reduce the risk from market fluctuations in the price
of electricity and related transmission, Illinova, through its subsidiary IP,
enters into forward transactions, swaps, and options (energy derivatives). These
instruments are used to hedge expected purchases, sales, and transmission of
electricity (a portion of which are firm commitments at the inception of the
hedge). The weighted average maturity of these instruments is less than one
year.
Periodically, IP has 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 March 31, 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
March 31, 1999, the notional amount of two emission allowance swaps was 126,925
units, with a recorded liability of $15.6 million, based on fair value at
delivery date. The maximum maturity of the swap agreements is 10 years. These
agreements do not fall under the scope of FAS 133. Due to the remote probability
of exercise, three put options written by IP are considered immaterial.
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 March 31, 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 March 31, 1999,
follows:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 900 MW 300 MW 1 year
In addition to the fixed-price notional volumes above, IP recorded a $25
million liability in 1998 for two "commodity for commodity" energy swap
agreements totaling 350 MW which are not considered derivatives as defined by
18
FAS 133. As of March 31, 1999, the swap liability decreased to $23.5 million.
The decrease in the liability is due to IP's commencing repayment of one power
swap in January 1999.
The notional amount is intended to be indicative of the level of
activity in such derivatives, although the amounts at risk are significantly
smaller because changes in the market value of these derivatives generally are
offset by changes in the value associated with the underlying physical
transactions or in other derivatives. When energy derivatives are closed out in
advance of the underlying commitment or anticipated transaction, the market
value changes may not be offset because price movement correlation ceases to
exist when the positions are closed.
The estimated fair values of energy derivative commodity instruments,
held for non-trading purposes at March 31, 1999, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $6.0 $18.6
The fair value was estimated using quoted prices and indices where
available, and considering the liquidity of the market for the instrument. The
fair values are subject to significant volatility based on changing market
conditions.
The average maturity and fair values discussed above are not necessarily
indicative of likely future cash flows. These positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions, market liquidity, and Illinova's risk management portfolio
needs and strategies. Terms regarding cash settlements of these contracts vary
with respect to the actual timing of cash receipts and payments.
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
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
were used to judge segment performance: contribution margin and cash flow;
return on net invested capital is no longer a corporate measure in 1999.
20
Illinova Corporation
Three Months Ended March 31, 1999 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1999
Revenues from external customers 376.7 94.1 1.5 - - - 472.3
Diversified enterprise revenue - - - 46.4 28.3 1.4 76.1
Intersegment revenue (1) - 135.9 (0.7) - - - 135.2
-----------------------------------------------------------
Total Revenue 376.7 230.0 0.8 46.4 28.3 1.4 683.6
Depreciation and amortization
expense 18.5 25.6 2.0 - - (0.1) 46.0
Other operating expenses (1) 275.3 126.6 89.4 49.3 30.1 3.2 573.9
-----------------------------------------------------------
Operating income (loss) 82.9 77.8 (90.6) (2.9) (1.8) (1.7) 63.7
Interest expense 19.3 19.9 0.7 - - 3.2 43.1
AFUDC (0.4) (0.8) - - - 0.0 (1.2)
-----------------------------------------------------------
Net income (loss) before taxes 64.0 58.7 (91.3) (2.9) (1.8) (4.9) 21.8
Income tax expense (benefit) 24.4 22.3 (35.7) (0.7) 1.7 (0.7) 11.3
Miscellaneous - net - 0.1 (0.5) - (6.2) (1.2) (7.8)
Equity earnings in subsidiaries - - - (1.0) 0.4 0.1 (0.5)
Interest revenue - - (1.1) - - (2.0) (3.1)
-----------------------------------------------------------
Net income (loss) after taxes 36.7 36.3 (54.0) (1.2) 2.3 (1.1) 21.9
Preferred dividend requirement and
carrying amount over consideration
paid for redeemed preferred stock 2.9 3.0 (0.9) - - (0.8) 4.2
----------------------------------------------------------
Net income (loss) available
to common 36.7 33.3 (53.5) (1.2) 2.3 (0.3) 17.7
- -----------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (3) 2,297.3 3,121.8 198.5 63.3 239.7 149.2 6,069.8
Subsidiary's investment in
equity method investees - - - 9.5 188.5 - 198.0
Total expenditures for additions
to long-lived assets 22.9 14.5 - - - 0.9 38.3
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (4) 50.0 46.5 (53.4) (1.2) 2.3 0.9 45.3
Cash flow (5) 42.1 (87.6) (106.3) (1.7) 12.5 51.6 (89.4)
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.9 cents per kwh delivered.
Intersegment expense is reflected in other operating expenses for
Customer Service.
(2) Net Income (loss) before Clinton impairment loss.
(3) Primary assets for Nuclear include decommissioning assets, shared
general and intangible plant and nuclear fuel.
(4) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(5) Cash flow before financing activities.
