1998 INFORMATION STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
Notice of Annual Meeting of Shareholders
Information Statement Table of Contents
Notice of Annual Meeting............................. 2
Information Statement................................ 3
Appendix: 1998 Annual Report to Shareholders.........a-1
TO THE SHAREHOLDERS OF ILLINOIS POWER:
Notice is hereby given that the Annual Meeting of Shareholders of Illinois Power
Company ("Illinois Power") will be at 10 a.m. Wednesday, May 5, 1999, at
Shilling Community Education Center, Richland Community College, One College
Park, Decatur, Illinois 62521, for the following purposes:
1) To elect the Board of Directors for the ensuing year.
2) To transact any other business that may properly come before the
meeting or any adjournment.
Shareholders of record at the close of business on March 8, 1999, will be
entitled to receive notice of and to vote at the Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice President, General Counsel
and Corporate Secretary
Decatur, Illinois
March 31, 1999
IMPORTANT
Only shareholders of Illinois Power are entitled to attend the Annual Meeting.
Shareholders will be admitted on verification of record share ownership at the
admission desk. Shareholders who own shares through banks, brokerage firms,
nominees or other account custodians must present proof of beneficial share
ownership (such as a brokerage account statement) at the admission desk.
Information Statement
FIRST SENT OR GIVEN TO SECURITY HOLDERS ON OR ABOUT MARCH 31, 1999.
We are not asking you for a proxy and you are requested not to send us a proxy.
This Information Statement is furnished in connection with the Annual Meeting of
Shareholders of Illinois Power. The Annual Meeting will be held at 10 a.m.
Wednesday, May 5, 1999, at Shilling Community Education Center, Richland
Community College, One College Park, Decatur, Illinois 62521, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders.
On March 8, 1999 ("Record Date"), Illinova Corporation ("Illinova")
beneficially owned all of the 62,892,213 shares of Illinois Power Common Stock
then outstanding and there were 1,139,110 shares of Illinois Power Preferred
Stock then outstanding, none of which was held by Illinova.
VOTING RIGHTS
Shareholders of record at the close of business on the Record Date will be
entitled to receive notice of and to vote at the Annual Meeting. Shareholders
who are present at the Annual Meeting will be entitled to one vote for each
share of Illinois Power Preferred Stock which they held of record at the close
of business on the Record Date.
All shareholders will be entitled to 10 votes (the number of directors to be
elected) for each of their shares for candidates nominated to serve as
directors. Shareholders may cast all of their votes for any one candidate whose
name has been placed in nomination prior to the voting, or distribute their
votes among two or more such candidates. Shareholders will be entitled to one
vote for each share of Preferred Stock held of record at the close of business
on the Record Date when voting on other matters presented for consideration at
the Annual Meeting.
ANNUAL REPORT AND INFORMATION STATEMENT
Accompanying this Information Statement, which includes Consolidated Financial
Statements, is a Notice of Annual Meeting of Shareholders and the Summary Annual
Report to Shareholders covering operations of Illinova for the year 1998. This
Information Statement and accompanying documents are first being mailed to
shareholders on or about March 31, 1999.
BOARD OF DIRECTORS
Information Regarding the Board of Directors
The Board of Directors held six Board meetings in 1998. All directors attended
at least 75 percent of the aggregate meetings of the Board and Committees of
which they were members during 1998. The Board has four standing committees: the
Audit Committee, the Finance Committee, the Compensation and Nominating
Committee, and the Nuclear Operations Committee.
The duties and members of the standing committees are:
Audit Committee
1) Review with the Chairman, President and Chief Executive Officer and
the independent accountants the scope and adequacy of Illinois Power's
system of internal controls;
2) Review the scope and results of the annual examination performed by
the independent accountants;
3) Review the activities of Illinois Power's internal auditors;
4) Report its findings to the Board and provide a line of communication
between the Board and both the internal auditors and the independent
accountants;
5) Recommend to the Board the appointment of the independent accountants;
6) Approve the services performed by the independent accountants.
The Audit Committee met three times during 1998.
This Committee consists of the following directors who are not employees of
the Company ("Outside Directors"): Robert M. Powers (Chairman), C. Steven
McMillan, Sheli Z. Rosenberg, Marilou von Ferstel, and John D. Zeglis.
Finance Committee
1) Review management's cash flow forecasts, financial forecasts and
financing program, and make recommendations to the Board regarding the
approval of such plans;
2) Review Illinois Power's banking relationships, short-term borrowing
arrangements, dividend policies, arrangements with the transfer agent
and registrar, and investment objectives;
3) Review the performance of Illinois Power's pension and other trust
funds, evaluate fund managers, and make recommendations to the Board
concerning such matters;
4) Review Illinois Power's risk management programs, including insurance
coverage, and make recommendations to the Board; and
5) Act in an advisory capacity to management, the Board of Directors, and
the Chairman, President and Chief Executive Officer on other financial
matters as they may arise.
The Finance Committee met five times during 1998.
This Committee consists of the following members of the Board: Walter D.
Scott (Chairman), Charles E. Bayless, C. Steven McMillan, Sheli Z. Rosenberg,
Joe J. Stewart, and Walter M. Vannoy.
Compensation and Nominating Committee
1) Review performance of and recommend salaries plus other forms of
compensation for elected Illinois Power officers and the Board of
Directors;
2) Review Illinois Power's benefit plans for elected Illinova officers
and make recommendations to the Board;
3) Review with the Chairman, President and Chief Executive Officer any
organizational or other personnel matters; and
4) Recommend to the Board candidates for election as director to fill
vacancies on the Board of Directors as they occur.
The Compensation and Nominating Committee will consider shareholders'
recommendations for candidates for director made in writing and addressed to the
Chairman of the Committee at the executive offices of Illinois Power. The
recommendation should include a full description of the qualifications and
business and professional experience of the candidates and a statement of the
candidates' willingness to serve. The notice must be delivered to or mailed and
received at the executive offices of Illinois Power not less than 90 nor more
than 120 days prior to the Annual Meeting.
The Compensation and Nominating Committee met three times during 1998.
This Committee consists of the following Outside Directors: Ronald L.
Thompson (Chairman), J. Joe Adorjan, Robert M. Powers, Marilou von Ferstel, and
John D. Zeglis.
Nuclear Operations Committee
1) Review the safety, reliability and quality of nuclear operations;
2) Review the effectiveness of the management of nuclear operations;
3) Review the strategic plan for nuclear operations;
4) Review various nuclear reports; and
5) Report its findings to the Board.
The Nuclear Operations Committee met six times during 1998.
This Committee consists of the following members of the Board: Joe J.