21
Illinova Corporation
Three Months Ended March 31, 1998 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1998
Revenues from external customers 391.6 96.3 1.6 - - - 489.5
Diversified enterprise revenue - - - 84.9 0.7 0.3 85.9
Intersegment revenue (1) - 111.8 (0.6) - - - 111.2
------------------------------------------------------------
Total Revenue 391.6 208.1 1.0 84.9 0.7 0.3 686.6
Depreciation and amortization
expense 16.9 7.4 24.8 - - 1.6 50.7
Other operating expenses (1) 244.7 150.7 84.0 89.8 4.0 (1.0) 572.2
------------------------------------------------------------
Operating income (loss) 130.0 50.0 (107.8) (4.9) (3.3) (0.3) 63.7
Interest expense 17.1 5.7 21.5 - - (7.7) 36.6
AFUDC (0.3) (0.4) (0.4) - - - (1.1)
------------------------------------------------------------
Net income (loss) before taxes 113.2 44.7 (128.9) (4.9) (3.3) 7.4 28.2
Income tax expense (benefit) 46.4 16.7 (55.3) (1.1) (0.7) (1.7) 4.3
Miscellaneous - net - 1.8 - (0.1) - (0.2) 1.5
Equity earnings in subsidiaries - - - (2.0) (3.5) - (5.5)
Interest revenue - - - - - - -
------------------------------------------------------------
Net income (loss) after taxes 66.8 26.2 (73.6) (1.7) 0.9 9.3 27.9
Preferred dividend requirement and
carrying amount over consideration
paid for redeemed preferred stock 1.8 0.7 2.5 - - (0.1) 4.9
----------------------------------------------------------
Net income (loss) available
to common 65.0 25.5 (76.1) (1.7) 0.9 9.4 23.0
- -----------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets 1,766.9 717.1 2,772.3 56.4 174.6 131.5 5,618.8
Subsidiary's investment in
equity method investees - - - 12.4 165.4 - 117.8
Total expenditures for additions
to long-lived assets 30.2 10.2 7.2 - - 1.3 48.9
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (2) 75.6 28.1 (61.2) (1.7) 0.9 5.0 46.7
Cash flow (3) 73.2 43.2 (81.6) 2.1 3.9 42.1 82.9
- -----------------------------------------------------------------------------------------------------------------------------------
Return on net invested capital (4) 5.9% 6.0% N/A 5.2% 0.5% N/A 1.3%
(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) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(3) Cash flow before financing activities.
(4) Return on net invested capital calculated as contribution margin divided
by net invested capital.
22
GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Quarter ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $544.2 $575.4
Foreign countries - seven 4.2 0
------ ------
$548.4 $575.2
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
March 31, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,525.5 $4,597.4
Foreign countries - nine 157.1 124.8
-------- --------
$4,682.6 $4,722.2
======== ========
(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.
23
In 1998, three measures were used to judge segment performance: contribution
margin, cash flow, and return on net invested capital. In 1999, two measures
were used to judge segment performance; contribution margin and cash flow;
return on net invested capital is no longer a corporate measure in 1999.
Illinois Power
Three Months Ended March 31, 1999
Customer Wholesale Total
1999 Service Energy Nuclear Other Company
Revenues from external customers $376.7 $94.1 $1.5 $ - $472.3
Intersegment revenue (1) - 135.9 (0.7) - 135.2
-------------------------------------------------------------------------
Total Revenue 376.7 230.0 0.8 - 607.5
Depreciation and amortization expense 18.5 25.6 2.0 (0.1) 46.0
Other operating expenses (1) 275.3 126.6 89.4 1.1 492.4
-------------------------------------------------------------------------
Operating income (loss) 82.9 77.8 (90.6) (1.0) 69.1
Interest expense 19.3 19.9 0.7 (0.1) 39.8
AFUDC (0.4) (0.8) - 0.0 (1.2)
-------------------------------------------------------------------------
Net income (loss) before taxes 64.0 58.7 (91.3) (0.9) 30.5
Income tax expense (benefit) 24.4 22.3 (35.7) 0.6 11.6
Miscellaneous-net - 0.1 (0.5) (0.4) (0.8)
Interest revenue - - (1.1) (2.2) (3.3)
-------------------------------------------------------------------------
Net income (loss) after taxes 39.6 36.3 (54.0) 1.1 23.0
Preferred dividend requirement and
carrying amount over consideration
paid for redeemed preferred stock 2.9 3.0 (0.9) (0.8) 4.2
-------------------------------------------------------------------------
Net income (loss) available to common $ 36.7 $ 33.3 $ (53.1) $1.9 $ 18.8
- --------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,297.3 $3,121.8 $198.5 $ 34.4 $5,652.0
Total expenditures for additions to long-lived
assets 22.9 14.5 - 0.9 38.3
Corporate Measures -
Contribution margin (3) $ 50.0 $ 46.7 $ (53.4) $1.1 $ 44.4
Cash flow (4) 42.1 (87.6) (106.3) 81.4 (70.4)
- --------------------------------------------------------------------------------------------------------------------------------
(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 requirement.
(4) Cash flow before financing activities.
24
Illinois Power
Three Months Ended March 31, 1998
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
Revenues from external customers $391.6 $96.3 $ 1.6 $ - $489.5
Intersegment revenue (1) - 111.8 (0.6) - 111.2
-------------------------------------------------------------------------
Total Revenue 391.6 208.1 1.0 - 600.7
Depreciation and amortization expense 16.9 7.4 24.8 1.6 50.7
Other operating expenses (1) 244.7 150.7 84.0 (1.9) 477.5
-------------------------------------------------------------------------
Operating income (loss) 130.0 50.0 (107.8) 0.3 72.5
Interest expense 17.1 5.7 21.5 (10.2) 34.1
AFUDC (0.3) (0.4) (0.4) - (1.1)
-------------------------------------------------------------------------
Net income (loss) before taxes 113.2 44.7 (128.9) 10.5 39.5
Income tax expense (benefit) 46.4 16.7 (55.3) (0.6) 7.2
Miscellaneous-net - 1.8 - 0.3 2.1
Interest revenue - - - (0.2) (0.2)
-------------------------------------------------------------------------
Net income (loss) after taxes 66.8 26.2 (73.6) 11.0 30.4
Preferred dividend requirement 1.8 0.7 2.5 (0.1) 4.9
-------------------------------------------------------------------------
Net income (loss) available to common $ 65.0 $25.5 $ (76.1) $ 11.1 $ 25.5
- --------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets $1,766.9 $ 717.1 $2,772.3 $ 84.4 $5,340.7
Total expenditures for additions to long-lived
assets long-lived assets $ 30.2 $10.2 $ 7.2 $ 1.3 $ 48.9
- --------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (2) $ 75.6 $28.1 $ (61.2) $ 5.1 $ 47.6
Cash flow (3) 73.2 43.2 (81.6) 31.3 66.1
Return on net invested capital (4) 5.9% 6.0% N/A N/A 1.3%
- --------------------------------------------------------------------------------------------------------------------------------
(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) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(3) Cash flow before financing activities.
(4) Return on net invested capital calculated as contribution margin divided
by net invested capital.
25
GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Quarter ended March 31, 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $472.3 $489.5
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
March 31, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,436.1 $4,536.5
======== ========
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include plant, equipment, and investments in subsidiaries.
RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND AS
OF DECEMBER 31, 1998
In February 2000, Illinova and IP restated their consolidated financial
statements for the year ended December 31, 1998 to reflect a revision to the
initial estimate of the "Transition period cost recovery" regulatory asset
established in December 1998 coincident with the impairment of the Clinton Power
Station. The effect of this revision was to decrease the amount of the
regulatory asset at December 31, 1998, and correspondingly increase the related
impairment charge by $325.7 million ($196.5 million net of taxes). The impact of
this revision on the consolidated financial statements follows:
- ------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------
As Previously As Restated As Previously As Restated
Reported Reported
- -------------------------------------------------------------------------------------------
(Millions of Dollars) (Millions of Dollars)
Illinova Corporation
Common stock-No par value $1,319.8 $1,123.3 $1,319.7 $1,123.2
Illinois Power Company
Common stock-No par value $1,382.5 $1,186.0 $1,382.4 $1,185.9
- -------------------------------------------------------------------------------------------
As a result of the quasi-reorganization, there was no effect of this revision on
"Retained Earnings." For more information, see "Accounting Matters" of "Notes to
Consolidated Financial Statements" on page 15 of this report.
26
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 in 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.
27
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.
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.
Illinova Power Marketing, Inc. (IPMI) is a wholly-owned subsidiary of
Illinova created in April, 1999 to become the wholesale generation and power
marketing company to which IP's fossil generating assets will be transferred.
Regulatory approvals for the transfer of these assets and for IPMI's marketing
activities are being sought.
RESTATEMENT OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER
31, 1998 AND AS OF MARCH 31, 1999
In February 2000, Illinova and IP restated their financial statements for the
year ended December 31, 1998 to reflect a revision to the initial estimate of
the "Transition period cost recovery" regulatory asset established in December
1998 coincident with the impairment of the Clinton Power Station. The effect of
this revision was to decrease the amount of the regulatory asset at December 31,
1998, and correspondingly increase the related impairment charge by $325.7
million ($196.5 million net of tax). The net effect of this revision was to
increase the previously reported net loss by $196.5 million, or $2.74 per common
share (basic and diluted). As a result of the quasi-reorganization described
below, there was no effect of this revision on "Retained earnings;" however,
"Total common stock equity" was reduced by $196.5 million. The financial tables
and stateemnts, the notes to the consolidated financial statements, and
management's discussion and analysis of financial condition and results of
operations in the 10-Q/A have been modified to reflect these changes.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES AND REQUIREMENTS
Cash flows from operations during the first three 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. However, Illinova and IP liquidity
has decreased as compared to March 31, 1998, as a result of higher fossil
maintenance costs, increased marketing expenses, and higher Clinton costs
combined with lower revenues caused by the rate reduction mandated by P.A.
90-561.
Illinova expects to use future operating cash flows, supplemented by
external financing, to meet operating requirements and to continue to service
28
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 put
in place a $130 million Revolving Credit Agreement in January 1999, which had
$64 million of capacity available at March 31, 1999. Prior to 1999 IP has paid
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. Based
on the Board's current dividend policy, management expects IP's retained
earnings to be sufficient to support Illinova common dividends. IP also is
allowed to periodically 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 $130 million capacity under the existing shelf
registration should meet its cash requirements through the remainder of 1999.
Illinova and IGC are developing additional financing capabilities to meet future
needs.
Through May 10, 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, $39.85 million of 7.50% New Mortgage Bonds due 2025, along with
154,900 shares of Monthly Income Preferred Securities (MIPS) and 83,780 shares
of various serial preferred stock series. These securities were retired using
funds from securitization proceeds received in December 1998.
IP's capital requirements for construction were approximately $37
million and $48 million during the three months ended March 31, 1999 and 1998,
respectively. Through 2000, IP plans to complete improvements in its generation
facilities including pollution control equipment and new combustion turbine
peaking units. Illinova estimates that it will spend approximately $370 million
for IP construction expenditures in 1999. IP construction expenditures for 1999
through 2003 are expected to total approximately $1.3 billion. In light of the
December 1998 decision to exit Clinton and resulting Clinton impairment, Clinton
capital expenditures are expensed as incurred and are not included in the above
estimates. On March 2, 1999, IP deposited $62.1 million for partially depleted
nuclear fuel in the Clinton reactor with 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.
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.
29
In addition to IP construction expenditures, Illinova's capital
expenditures for 1999 through 2003 are expected to include $592 million for
mandatory debt retirement and approximately $600 million target levels for
investment opportunities by the non-regulated subsidiaries. In addition, IPSPT
has long-term debt maturities of $86.4 million in each of the above years.