Stewart (Chairman), J. Joe Adorjan, Charles E. Bayless, Walter D. Scott, Ronald
L. Thompson, and Walter M. Vannoy.
Board Compensation
The Outside Directors of Illinois Power, all of whom also serve on the Board of
Illinova, receive a total retainer fee of $18,000 per year for their service on
these boards. Outside Directors who also chair Board Committees receive an
additional $2,500 per year. Outside Directors receive a grant of 650 shares of
Illinova Common Stock on the date of each Annual Shareholders Meeting. Outside
Directors elected to the Board between Annual Shareholders Meetings are paid
$850 for each Board and Committee meeting attended prior to the first Annual
Shareholders Meeting after their election to the Board. Other than the
foregoing, there are no attendance-based fees.
Illinova had a Retirement Plan for Outside Directors. Under this plan, each
Outside Director who attained age 65 and served on the Board for a period of 60
or more consecutive months was eligible for annual retirement benefits at the
rate of the annual retainer fee in effect when the director retired. Each former
Outside Director whose right to receive the retirement benefit had vested
continues to receive such benefits in accordance with the terms of the
Retirement Plan.
In 1996, the Board of Directors adopted a Comprehensive Deferred Stock Plan
for Outside Directors, replacing the Retirement Plan. All Outside Directors
serving at the time this new plan was adopted were granted a lump sum amount
based on the net present value of these benefits to them, were they to have
retired under the Retirement Plan, based on the number of years they served on
the Board but not to exceed 10. This dollar amount was converted into stock
units, based on the then market value of Illinova Common Stock, and placed into
an account. The value of these stock units is to be paid to the director in
cash, in a lump sum or installments, on termination of service, based on the
then market value of Illinova Common Stock, plus dividend equivalents.
In addition, each Outside Director receives an annual award of stock units
having a value of $6,000. This award is paid to the Outside Director in cash on
retirement, at once or in installments as the Director may elect. The amount of
such payment is determined by multiplying the number of stock units in the
account times the then market value of Illinova Common Stock, and adding the
dividend equivalents attributable to such stock units.
Illinova has a Deferred Compensation Plan for Certain Directors. Outside
Directors of Illinois Power may elect to defer all or any portion of their fees
and stock grants until termination of their services as directors. Deferred fees
and grants are converted into stock units representing shares of Illinova Common
Stock with the value of each stock unit based on the last reported sales price
of such stock. Additional credits are made to the participating director's
account in dollar amounts equal to the dividends paid on the Common Stock which
the director would have received if the director had been the record owner of
the shares represented by stock units, and these amounts are converted into
additional stock units. On termination of the participating directors' services
as directors, payment of deferred fees and stock grants is made in shares of
Illinova Common Stock in an amount equal to the aggregate number of stock units
credited to their accounts.
Illinova amended the plan in 1997 to provide for a payout in cash instead of
shares of Common Stock. Deferred amounts are still converted into stock units
representing shares of Common Stock with the value of each stock unit based on
the last reported sales price of such stock. Payment is made in cash, in a lump
sum or installments, as soon as practical following a director's termination.
The cash paid on termination equals the number of stock units times the share
price at the close of market on the last business day of the month preceding
termination. Directors receive no other payments after their service on the
Board ceases.
ELECTION OF DIRECTORS
Illinois Power's entire Board of Directors is elected at each Annual Meeting of
Shareholders. Directors hold office until the next Annual Meeting of
Shareholders or until their successors are elected and qualified. At the Annual
Meeting a vote will be taken on a proposal to elect the 10 directors nominated
by Illinois Power's Board of Directors. Their names and certain additional
information are set forth on the following pages. If any nominee should become
unable to serve as a director, another nominee may be selected by the current
Board of Directors.
Name of Director Nominee, Age, Year in Which First
Business Experience and Elected a Director
Other Information of Illinois Power
J. Joe Adorjan, 60 1997
Chairman of Borg-Warner Security Corporation, Chicago, Ill., a security systems
services firm, since 1995. He was President of Emerson Electric Company from
1993 to 1995. Prior to that, he was Chairman and Chief Executive Officer of ESCO
Electronics Corporation. He is a director of The Earthgrains Company, ESCO
Electronics Corporation, Hussmann Corporation and Goss Graphics
Systems, Inc.
Charles E. Bayless, 56 1998
Chairman of Illinova and Illinois Power since August 1998, and President and
Chief Executive Officer since July 1998. He was Chairman, President and Chief
Executive Officer of Tucson Electric Power from 1992 to 1998, President and
Chief Executive Officer from 1990 to 1992, and Senior Vice President and Chief
Financial Officer from 1989 to 1990. He is a director of Trigen Energy
Corporation.
C. Steven McMillan, 53 1996
President, Chief Operating Officer, and Director of Sara Lee Corporation,
Chicago, Ill., a global packaged food and consumer products company, since 1997.
He was Executive Vice President of Sara Lee from 1993 to 1997 and Senior Vice
President-Strategy Development from 1986 to 1993. He is a director of Pharmacia
and Upjohn.
Robert M. Powers, 67 1984
From 1980 until retirement in December 1988, President and Chief Executive
Officer of A. E. Staley Manufacturing Company, Decatur, Ill., a processor of
grain and oil seeds. He is a director of A. E. Staley Manufacturing Company.
Sheli Z. Rosenberg, 57 1997
President and Chief Executive Officer since 1994 and General Counsel 1980 to
1994 of Equity Group Investments, LLC, Chicago, Ill., a privately held business
conglomerate holding controlling interests in seven publicly traded corporations
involved in basic manufacturing, radio stations, retail, insurance, and real
estate. She is a director of Jacor Communications, Inc.; Capitol Trust; Anixter
International, Inc.; Equity Office Properties Trust; Equity Residential
Properties Trust; CVS Corporation; and Manufactured Home Communities, Inc.
Walter D. Scott, 67 1990
Professor of Management and Senior Austin Fellow, J. L. Kellogg Graduate School
of Management, Northwestern University, Evanston, Ill., since 1988. He was
Chairman of GrandMet USA from 1984 to 1986 and President and Chief Executive
Officer of IDS Financial Services from 1980 to 1984. He is a director of
Neodesic Corporation and Intermatic Incorporated.
Joe J. Stewart, 60 1998
From 1995 until retirement in 1998, President of BWX Technologies, Inc.,
formerly The Babcock & Wilcox Government Group, Lynchburg, Va., a diversified
energy equipment and services company, and Executive Vice President of McDermott
International, Inc. (parent of BWX Technologies, Inc. and The Babcock & Wilcox
Company). He was President and Chief Operating Officer of The Babcock and Wilcox
Company and Executive Vice President of McDermott International, Inc., from 1993
to 1995 and Executive Vice President of the Power Generation Group of The
Babcock and Wilcox Company from 1987 to 1993.
Ronald L. Thompson, 49 1991
Chairman and Chief Executive Officer of Midwest Stamping and Manufacturing Co.,
Bowling Green, Ohio, a manufacturer of automotive parts, since 1993. He was
President and Chief Executive Officer and a director of The GR Group, Inc., St.