IP currently has the authority to issue $250 million in long-term debt
and $500 million in short-term debt, which includes $350 million in committed
bank lines of credit. Of these authorized amounts, IP had $229 million at March
31, 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 into the fourth quarter of 1999. IP is
developing additional financial capabilities to meet future needs.
Presently, IP's mortgage bonds are rated Baa1 by Moody's, BBB+ by Duff &
Phelps and BBB by Standard & Poor's. IP's preferred stock is rated Baa2 by
Moody's, BBB- by Duff & Phelps and BB+ by Standard & Poor's. Illinova's senior
and medium-term notes have a rating of Baa3 from Moody's and BBB- from Standard
& Poor's. On July 6, 1998, a change in outlook was issued. The outlook from
Moody's changed from stable to negative and the outlook from Standard & Poor's
changed from positive to stable.
On March 4, 1999, Moody's placed all of the securities of Illinova and
IP under review for possible downgrade, citing erosion of cash flow and an
expected increase in leverage caused by the extended Clinton outage. On April
18, 1999, Moody's confirmed the security ratings of Illinova and IP, and removed
the securities from review for possible downgrade following the NRC's decision
to allow the restart of Clinton and the announcement of an interim sales
agreement with AmerGen to purchase and operate Clinton. See "PECO Agreement"
section which follows on page 30 for additional information regarding the
interim sales agreement.
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.
CLINTON POWER STATION
In September 1996, a leak in a recirculation pump seal caused IP
operations personnel to shut down Clinton. Clinton has not resumed operation.
In January 1997, the Nuclear Regulatory Commission (NRC) named Clinton
among plants having a trend of declining performance and, in January 1998,
placed Clinton on its "Watch List" of nuclear plants that require additional
regulatory oversight.
In late 1997, an independent team conducted an ISA to thoroughly assess
Clinton's performance, and an NRC team performed an evaluation to validate the
ISA results. Both teams concluded that the underlying reasons for Clinton's
30
performance problems were ineffective leadership throughout the organization in
providing standards of excellence, complacency throughout the organization,
barrier weaknesses, and weaknesses in teamwork.
In January 1998, IP and PECO announced an agreement under which PECO
provides management services for Clinton, with IP maintaining the operating
license and ultimate oversight for the plant. PECO employees have assumed senior
positions at Clinton but the plant remains staffed primarily by IP employees. IP
selected PECO because it believed that bringing in PECO's experienced management
team would be the fastest and most efficient way to return Clinton to service
and to a superior level of operation.
In February 1998, IP filed with the NRC Clinton's Summary Plan for
Excellence, a comprehensive set of strategies and associated actions necessary
to improve performance, permit safe restart of the plant, and achieve excellence
in operations. IP is implementing the actions required prior to plant restart.
The NRC is conducting a formal review process in parallel with IP's recovery and
restart program.
On April 27, 1999, IP received notification from the NRC that the
actions required prior to restart have been satisfied, thus lifting the
regulatory agency's constraints on restarting the plant.
Due to uncertainties of deregulated generation pricing in Illinois and
to various operation and management factors, Illinova's and IP's Boards of
Directors decided in December 1998 to sell or close Clinton. This decision
resulted in an impairment of Clinton-related assets and accrual of exit-related
costs of $1,523.7 million, net of income taxes, which was recognized as a charge
against earnings.
The prolonged outage at Clinton is having an adverse effect on
Illinova's and IP's financial condition, through higher operating and
maintenance and capital costs, lost opportunities to sell energy, and
replacement power costs. 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 deposit $62.1 million cash for the acquisition of core fuel in
March 1999, with the Fuel Company Trustee for the benefit of investors in
secured Notes of the Fuel Company.
PECO 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 75 percent of the plant's electricity
output for the next several years. AmerGen is owned jointly by PECO Energy
Company (PECO) and British Energy. IP also announced a revised management
agreement (Agreement) with PECO for the operation of Clinton commencing April 1,
1999. PECO will continue to manage the station pending a final agreement between
the parties and consummation of the sale.
Under the Agreement, starting April 1, 1999, PECO is assuming the
plant's direct operating and capital expenditures, regardless of operating
status. This eliminates the Company's exposure to the uncertainty regarding the
31
costs of returning Clinton to service and subsequent operations. In return for
transferring this financial risk, the Company has modified the management
agreement with PECO to incorporate a new fee structure. The Agreement obligates
IP to pay a management fee to PECO calculated by multiplying a fixed dollar
amount per MWH times 80 percent of the electricity generated at Clinton during
the remainder of 1999. The financial impact of this obligation is contingent on
three variables: (1) whether Clinton restarts; (2) the capacity levels at which
it subsequently operates; and (3) 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 between April 1 and December 31, 1999 could equal or
exceed the 1999 Clinton-related O&M and capital costs for which PECO assumed
full responsibility commencing April 1, 1999. Under the interim agreement
AmerGen has no obligation to buy the plant if it has not actually generated
electric energy and been synchronized to the grid by December 31, 1999. For
further information, see the management agreement, which is attached as exhibit
A to the interim agreement filed as Exhibit 10.1 to this document.
Under the terms of the interim agreement, AmerGen will pay IP $20
million for Clinton (including nuclear fuel) and IP will have an obligation to
pay AmerGen $275 million to assume the Clinton decommissioning liability. It is
anticipated that IP will transfer $95 million in its decommissioning trust fund
and make payments of $30 million in each of the next six years to meet its
decommissioning obligation. This compares favorably with the $529 million NPV
that IP reported as its decommissioning liability as of December 31, 1998.
IP has agreed to negotiate exclusively with AmerGen until June 15, 1999.
While the interim agreement provides a framework for further negotiations toward
a final agreement to sell Clinton to AmerGen, several significant steps remain
before a sale can be completed. 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
parties must conclude a definitive agreement. The NRC must approve the sale and
the transfer of the operating license; the ICC must approve the sale; and, the
FERC must approve the PPA.
REGULATORY MATTERS
FOSSIL GENERATION FILING
IP filed a notice with the ICC in April 1999, as required by law,
advising of its intention to sell its fossil generating assets to Illinova.
Subsequently, Illinova intends to transfer those assets to its IPMI subsidiary.
IPMI, which was incorporated in April 1999, will become a wholesale generation
and power marketing company. The proposed transfer of assets from IP will be
done pursuant to Section 16-111(g) of The Customer Choice and Rate Relief Act of
1997, which permits transfer of utility assets on successful demonstration to
the Commission that certain financial and reliability criteria will be met. The
Commission will have 90 days to review the filing and make its decision. Also,
IP intends to make a filing with the FERC during the second quarter of 1999,
seeking approval of a proposed Purchase Power Agreement between IP and IPMI.
32
ATTORNEY GENERAL COMPLAINT
On July 17, 1998, a complaint against IP was filed at the ICC by the
Illinois State Attorney General. The complaint alleges that 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 31). It asks the ICC to conduct a management
audit of IP and seeks an order requiring IP to offer compensation to customers
for voluntary conservation and service interruptions. The company has agreed to
provide the Attorney General with a reliability report. The Attorney General and
the Company have mutually agreed on an independent committee of two outside
experts to review the report. The company believes this approach will lead to a
settlement of the complaint without a material adverse effect. Although there
were limited calls for voluntary conservation, and interruptible customers were
curtailed, no firm load was interrupted or curtailed during all of 1998.
SOYLAND POWER COORDINATION AGREEMENT
The FERC approved an amended Power Coordination Agreement (PCA) between
Soyland and IP in July 1997. Under the amended PCA, Soyland was allowed to
prepay an Elected Capacity Reduction Fee associated with a unilateral reduction
in its base capacity charge under the PCA. In December 1997, Soyland signed a
letter of intent to pay in advance the remainder of its base capacity charges in
the PCA. Soyland obtained the necessary financing and regulatory approvals
during the second quarter of 1998. During the first quarter of 1998, IP received
$30 million from Soyland and the remaining $40 million was received during the
second quarter of 1998. The prepayment was deferred and was being recognized as
interchange revenue evenly over the initial term of the PCA, which was from
September 1, 1996 through August 31, 2006. In March 1999, Soyland and IP signed
a new PCA agreement and filed this agreement with 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 the deferred revenue from the prepayment of the base capacity charge as
discussed above. 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
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
33
closed the audits for all previously disputed years. As a result of the
settlements, IP electric customers received refunds totaling $15.1 million in
the first quarter of 1999. These refunds 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 used
and useful in providing utility service to customers. IP must continue to
provide bundled retail electric service to all who choose to continue to take
service at tariff rates, and IP must provide unbundled electric distribution
services to all eligible customers as defined by P.A. 90-561 at rates to be
determined by the ICC. During 1998, pursuant to authority granted in P.A.
90-561, the ICC issued rules associated with (i) transactions between the
utility and its affiliates; (ii) service reliability; (iii) environmental
disclosure; and (iv) alternative retail electric supplier certification criteria
and procedures. During 1999, it is expected that the ICC will rule on (i) the
rates and terms associated with the provision of delivery services for
commercial and industrial customers; (ii) establishing the neutral fact finder
price utilized in (a) calculating competitive transition costs and (b) IP's
power purchase tariff; (iii) the competitive transition cost methodology; and
(iv) guidelines regarding standards of conduct and functional separation. A
proceeding will be 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. The final rule on delivery service
tariffs is expected in early August.
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.
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.
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
34
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.
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, IGC, and IEP. A central organization is
providing 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
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, barges, etc., fuel
suppliers, electric and gas transmission and distribution facilities,
substations and transformers, meters, building systems such as HVAC and
security, and financial institutions.
35
The overall status of Illinova's Y2K project is illustrated in the table
below.
Illinova Status
March 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) 81 06/30/99 e 74 10/31/99 e
Implementation -
(Important to
Operations) 87 05/31/99 e 73 10/31/99 e
Contingency Planning 20 06/30/99 e 35 06/30/99 e
*"a" = Actual Completion Date, "e" = Estimated Completion Date
IP has completed its awareness, inventory, assessment, and process
analysis phases. The table below provides further details differentiating
between IT and non-IT for IP alone.
36
IP Status
March 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) 81 06/30/99 e 79 10/31/99 e
Implementation -
(Important to ***
Operations) 87 05/31/99 e 82 10/31/99 e
Contingency Planning 20 06/30/99 e 41 06/30/99 e
*"a" = Actual Completion Date, "e" = Estimated Completion Date
** It is currently projected that all IP mission critical items will be fully
Year 2000 ready by June 30, 1999, with the exception of one process computer
system at Clinton. However, Clinton still plans to be Year 2000 ready, per NRC
requirements, by developing contingency plans that will allow continued
operation.
*** It is currently projected that all IP important to operations items will be
fully Year 2000 ready by June 30, 1999, with the exception of three process
computer systems at Clinton and one process computer system in our fossil power
system. Contingency plans for these systems are being developed to allow
continued operations.
IT systems (such as billing, payroll, etc.) and infrastructure are
approximately 84% complete, with 100% completion projected by 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.