Louis, Mo., from 1980 to 1993. He is a director of Teachers Insurance and
Annuity Association, and Ryerson Tull.
Marilou von Ferstel, 61 1990
Executive Vice President and General Manager of Ogilvy Adams & Rinehart, Inc., a
public relations firm in Chicago, Ill., from June 1990 until retirement in April
1997. She was Managing Director and Senior Vice President of Hill and Knowlton,
Chicago, Ill., from 1981 to 1990. She is a director of Walgreen Company.
John D. Zeglis, 51 1993
President and Director of AT&T, Basking Ridge, N.J., a diversified
communications company, since October 1997. He was Vice Chairman from June 1997
to October 1997, Senior Executive Vice President and General Counsel, from 1995
to June 1997 and Senior Vice President -- General Counsel and Government Affairs
from 1989 to 1995. He is a director of the Helmerich & Payne Corporation, and
Sara Lee Corporation.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below shows shares of Illinova Common Stock beneficially owned as of
December 31, 1998, by each director nominee and the executive officers named in
the Summary Compensation Table. All of Illinois Power's Common Stock is owned by
Illinova. To the best of Illinois Power's knowledge, no owner holds more than 5
percent of Illinois Power Preferred Stock.
Number Number of Stock
of Shares Units in Deferred
Name of Beneficially Compensation Percent
Beneficial Owner Owned (1)(2) Plans of Class
J. Joe Adorjan 1,650 205 (3)
Charles E. Bayless 2,501 2,000 (3)
Larry D. Haab 88,822 5,420 (3)
C. Steven McMillan 1,950 777 (3)
Robert M. Powers 9,200 4,937 (3)
Sheli Z. Rosenberg 1,000 3,704 (3)
Walter D. Scott 6,125 3,664 (3)
Joe J. Stewart 1,500 851 (3)
Ronald L. Thompson 3,806 6,091 (3)
Marilou von Ferstel 4,579 4,620 (3)
John D. Zeglis 2,714 3,170 (3)
Larry F. Altenbaumer 30,092 2,157 (3)
David W. Butts (4) 13,944 1,742 (3)
Alec G. Dreyer 13,673 3,035 (3)
Paul L. Lang (5) 27,991 2,402 (3)
(1) With sole voting and/or investment power.
(2) Includes the following shares issuable pursuant to stock options
exercisable June 30, 1998: Mr. Haab, 76,900; Mr. Altenbaumer, 24,300;
Mr. Butts, 12,900; Mr. Dreyer, 11,250; and Mr. Lang, 24,300.
(3) No director or executive officer owns any other equity securities of
Illinova or as much as 1 percent of the Common Stock. As a group,
directors and executive officers of Illinova and Illinois Power own
244,324 shares of Common Stock (less than 1 percent).
(4) Includes 135 shares owned by family members.
(5) Includes 910 shares owned by spouse.
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation of the Chief
Executive Officer, the retired Chief Executive Officer, and the four other most
highly compensated executive officers of Illinois Power for the years indicated.
The compensation shown includes all compensation paid for service to Illinois
Power, its parent and subsidiaries.
Summary Compensation Table
Long-Term Compensation
Annual Compensation Awards
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (1) Compensation (2) Options (4)
LARRY D. HAAB 1998 $ 338,625 $16,931 $ 46,025 $ 0 27,000 shs. $2,660
Retired Chairman, President 1997 514,952 41,840 16,557 41,840 20,000 shs. 2,614
and Chief Executive Officer 1996 493,709 69,267 15,973 69,267 22,000 shs. 2,615
of Illinova and Illinois Power
CHARLES E. BAYLESS 1998 $ 272,372 $137,500 $ 2,868 $309,625(3) 165,000 shs. $ 0
Chairman, President and
Chief Executive Officer of
Illinova and Illinois Power
PAUL L. LANG 1998 $ 250,875 $ 24,304 $ 7,705 $ 24,304 8,000 shs. $2,697
Senior Vice President 1997 242,325 10,602 8,305 10,601 6,500 shs. 2,615
of Illinois Power 1996 233,450 19,747 8,863 19,747 6,500 shs. 2,595
LARRY F. ALTENBAUMER 1998 $ 244,375 $ 19,855 $ 7,010 $ 19,855 10,000 shs. $2,500
Chief Financial Officer, 1997 232,048 8,992 9,521 8,992 6,500 shs. 1,985
Treasurer and Controller 1996 222,374 19,832 8,459 19,832 7,500 shs. 1,976
of Illinova, and Senior
Vice President and Chief
Financial Officer of
Illinois Power
LEAH MANNING STETZNER 1998 $ 191,375 $ 15,310 $ 6,083 $ 15,310 5,000 shs. $2,100
General Counsel and 1997 175,862 5,276 7,277 5,276 4,000 shs. 2,006
Corporate Secretary of 1996 168,674 11,880 7,080 11,879 4,500 shs. 1,996
Illinova, and Vice President,
General Counsel and
Corporate Secretary of
Illinois Power
ROBERT A. SCHULTZ 1998 $ 187,395 $ 14,956 $ 7,002 $ 14,956 5,000 shs. $2,700
Vice President of 1997 185,560 0 8,480 0 6,000 shs. 2,214
Illinois Power 1996 176,170 23,604 6,957 23,604 6,500 shs. 2,114
(1) The amounts shown in this column are the cash award portion of grants
made to these individuals under the Executive Incentive Compensation
Plan ("Compensation Plan") for 1998, including amounts deferred under
the Executive Deferred Compensation Plan. See the Compensation Plan
description in footnote (2) below.
(2) This table sets forth stock unit awards for 1998 under the
Compensation Plan. One-half of each year's award under this plan is
converted into stock units representing shares of Illinova Common
Stock based on the closing price of Common Stock on the last trading
day of the award year. The other one-half of the award is cash and is
included under Bonus in the Summary Compensation Table. Stock units
awarded in a given year, together with cash representing the
accumulated dividend equivalents on those stock units, become fully
vested after a three-year holding period. Stock units are converted
into cash based on the closing price of Common Stock on the first
trading day of the distribution year. Participants (or beneficiaries
of deceased participants) whose employment is terminated by retirement
on or after age 55, disability, or death receive the present value of
all unpaid awards on the date of such termination. Participants whose
employment is terminated for reasons other than retirement,
disability, or death forfeit all unvested awards. In the event of a
termination of employment within two years after a change in control
of Illinova, without good cause or by any participant with good
reason, all awards of the participant become fully vested and payable.
As of December 31, 1998, named executive officers were credited with
the following total aggregate number of unvested stock units under the
Compensation Plan since its inception, valued on the basis of the
closing price of Common Stock on December 31, 1998: Mr. Haab, 5,420
units valued at $135,513; Mr. Lang, 2,402 units valued at $60,069; Mr.