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
37
its regional council (MAIN) in assessment and renovation of the grid and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.
IP participated in the April NERC drill and is also participating in the
September NERC drill.
NERC has recommended that all "mission critical" systems needed to meet
demand and reliability obligations be Year 2000 ready by June 30, 1999. IP is
working diligently to meet the June 30, 1999, deadline. It is currently
projected that all of IP's power plants and field transmission and distribution
items will be fully Year 2000 ready by that date with the exception of one
process computer system at Clinton. Clinton still plans to be Year 2000 ready by
June 30, 1999, per NRC requirements, by developing contingency plans that will
allow continued operation.
The total cost for achieving Year 2000 readiness for Illinova is
estimated to be approximately $20.5 million through 1999. Through the end of
March 1999, $11.8 million, or 57% of the total $20.5 million had been spent.
Invoicing is lagging a few months behind when the actual work is completed, and
Clinton has had to reschedule some tasks to a later date to coincide with the
plant startup schedule.
Development of contingency plans has begun and are focused on Illinova's
"mission critical" business processes. Contingency plans are being developed in
accordance with industry guidelines, such as NERC and the General Accounting
Office, and involve 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.
Illinova is currently assessing potential worst-case scenarios. Such a
scenario might include one or both of the following events: winter storms
coupled with a significant Year 2000 system problem that compounds emergency
response efforts and/or loss of a major telecommunications carrier causes
disruptions in dispatching generation, dispatching emergency response crews, and
communications with financial institutions.
Contingency plans will address the above scenarios as well as any other
potential scenarios that could affect the ability to serve customers and
maintain the financial viability of Illinova.
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 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, AZ 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, IL.
38
The 1998 combined revenues of ERI, QES, and EDI were approximately $67
million.
ENVIRONMENTAL MATTERS
GAS MANUFACTURING SITES
See "Manufactured Gas Plant Sites" under "Regulatory and Legal Matters"
of the "Notes to Consolidated Financial Statements" on page 16 of this report.
NITROGEN OXIDE
On October 27, 1998, the U.S. EPA finalized air pollution rules that
will require substantial reductions of NOx emissions in Illinois and 21 other
states. This rule will require the installation of NOx controls by May 2003,
with each Illinois utility's exact reduction requirement to be specified in
1999. Preliminary estimates of the capital expenditures needed in 2000 through
2003 to comply with these new NOx limitations are $90 million to $140 million.
NOx estimates are included in forecasted capital expenditures. The legality of
this proposal, along with its technical feasibility, is being 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 March
31, 1999, was $10.4 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
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.
IP will face major changes in the way it generates electricity if the
Kyoto Protocol is ratified, or if the Protocol's reduction goals are
incorporated into other environmental regulations. IP would have to repower some
generating units and change from coal to natural gas in other units to reduce
greenhouse gas emissions. IP estimates that compliance with these proposed
regulations may require significant capital outlays and annual operating
expenses which could have a material adverse impact on Illinova and IP.
39
POWER SUPPLY AND RELIABILITY
Electricity was in short supply during the 1998 summer cooling season
because of an unusually high number of plant outages in the Midwest region. IP
bought generation and transmission capacity to prevent firm load curtailment and
took additional steps to avoid power outages, including upgrading transmission
lines and equipment, readying emergency procedures, and returning to service
five units that had been in cold shutdown. Expenses incurred as a result of the
shortage have had a material adverse impact on Illinova and IP.
The electric energy market experienced unprecedented prices for power
purchases during the last week of June 1998. IP's power purchases for 1998 were
$517 million higher than 1997 due to summer price spikes resulting in a $274
million increase in power purchased, additional purchases of $215 million to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts as part of the wholesale
trading business. Income from interchange sales was $382 million higher than in
1997 due to increased sales volumes and higher prices.
IP expects to have in excess of 400 MW of additional generation on line
for the summer of 1999. This includes approximately 235 MW from five oil-fired
units which were brought up from cold shutdown during the summer of 1998 and 176
MW from four natural gas turbines that IP plans to install before the summer of
1999. Total cost for the two projects is estimated at $87 million. IP also plans
to refurbish nine gas turbines already in service at a cost of $13 million. In
addition, the restructuring of the Soyland PCA agreement freed up an additional
287 MW of capacity. IP expects to have sufficient generating capacity to serve
firm load during the periods of peak summer demand using demand-side and
supply-side initiatives taken in response to the 1998 regional supply crisis. If
generation is lost or demand is at unprecedented levels, firm load could be
curtailed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED March 31, 1999 AND 1998
Electric Operations - Electric revenues for the first quarter of 1999
decreased $21.4 million compared to the first 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 now accounted for as a liability, and both revenues
and general taxes are reduced. The rate decrease resulted in revenue reductions
of $17.4 million in the first quarter of 1999. The removal of $11.3 million in
excise and municipal taxes from revenue and general taxes also negatively
impacted electric revenues. These reductions were partially offset by increased
sales in 1999. Electric interchange revenues decreased $2.3 million. Interchange
activity decreased $59.0 million along with a $3.4 million expense to reflect
mark-to-market for forward contracts and options. These decreases were offset by
40
a $60.1 million revenue recognition resulting from the restructuring of a
Soyland Power Cooperative power supply contract. Power purchased decreased $45.4
million due largely to decreased interchange activity. During the quarter, fuel
for electric plants decreased $4.3 million due to decreased generation and
decreased emission allowance costs. These factors combined to increase electric
margin $26.0 million for the quarter.