Altenbaumer, 2,157 units valued at $53,927; Ms. Stetzner, 1,826 units
valued at $45,663; Mr. Schultz, 1,390 units valued at $34,740.
Although stock units have been rounded, valuation is based on total
stock units, including partial shares.
(3) In December the Company granted Mr. Bayless an award of 6,000 share
units which vest in three equal annual installments of 2,000 share
units and may be deferred by Mr. Bayless at his option. These units
are converted into Illinova Common Stock when paid.
(4) The amounts shown in this column are Illinois Power's contributions
under the Incentive Savings Plan (including the market value of shares
of Illinova Common Stock at the time of allocation).
The following tables summarize grants during 1998 of stock options under
Illinova's 1992 Long-Term Incentive Compensation Plan ("LTIC") and awards
outstanding at year end for the individuals named in the Summary Compensation
Table.
OPTION GRANTS IN 1998
Individual Grants
Number of Securities % of Total Options
Underlying Options Granted to Employees Exercise or Base Grant Date
Granted (1) in 1998 Price Per Share (1) Expiration Date Present Value (2)
Larry D. Haab 27,000 9.5% $29.094 2/11/2008 $129,600
Charles E. Bayless 50,000(3) 17.5% 30.25 6/23/2008 261,500
115,000(4) 40.3% 30.25 6/23/2008 478,400
Paul L. Lang 8,000 2.8% 29.094 2/11/2008 38,400
Larry F. Altenbaumer 10,000 3.5% 29.094 2/11/2008 48,000
Leah Manning stetzner 5,000 1.7% 29.094 2/11/2008 24,000
Robert A. Schultz 5,000 1.7% 29.094 2/11/2008 24,000
(1) Each option becomes exercisable on February 11, 2001. In addition to the
specified expiration date, the grant expires on the first anniversary of
the recipient's death and/or 5 years following date of retirement, and is
not exercisable in the event a recipient's employment terminates. In the
event of certain change-in-control circumstances, the Compensation and
Nominating Committee may declare the option immediately exercisable. The
exercise price of each option is equal to the fair market value of the
Common Stock on the date of the grant. Recipients shall also receive, on or
shortly after February 11, 2001, a target performance award, determined by
calculating the difference between the return earned by Illinova on its
invested capital and its cost of capital (the "spread"), then comparing
this spread to that of a peer group and reducing or increasing the target
award depending on Illinova's relative performance, but not reducing the
payment below zero. The target award is equal to one-half of the mid-point
of compensation for each officer's salary grade (a market-based number)
times a percentage, determined by the Compensation and Nominating
Committee. In 1998 those percentages ranged between 20 and 45 percent. This
range does not apply to Mr. Bayless's stock options as described in his
employment agreement on page 10. At the discretion of the Board of
Directors, the foregoing payment may be made in the form of Illinova Common
Stock of equivalent value based on the average New York Stock Exchange
price of the stock during February 2001, or in cash.
(2) The Grant Date Present Value has been calculated using the Black-Scholes
option pricing model. Disclosure of the Grant Date Present Value, or the
potential realizable value of option grants assuming 5% and 10% annualized
growth rates, is mandated by regulation; however, Illinova does not
necessarily view the Black-Scholes pricing methodology, or any other
present methodology, as a valid or accurate means of valuing stock option
grants. The calculation was based on the following assumptions: (i) As of
the grant date, Illinova's calculated Black-Scholes ratio was .1808. After
discounting for risk of forfeiture at three percent per year over
Illinova's three-year vesting schedule, the ratio is reduced to .1650; (ii)
An annual dividend yield on Illinova Common Stock of 4.48%; (iii) A
risk-free interest rate of 5.76%, based on the yield of a zero-coupon
government bond maturing at the end of the option term; and (iv) Stock
volatility of 18.65%.
(3) The Grant Date Present Value for Mr. Bayless's 50,000 time-vesting options
was calculated based on the following assumptions: (i) As of the grant
date, Illinova's calculated Black-Scholes ratio was .1836. After
discounting for risk of forfeiture by three percent per year over the
option vesting schedule, the ratio is reduced to .1728; (ii) An annual
dividend yield on Illinova Common Stock of 4.46%; (iii) a risk-free
interest rate of 5.64%, based on the yield of a zero-coupon government bond
maturing at the end of the option term; and (iv) Stock Volatility of
19.30%.
(4) Mr. Bayless has 115,000 options which will vest based on the satisfaction
of certain performance criteria -- specifically, when Illinova's stock
price appreciates to specified levels above the market price on the date of
grant. As a result, The Grant Date Present Value for Mr. Bayless's 115,000
performance-vesting options was calculated based on the same assumptions as
were used for the time-vesting options, with the exception of risk of
forfeiture which was assumed to be somewhat greater since the options will
vest sooner than 9.5 years only if the performance restrictions are
satisfied. As a result, the Black-Scholes ratio used for the
performance-vesting options was reduced to .1375.
AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
Number of Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year-End Options at Fiscal Year-End
Name Exercisable/Unexercisable Exercisable/Unexercisable (1)
Larry D. Haab 76,900 shs./69,000 shs. $129,712/$0
Charles E. Bayless 0 shs./165,000 shs. $0/$0
Paul L. Lang 24,300 shs./21,000 shs. $ 41,487/$0
Larry F. Altenbaumer 24,300 shs./24,000 shs. $ 41,487/$0
Leah Manning stetzner 13,300 shs./13,500 shs. $ 24,047/$0
Robert A. Schultz 10,750 shs./17,500 shs. $ 16,594/$0
(1) None of the unexercisable options were in the money at fiscal year-end 1998.
PENSION BENEFITS
Illinois Power maintains a Retirement Income Plan for Salaried Employees (the
"Retirement Plan") providing pension benefits for all eligible salaried
employees. In addition to the Retirement Plan, Illinois Power also maintains a
nonqualified Supplemental Retirement Income Plan for Salaried Employees (the
"Supplemental Plan") that covers certain officers eligible to participate in the
Retirement Plan and provides for payments from general funds of Illinois Power
of any monthly retirement income not payable under the Retirement Plan because
of benefit limits imposed by law or because of certain Retirement Plan rules
limiting the amount of credited service accrued by a participant.
The following table shows the estimated annual pension benefits on a straight
life annuity basis payable upon retirement based on specified annual average
earnings and years of credited service classifications, assuming continuation of
the Retirement Plan and Supplemental Plan and employment until age 65. This
table does not show the Social Security offset, but any actual pension benefit
payments would be subject to this offset.
Estimated Annual Benefits (rounded)
Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Average Credited Credited Credited Credited Credited
Earnings Service Service Service Service Service
$ 125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
150,000 45,000 60,000 75,000 90,000 105,000
175,000 52,500 70,000 87,500 105,000 122,500
200,000 60,000 80,000 100,000 120,000 140,000
250,000 75,000 100,000 125,000 150,000 175,000
300,000 90,000 120,000 150,000 180,000 210,000
350,000 105,000 140,000 175,000 210,000 245,000
400,000 120,000 160,000 200,000 240,000 280,000
450,000 135,000 180,000 225,000 270,000 315,000
500,000 150,000 200,000 250,000 300,000 350,000
550,000 165,000 220,000 275,000 330,000 385,000
600,000 180,000 240,000 300,000 360,000 420,000
650,000 195,000 260,000 325,000 390,000 455,000
700,000 210,000 280,000 350,000 420,000 490,000
750,000 225,000 300,000 375,000 450,000 525,000
800,000 240,000 320,000 400,000 480,000 560,000
The earnings used in determining pension benefits under the Retirement Plan
are the participants' regular base compensation, as set forth under Salary in
the Summary Compensation Table.
See Employment Agreement for information relating to Mr. Bayless's pension
agreement.
At December 31, 1998, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Bayless, Lang, Altenbaumer, Ms. Stetzner and Mr.
Schultz had completed 0, 17, 26, 9 and 17 years of credited service,
respectively. As of the date of his retirement, Mr. Haab had completed 33 years
of credited service.
EMPLOYMENT AGREEMENT
Charles Bayless was hired in July 1998 and elected Chairman, President and CEO
in August 1998. Mr. Bayless received a base salary of $560,000, which will be
subject to periodic review. The 1998 bonus opportunity for Mr. Bayless had a
minimum guarantee of $232,000 with an opportunity for payment of up to $302,000.
Mr. Bayless has an option to purchase 165,000 shares of Illinova stock based on
the following vesting schedule:
If employed through Options available
the following date to Exercise
One-year anniversary of grant date 16,667 shares
Two-year anniversary of grant date 16,667 shares
Three-year anniversary of grant date 16,667 shares
The first date on which the stock
price is $35.00 57,500 shares
The first date on which the stock
price is $40.00 57,500 shares
An additional grant of 6,000 share units of Illinova stock was awarded Mr.
Bayless in December 1998. Mr. Bayless has a right to receive these shares in
2,000-share blocks in calendar years 1998, 1999, and 2000. These share units may
be deferred by Mr. Bayless at his option.
For future years, Mr. Bayless will participate in the Executive Incentive
Compensation Plan and the Long-Term Incentive Compensation Plan. Mr. Bayless was
provided with a Retention Agreement comparable to those issued to other named
Executives. Mr. Bayless will be entitled to a supplemental pension which fully
vests on December 31, 2004. Supplemental pension will pay an equivalent of 40
percent of his highest 36 consecutive months of his final 60 months of base pay
and bonus, less any payment made through the qualified pension plan. To
compensate for benefits or payments he was entitled to from his previous
employer but will not receive because of his departure, a $500,000 loan was made
to Mr. Bayless. This loan, plus all applicable taxes resulting from its receipt,
will be forgiven in 20 percent increments over a period of five years.
RETIREMENT AND CONSULTING AGREEMENT
Larry Haab became Chairman, President and Chief Executive Officer ("CEO") of
Illinois Power on June 12, 1991, and Chairman, President and Chief Executive
Officer of Illinova in December 1993. Mr. Haab retired from Illinova on August
12, 1998. Following his retirement, Illinova entered into a two-year retirement
and consulting agreement with Mr. Haab. Consulting services are to be provided
on request and Mr. Haab is compensated with a fee of $25,000 per month. Mr. Haab
is also entitled to office space and secretarial assistance for the period of
his consulting term. Financial consulting and tax preparation services are
provided to Mr. Haab for the five years following the year of his retirement.
Mr. Haab is also provided with certain personal property previously provided for
his business use. Additionally, the Board of Directors at its discretion may
elect to make a pro rata incentive compensation payment to Mr. Haab for the
period he was actually employed in 1998. As part of his retirement and
consulting agreement, Mr. Haab agrees to assist with any claims for a period of
48 months; will keep all non-public information regarding the company
confidential; will not make any disclosure or disparaging remarks about the
company; or solicit, employ, or offer to employ any person who was an employee
of the company in the previous year.
EMPLOYEE RETENTION AGREEMENTS
Illinova has entered into Employee Retention Agreements with each of its
executive officers and with officers of its subsidiaries. Under each agreement,
the officer would be entitled to receive a lump sum cash payment if his or her
employment were terminated without good cause or voluntarily by the officer for
good reason within two years following a change in control of Illinova (as
defined in the Agreement) or terminated prior to a change of control at the
request of a potential acquiror. The amount of the lump sum payment would be
equal to
1) 36 months' salary at the greater of the officer's salary rate in effect on
the date the change in control occurred or the salary rate in effect on the
date the officer's employment with Illinova terminated; plus
2) three times the latest bonus earned by the officer during the three
calendar years preceding termination of employment.
Under the agreement, the officer would continue, after any such termination
of employment, to participate in and receive benefits under other benefit plans
of Illinova. Such coverage would continue for 36 months following termination of
employment, or, if earlier, until the officer reached age 65 or was employed by
another employer; provided that, if the officer was 50 years of age or older at
the time of such termination, then coverage under health, life insurance and
similar welfare plans would continue until the officer became 55 years of age,
at which time he or she would be eligible to receive the benefits extended to
the employees of Illinova who elect early retirement.
COMPENSATION AND NOMINATING COMMITTEE REPORT ON OFFICER COMPENSATION
The five-member Compensation and Nominating Committee of the Board of Directors
(the "Committee") is composed entirely of Outside Directors. The Committee's
role includes an assessment of the Company's Compensation Strategy, a review of
the performance of the elected officers and the establishment of specific
officer salaries subject to Board approval. The Committee established
performance goals for the officers and approves payments to officers made
pursuant to the Annual Incentive Compensation Plan and recommends grants under
the Long-Term Incentive Compensation Plan approved by the shareholders in 1992.
The Committee also reviews other forms of compensation and benefits, making
recommendations to the Board on changes whenever appropriate. The Committee
carries out these responsibilities with assistance from an executive
compensation consulting firm and with input from the Chief Executive Officer and
management as it deems appropriate.
OFFICER COMPENSATION PHILOSOPHY
Illinova's compensation philosophy reflects a commitment to compensate officers
competitively with other companies while rewarding executives for achieving
levels of operational and financial excellence consistent with continuous
improvement.
In 1998 it was determined that the company would broaden its competitive
reference beyond the regulated utility industry in order to compete sufficiently
for talent in the changing industry. Illinova's current compensation policy is
to provide a total compensation opportunity targeted to the median of the
appropriate comparable markets in which it competes for executive talent. Thus
the comparison markets will consist of Utility Industry, Independent Power
Producers, Energy Marketing and Trading Companies, and General Industry
companies. The S&P Utilities Index covers the utility industry widely and
includes electric and gas utilities.