Kilowatt hour (kwh) sales to ultimate consumers increased 6.5% for the
quarter due to increases of 11.3% and 9.5% in the residential and the commercial
markets, respectively. Heating degree days increased approximately 12% from 1998
which contributed to the increase in sales to the temperature-sensitive markets.
For the first quarter of 1999 and 1998, Clinton was unavailable due to
the continued outage which began September 6, 1996. The equivalent availability
for IP's coal-fired plants was 77.5% and 79.5% for the three months ended March
31, 1999 and 1998, respectively.
Gas Operations - For the quarter, gas margin remained constant. Gas
revenues increased $6.5 million reflecting a 10% increase in therm sales
(excluding transport) caused by colder winter weather. Gas purchased costs
increased $6.5 million due to the higher consumption.
Operation and Maintenance Expenses - Of the current quarter increase of
$42.9 million, $29.0 million is due to higher operating and maintenance expenses
associated with the Clinton outage. This $29.0 million increase in Clinton
expenses includes $12.4 million of costs which would have been considered
capital additions had Clinton not been impaired. For more information, see
"Clinton Power Station" of the "Management's Discussion and Analysis" on pages
13-14 of this report.
Depreciation and amortization - The decrease in depreciation and
amortization for the first quarter of 1999 compared to 1998 was $6.2 million.
Due to the Clinton impairment, nuclear depreciation decreased approximately $23
million but was offset by approximately $18 million for the amortization of the
adjustment to fair value for the fossil generation assets.
Diversified enterprises - Due primarily to decreased power trading
activity at IEP, diversified enterprise revenues decreased $9.8 million for the
first quarter of 1999, which was offset by a decrease in diversified enterprise
expenses of $13.2 million.
Miscellaneous - net - Of the current quarter increase of $12.4 million,
$6.2 million is income from IGC investments not accounted for under the equity
method. Interest income increased $3.1 million primarily due to the investment
of the proceeds of the transitional funding trust notes issued in December 1998,
and the adjustment in the net present value of the decommissioning regulatory
asset. Revenues from non-utility operations also increased in the first quarter
of 1999.
Interest expense - The increase in interest expense of $6.5 million in
the first quarter of 1999 is primarily the result of interest on increased
long-term debt and the adjustment in the net present value of the
decommissioning liability, offset by lower interest charges resulting from
reduced short-term borrowings in 1999.
41
Earnings per Common Share - The earnings per common share for Illinova
during the first 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 - ILLINOVA SEGMENTS OF BUSINESS
Customer Service
For the quarter, both the contribution margin and cash flow measures were lower
than for the corresponding quarter in 1998, primarily due to decreased electric
revenues as discussed below.
Transmission, Distribution and Sale of Electric Energy
The Customer Service Business Group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy Business Group;
electricity was provided to the Customer Service Business Group at a fixed 2.9
cents per kwh in 1999 and 2.5 cents per kwh in 1998, primarily due to decreased
electric revenues as discussed below.
Retail electric revenues, excluding interchange sales, for the first quarter of
1999 decreased 7.7% over the first quarter of 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. Additionally, operating
costs were higher during the first quarter of 1999 compared to the same period
in 1998.
Transmission, Distribution and Sale of Natural Gas
Revenues are derived through regulated tariffs. During the first quarter of
1999, revenues from gas sales and transportation were up 5.5%, while therms sold
and transported were up 7.7% over the first quarter of 1998. The increase in
therm sales was caused by a return to normal weather after the milder-than-usual
weather experienced in 1998. The margin on gas sales and transportation
decreased 0.2% during the period due to an increase in gas costs, offset by
decreases in both therms sold and therms transported.
Wholesale Energy
Factors leading to the increased contribution margin during the first quarter of
1999 compared to 1998 include: higher intersegment revenues in 1999 due to a new
pricing agreement; higher purchased power costs, partially offset by lower fuel
costs, due to fossil generating stations having extended outages during 1999; a
one-time credit to electric interchange revenues from the restructuring of a
power supply contract; market losses recorded on forward power purchase and
sales contracts as part of the wholesale trading business; and higher
depreciation expense due to the revaluation of fossil assets during the December
1998 quasi-reorganization.
Cash flow is lower than 1998 due to cash received in 1998 related to the power
supply contract buyout, increased expenditures for major capital projects in
1999, payments in 1999 for prepaid fuel purchases, as well as changes in current
assets and liabilities due to normal operating activity.
42
Wholesale Energy provided power to the Customer Service Group at 2.9 cents per
kwh during the first Quarter of 1999 compared to 2.5 cents per kwh in 1998.
Nuclear
IP's only nuclear generating station, Clinton, did not generate electricity
during the first quarter of either 1999 or 1998. Its only revenues were those
paid by customers under a tariff rider to fund the decommissioning trust.
Nuclear's results were unfavorably affected by higher operating and maintenance
expenses and capital being expensed in 1999.
Illinova Energy Partners, Inc.
Although negative, contribution margin is slightly more favorable than in 1998
due to increased revenues and margin earned on electricity and natural gas,
offset by continuing investment in future growth and market penetration in both
the Midwest and Western United States.
Illinova Generating Company
IGC's positive contribution margin during the first quarter of 1999 compared
with the first quarter of 1998 reflect improvement due primarily to an increase
in income from investing activities. The increase in cash flows is attributed to
increased distributions from project investments.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure.
See "Illinova Segments of Business" in the footnotes to the financial statements
on page 19 for additional information.
RESULTS OF OPERATIONS - ILLINOIS POWER SEGMENTS OF BUSINESS
Customer Service
For the quarter, both the contribution margin and cash flow measures were lower
than for the corresponding quarter in 1998, primarily due to decreased electric
revenues as discussed below.