The compensation program for officers consists of base salary, annual
incentive, and long-term incentive components. The Committee believes that the
combination of these three elements balances short and long-term business
performance goals and aligns officer financial rewards with those of Illinova's
shareholders. The compensation program is structured so that, depending on the
salary level, between approximately 30 percent and 60 percent of an officer's
total compensation target is composed of incentive compensation.
BASE SALARY PLAN
The Committee determines base salary ranges for executive officers based on
competitive pay practices for similarly sized companies in both the energy
specific and general industries. Officer salaries correspond to approximately
the median of the companies in the appropriate comparison market. Individual
increases are based on several factors, including the officer's performance
during the year, the relationship of the officer's salary to the market salary
level for the position, and competitive industry salary increase practices.
ANNUAL INCENTIVE COMPENSATION PLAN
Annual incentive awards are earned based on the achievement of specific annual
financial and operational goals by the Illinova officer group as a whole and
consideration of each officer's individual contribution. If payment is earned
under this Plan, one-half of the bonus is payable in cash during the year
following the performance year, and one-half is credited to the participants in
the form of Common Stock units, the number of which is determined by dividing
half of the earned bonus amount by the closing price of the Common Stock on the
last trading day of the performance year. The officer's interest in the stock
units vests at the end of the three-year period, which begins the year after the
performance year. The officer receives this award in cash equal to
1) the closing stock price on the first trading day of the distribution year
times the number of units held; plus
2) dividend equivalents that would have been received if the stock had
actually been issued.
Maximum awards under the plan may be up to 150 percent of target; threshold
awards are 50 percent of target.
For Illinois Power officers, 1998 awards under the Compensation Plan were
based on achievement in the following performance areas where applicable: cash
flow, earnings per share, return on invested capital, sales, customer
satisfaction, safety, employee teamwork, and cost management. Up to 20 percent
of the awarded amount is based on an assessment of the individual officer's
performance during the year.
Awards shown under Bonus in the Summary Compensation Table for performance
during 1998 were based on achievement of Business Unit Operational Goals and
Individual Goals for the Officer. Corporate Financial Goals were not satisfied
in 1998.
LONG-TERM INCENTIVE COMPENSATION (LTIC) PLAN
Awards under the LTIC Plan are calibrated to median utility industry and the
general industry and are based on corporate performance as well as individual
officer's contributions to corporate performance subject to the review of this
Committee. The LTIC value granted to the officers for 1998 represent an award
based on market levels as well as on Illinova, Illinois Power, and individual
performance as evaluated by the Chairman and reviewed by the Committee. In 1998,
it was determined that awards under the LTIC plan be delivered in two
components. One-half of each officer's LTIC plan award is delivered in the form
of stock options granted at fair market value on the date of the award. The
other half of the LTIC plan award is distributed to officers in cash based on
Illinova's Shareholder Value-Added (SVA) performance relative to a peer group of
utility companies, as measured in overlapping three-year periods. SVA measures
Illinova's return on the Company's weighted average cost of capital. SVA
performance at the median of the peer group will result in target award levels.
Performance above the median will result in payouts greater than target to a
maximum of two times target; performance significantly below the median results
in no payouts. Since 1996 represented the first year of the SVA plan's first
three-year measurement cycle, no awards are due to be paid out under the plan
until 1999. Based on performance, no award was earned in 1998 for payment in
1999. No future payments will be made as a result of the SVA program.
In 1998 the Board elected to eliminate SVA as a criteria for the cash
portion of the LTIC. The rationale for this change was a desire for the
component to have a closer alignment to shareholder return. The SVA Plan was
replaced with a Total Shareholder-Return Performance Plan (TSR Plan). Awards
from the TSR Plan will be based on Illinova's stock price appreciation plus
dividends compared to a broad peer group of publicly traded utility companies.
The plan has been changed for 1999 to be awarded in restricted stock.
CEO COMPENSATION
Charles E. Bayless became Chairman, President and Chief Executive Officer (CEO)
of Illinova and Illinois Power on August 13, 1998. Illinova and the Board based
Mr. Bayless's contract on the competitive market for CEOs in both the Utility
Industry as well as the broader competitive market for executive talent. The
Committee involves all outside Directors in reviewing Mr. Bayless's performance
before it makes recommendations regarding his compensation. The Committee is
responsible for administering the processes for completing this review. The
annual process begins the first of each year when the Board of Directors and Mr.
Bayless establish his personal goals and short- and long-term strategic goals
for Illinova. Mr. Bayless was hired in July 1998 and interim goals were
developed. At the conclusion of the year, Mr. Bayless reviews his performance
with the outside Directors. The Committee then recommends appropriate
compensation adjustments to the Board. The Committee with the participation of
all outside Directors developed a contract with Mr. Bayless that recognizes his
experience and ability to lead Illinova into the future. Progress has been made
to advance strategic objectives of the Company.
The 1998 Annual Incentive Compensation Plan award for the Chief Executive
Officer was consistent with the terms of the contract between Mr. Bayless and
the Board.
The option shares granted to the CEO reflect the Committee's recognition of
Mr. Bayless's work in directing Illinova toward its long-term objectives and
provide a strong incentive to maximize the creation of shareholder value.
COMPENSATION AND NOMINATING COMMITTEE
Ronald L. Thompson, Chairman
J. Joe Adorjan
Robert M. Powers
Marilou von Ferstel
John D. Zeglis
INDEPENDENT AUDITORS
The Board of Directors of Illinois Power has selected PricewaterhouseCoopers as
independent auditors for 1999. A representative of that firm will be present at
the Annual Meeting and available to make a statement and to respond to
questions.
OTHER MATTERS
Illinova's 1998 Summary Annual Report to Shareholders was mailed to Illinois
Power's shareholders on or about March 31, 1999. Copies of Illinois Power's
Annual Report on Form 10-K will be available to shareholders, after its filing
with the Securities and Exchange Commission on or before March 31, 1999.
Requests should be addressed to Investor Relations, G-21, IIllinois Power, 500
South 27th Street, Decatur, Illinois 62521-2202.
Under the Securities and Exchange Commission rules, a shareholder proposal
submitted for inclusion in next year's proxy statement must be received at
Illinois Power's executive offices not later than November 10, 1999.
A shareholder proposal submitted for presentation at the Annual Meeting in
2000 will be considered untimely if notice of the proposal is received by
Illinois Power after January 24, 2000.
OTHER BUSINESS
Management does not know of any matter which will be presented for consideration
at the Annual Meeting other than the matters described in the accompanying
Notice of Annual Meeting.
By Order of the Board of Directors,
Leah Manning Stetzner,
Vice President, General Counsel and Corporate Secretary
Decatur, Illinois
March 31, 1999
Appendix: 1998 Annual Report to Shareholders
TABLE OF CONTENTS
Management's Discussion and Analysis................... a-2
Responsibility for Information......................... a-17
Report of Independent Accountants...................... a-18
Consolidated Statements of Income...................... a-19
Consolidated Balance Sheets............................ a-20
Consolidated Statements of Cash Flows.................. a-21
Consolidated Statements of Retained Earnings........... a-21
Notes to Consolidated Financial Statements............. a-22
Selected Consolidated Financial Data................... a-48
Selected Illinois Power Company Statistics............. a-49
ABBREVIATIONS USED THROUGHOUT THIS REPORT
AICPA American Institute of Certified Public Accountants
AFUDC Allowance for Funds Used During Construction
Baldwin Baldwin Power Station
Clinton Clinton Power Station
DOE U.S. Department of Energy
EITF Emerging Issues Task Force of the
Financial Accounting Standards Board
EMF Electric and Magnetic Fields
EPS Earnings Per Share
ESOP Employees' Stock Ownership Plan
FAS Statement of Financial Accounting Standards
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fuel Company Illinois Power Fuel Company
Hennepin Hennepin Power Station
ICC Illinois Commerce Commission
Illinova Illinova Corporation
IP Illinois Power Company
IPFI Illinois Power Financing I
IPSPT Illinois Power Special Purpose Trust
ISA Integrated Safety Assessment
ISO Independent System Operator
IT Information Technology
ITC Investment Tax Credits
kw Kilowatt
kwh Kilowatt-Hour
MAIN Mid-America Interconnected Network
MGP Manufactured-Gas Plant
MIPS Monthly Income Preferred Securities
MISO Midwest Independent Transmission System Operator, Inc.
MW Megawatt
MWH Megawatt-Hour
NAES North American Energy Services Company
NERC North American Electric Reliability Council
NOPR Notice of Proposed Rulemaking
NOx Nitrogen Oxide
NRC U.S. Nuclear Regulatory Commission
NWPA Nuclear Waste Policy Act of 1992
P.A. 90-561 Electric Service Customer Choice
and Rate Relief Law of 1997
PCA Power Coordination Agreement
PECO PECO Energy Company
ROE Return on Equity
S&P Standard & Poor's
SCR Selective Catalytic Reduction
SEC U.S. Securities and Exchange Commission
SFP Secondary Financial Protection
SO2 Sulfur Dioxide
SOP Statement of Position
Soyland Soyland Power Cooperative, Inc.
TOPrS Trust Originated Preferred Securities
UFAC Uniform Fuel Adjustment Clause
UGAC Uniform Gas Adjustment Clause
U.S. EPA U.S. Environmental Protection Agency
VaR Value-at-Risk
Vermilion Vermilion Power Station
Wood River Wood River Power Station
Management's Discussion and Analysis
In this report, we refer to the Consolidated Financial Statements, related Notes
to Consolidated Financial Statements, Selected Consolidated Financial Data, and
Selected Illinois Power Company Statistics for information concerning
consolidated financial position and results of operations. Below is discussion
of the factors having significant impact on consolidated financial position and
results of operations since January 1, 1996.
Illinois Power Company is a subsidiary of Illinova Corporation, a holding
company. Illinova Generating Company, Illinova Energy Partners, Inc., Illinova
Insurance Company, and Illinova Business Enterprises, Inc. are wholly owned
subsidiaries of Illinova. IP is engaged in the generation, transmission,
distribution and sale of electric energy and the distribution, transportation
and sale of natural gas in the State of Illinois.
OPEN ACCESS AND WHEELING
On March 29, 1995, FERC issued a NOPR initiating the process of mandating
non-discriminatory open access to public utility transmission facilities at
cost-based rates. Transmission of electricity for a reseller or redistributor of
energy is called wholesale wheeling. Transmission of electricity for end-use
customers is known as retail wheeling.
On April 24, 1996, FERC issued Orders 888 and 889 which established the Final
Rule resulting from the NOPR. The Orders became effective July 9, 1996. The Rule
requires all public utilities under FERC jurisdiction that own transmission
facilities to file transmission service tariffs that comply with Pro Forma
Tariffs attached to the Orders. FERC also requires that all wholesale sales made
by a utility provide for transmission of the power under the prescribed terms
and conditions. IP made a compliance filing as required on July 9, 1996, which
was accepted by FERC.
FERC currently does not exercise jurisdiction over public utilities serving
customers at retail and FERC does not require public utilities to give retail
customers access to alternate energy suppliers or direct transmission service.
In 1996, IP received approval from both the ICC and FERC to conduct an open
access experiment beginning in 1996 and ending on September 30, 1999. The
experiment allows certain industrial customers to purchase electricity and
related services from other sources. Currently, 15 customers are participating
in the experiment. Since inception, the experiment has cost IP approximately
$19.2 million in lost revenue, net of avoided fuel cost and variable operating
expenses. This loss was partially offset by selling the surplus energy and
capacity on the open market and by $4.8 million in transmission service charges.
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with FERC for all approvals necessary to create and implement
the MISO. On September 16, 1998, FERC issued an order authorizing the creation
of a MISO. The MISO is governed by a seven-person independent board of
directors. The goals of the MISO are to:
1) Put in place a tariff allowing easy and nondiscriminatory access to
transmission facilities in a multi-state region;
2) Enhance regional reliability; and
3) Establish an entity that operates independent of any transmission owner(s)
or other market participants, thus furthering competition in the wholesale
generation market consistent with the objectives of FERC's Order 888.
Since January 1998, four other transmission-owning entities joined the MISO.
Participation in an ISO is a requirement of P.A. 90-561. The MISO has a stated
goal to begin limited operation in 1999 and to be fully operational in 2000.
COMPETITION
P.A. 90-561, Illinois electric utility restructuring legislation, was enacted in
December 1997. P.A. 90-561 gives IP's residential customers a 15 percent
decrease in base electric rates beginning August 1, 1998, and an additional 5
percent decrease effective May 1, 2002. The rate decreases resulted in revenue
reductions of approximately $35 million in 1998 and expected revenue reductions
of approximately $70 million in each of the years 1999 through 2001,
approximately $90 million in 2002, and approximately $100 million in 2003, based
on current consumption.