Transmission, Distribution and Sale of Electric Energy
The Customer Service Business Group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy Business Group;
electricity was provided to the Customer Service Business Group at a fixed 2.9
cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the first quarter of
1999 decreased 7.7% over the first quarter of 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. Additionally, operating
costs were higher during the first quarter of 1999 compared to the same period
in 1998.
43
Transmission, Distribution and Sale of Natural Gas
Revenues are derived through regulated tariffs. During the first quarter of
1999, revenues from gas sales and transportation were up 5.5%, while therms sold
and transported were up 7.7% over the first quarter of 1998. The increase in
therm sales was caused by a return to normal weather after the milder-than-usual
weather experienced in 1998. The margin on gas sales and transportation
decreased 0.2% during the period due to an increase in gas costs, offset by
decreases in both therms sold and therms transported.
Wholesale Energy
Factors leading to the increased contribution margin during the first quarter of
1999 compared to 1998 include: higher intersegment revenues in 1999 due to a new
pricing agreement; higher purchased power costs, partially offset by lower fuel
costs, due to fossil generating stations having extended outages during 1999; a
one-time credit to electric interchange revenues from the restructuring of a
power supply contract; market losses recorded on forward power purchase and
sales contracts as part of the wholesale trading business; and higher
depreciation expense due to the revaluation of fossil assets during the December
1998 quasi-reorganization.
Cash flow is lower than 1998 due to cash received in 1998 related to the power
supply contract buyout, increased expenditures for major capital projects in
1999, payments in 1999 for prepaid fuel purchases, as well as changes in current
assets and liabilities due to normal operating activity.
Wholesale Energy provided power to the Customer Service Group at 2.9 cents per
kwh during the first quarter of 1999 compared to 2.5 cents per kwh in 1998.
Nuclear
IP's only nuclear generating station, Clinton, did not generate electricity
during the first quarter of either 1999 or 1998. Its only revenues were those
paid by customers under a tariff rider to fund the decommissioning trust.
Nuclear's results were unfavorably affected by higher operating and maintenance
expenses and capital being expensed in 1999.
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.
See "IP Segments of Business" in the footnotes to the financial statements on
page 23 for additional information.
44
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 is comprised basically 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 that it has
obtained. 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 March 31, 1998, 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 March 31, 1999, as compared to VaR at December 31, 1998, is given below.
- --------------------------------------------------------------------------------
(Millions of dollars) March 31, 1999 December 31,1998
- --------------------------------------------------------------------------------
VaR VaR
Illinova, including IP debt $9.2 $14.9
IP debt only $8.7 $14.2
- --------------------------------------------------------------------------------
Contributing factors to the decrease in VaR were retirement of high
coupon debt with maturities extending past the year 2020 and an increase in
commercial paper levels from that at year end. The 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.
45
COMMODITY PRICE RISK
Trading Positions
Illinova is exposed to commodity price risk through IEP's power trading
activities and IP's trading and non-trading operations. 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 quarter ended March 31, 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 March 31, 1999, and December 31,
1998, as restated using a five day holding period follow:
- --------------------------------------------------------------------------------
March 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
(Millions of Dollars) VaR VaR
IP $0.6 $1.4
IEP $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. 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 the firm (e.g., tolling,
forward, call & 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.
46
Since the new VaR methodology was implemented only at the beginning of
March 1999, there is no comparable VaR number at December 31, 1998. The VaR for
the non-trading portfolio at March 31, 1999 using a five-day holding period is
$11.6 million.
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.
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 March 31, 1999, IGC
had invested $169 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 $47
million in Asia and $119 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 March 31, 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 market risk as a result of fluctuations in
interest rates. IP actively monitors its portfolio by benchmarking the
performance of its investments against equity and fixed-income indexes. It
maintains and periodically reviews established target allocations of the trust
assets approved in the investment policy statement. VaR at March 31, 1999,
calculated based on a 95 percent confidence level and a one day holding period
follows:
- --------------------------------------------------------------------------------
(Millions of dollars) Value-at-Risk
- --------------------------------------------------------------------------------
IP $1.4
- --------------------------------------------------------------------------------
47
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed with this 10-Q/A are listed on the Exhibit Index.
(b) Reports on Form 8-K since December 31, 1998:
Report filed on Form 8-K on February 12, 1999
Item 7: Illinova announces continued
work toward restarting Clinton Power
Station and pursuit of negotiations
with potential buyers.
Report filed on Form 8-K/A on March 3, 1999
Item 5, Other Events: Press release: Illinova
releases 1998 year end earnings.
Item 7, Exhibits: Illinova Consolidated
Income Statements.
Report filed on Form 8-K/A on April 19, 1999
Item 5, Other Events: Press Release: Illinova
Releases 1999 first quarter earnings,
Announces expected sale of Clinton to AmerGen.
Item 7, Exhibits: Illinova Consolidated
Income Statements.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOVA CORPORATION
(Registrant)
/s/Larry F. Altenbaumer
---------------------------
Larry F. Altenbaumer
Senior Vice President,
Chief Financial Officer,
Treasurer and Controller
on behalf of
Illinova Corporation
Date: May 17, 1999
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOIS POWER COMPANY
(Registrant)
/s/Larry F. Altenbaumer
---------------------------
Larry F. Altenbaumer
Senior Vice President and
Chief Financial Officer
on behalf of
Illinois Power Company
Date: May 17, 1999
50
EXHIBIT INDEX
PAGE NO. WITHIN
SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
10 Material Contracts 52 - 118
27 Financial Data Schedule UT
(filed herewith)
51