Under P.A. 90-561, customers with demand greater than 4 MW at a single site,
and customers with at least 10 sites which aggregate at least 9.5 MW in total
demand are allowed to choose electric generation suppliers ("direct access")
starting in October 1999. Direct access for the remaining non-residential
customers will occur in two phases: customers representing one-third of the
remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002. IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates and remains obligated to provide delivery service to all customers
at regulated rates. In 1999, rates for delivery services for non-residential
customers will be established in proceedings mandated by P.A. 90-561. The
transition charges departing customers must pay to IP are not designed to hold
IP completely harmless from resulting revenue loss, because of the mitigation
factor described below. IP will be able to estimate the revenue impact of
customer choice more accurately when its delivery service charges are
established.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
ICC. The transition charges are calculated by subtracting from a customer's
fully bundled rate an amount equal to a) delivery charges the utility will
continue to receive from the customer, b) the market value of freed-up
energy, and c) a mitigation factor, which is the higher of a fixed rate per
kwh or a percentage of the customer's bundled base rate. The mitigation
factor increases during the transition period and is designed to provide
incentive for utilities to continue cost reduction efforts and generate new
sources of revenue;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) Utilities are permitted to seek rate relief in the event the change in law
leads to their ROE falling below a specified minimum based on a prescribed
test. Utilities are also subject to an "over-earnings" test which requires
them, in effect, to share with customers earnings in excess of specified
levels. See "Note 4 -- Commitments and Contingencies" for a more detailed
description of the earnings floor and ceiling.
The extent to which revenues are affected by P.A. 90-561 will depend on a
number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's existing service territory. The
impact on net income will depend on, among other things, the amount of revenues
earned and the cost of doing business.
CLINTON POWER STATION
See "Note 3 -- Clinton Power Station" for a discussion of Clinton.
Due to uncertainties of deregulated generation pricing in Illinois and to
various operation and management factors, IP's Board of Directors voted in
December 1998 to sell or close Clinton. This decision resulted in an impairment
of Clinton-related assets and accrual of exit-related costs. The impairment and
accrual of related charges resulted in a $1,327.2 million, net of income taxes,
charge against earnings.
IP has entered into discussions with parties interested in purchasing
Clinton. Principal concerns of interested parties are plant restart, funding the
decommissioning liability, terms of any purchase agreement for power generated
by Clinton, including the length of any agreement and price of electricity,
market price projections for electricity in the region, property tax obligations
of the purchaser, and income tax issues. These concerns create substantial
uncertainty with regard to the ability to convert any tentative agreement into
an executable transaction. Therefore, IP has accounted for the Clinton exit
based on the expectation of plant closure as of August 31, 1999. An August 31,
1999, closure allows IP to pursue opportunities to sell Clinton, which has the
potential economic benefit of reducing IP's financial exposure to
decommissioning. An August 31, 1999, closure also allows IP to refine its plans
to close and decommission Clinton if a tentative agreement cannot be converted
into an executable transaction. In addition, Clinton would be available for the
summer cooling season. The estimated Clinton other operating and maintenance
expense, including expensed capital expenditures, is $151 million for January
through August 1999.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for additional
information.
ACCOUNTING MATTERS
1998: Concurrent with the decision to exit Clinton operations, as discussed
above, IP's Board of Directors also voted to effect a quasi-reorganization in
which IP's consolidated accumulated deficit in retained earnings of $1,369.4
million was eliminated. A quasi-reorganization is an accounting procedure
whereby a company adjusts its accounts to obtain a "fresh start." In a
quasi-reorganization, a company restates its assets and liabilities to their
fair value, adopts accounting pronouncements issued but not yet adopted, and
eliminates any remaining deficit in retained earnings by a transfer from other
paid-in capital.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for additional
information.
See "Note 4 -- Commitments and Contingencies" for a discussion of
decommissioning.
1997: Prior to the enactment of P.A. 90-561, IP prepared its consolidated
financial statements in accordance with FAS 71, "Accounting for the Effects of
Certain Types of Regulation." Reporting under FAS 71 allows companies whose
service obligations and prices are regulated to maintain balance sheet assets
representing costs they expect to recover from customers through inclusion of
such costs in future rates. In July 1997, the EITF concluded that, for business
segments for which a plan of deregulation has been established, accounting under
FAS 71 should be discontinued when such deregulation legislation is enacted. The
EITF further concluded that regulatory assets and liabilities originating in the
business segment being deregulated should be written off, unless their recovery
is specifically provided for through future cash flows from the regulated
portion of the business.
Based on this conclusion and because P.A. 90-561 provides for future
market-based pricing of electric generation services, IP discontinued
application of FAS 71 for its generating segment. IP evaluated the regulatory
assets and liabilities associated with its generation segment and determined
that recovery of these costs was not probable through rates charged to
transmission and distribution customers, the regulated portion of the business.
IP wrote off generation-related regulatory assets and liabilities of
approximately $195 million, net of income taxes, in December 1997. These net
assets related to previously incurred costs that had been expected to be
collected through future revenues, including deferred costs for Clinton,
unamortized losses on reacquired debt, previously recoverable income taxes, and
other generation-related regulatory assets. At December 31, 1998, IP's net
investment in generation facilities was $2.9 billion.
See "Note 1 -- Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
REGULATORY MATTERS
In accordance with P.A. 90-561, ICC rulemakings are completed or in progress
covering issues such as limits on affiliate interaction and reliability. These
regulatory proceedings, alone or in combination, could significantly impact the
way IP operates and is organized, but they are not likely to have a material
impact on financial results.
Under the new reliability rules, Illinois utilities must keep records
identifying service interruptions experienced by each customer. Illinois
utilities must also file an annual report detailing the reliability of their
service and explaining their plans for reliability improvements. In addition,
each utility must also report the number and causes of service interruptions
that were within the utility's control. Outage targets were established for
service to individual customers and for system performance.
In March 1999, IP submitted a filing to the ICC to determine:
1) The rates and terms associated with the provision of unbundled delivery
services for select customer classes;
2) The methodology, terms, and conditions associated with billing competitive
transition charges; and
3) Terms and conditions associated with accepting service under IP's Market
Value Power Purchase Option tariff, a service option mandated by P.A.
90-561 which allows customers to purchase electricity from IP at current
market prices.
ICC orders on the foregoing rulemakings and filing are expected by September
1999.
Additionally, the ICC has initiated a proceeding to investigate the
feasibility of breaking out and unbundling various components of delivery
service, such as meter reading.
Delivery tariff revenues approved by the ICC are to be set at a level that
allows IP to recover all just and reasonable costs associated with providing
delivery services to those customers who choose to acquire power from alternate
retail electric suppliers.
P.A. 90-561 includes provisions allowing utilities to unbundle or segregate
assets. Illinova and IP are evaluating the benefits of creating a separate
Illinova subsidiary to which the IP fossil generation assets would be
transferred. IP would be required to demonstrate to the ICC that it will
continue to be able to serve its retail customers reliably and that the transfer
is not likely to cause IP to seek a rate increase during the mandatory
transition period, which extends through 2004. The new subsidiary, if formed,
will be regulated by FERC.
See "Note 4 -- Commitments and Contingencies" for a discussion of Fuel Cost
Recovery.
See "Note 6 -- Facilities Agreements" for a discussion of Soyland and the
Soyland PCA.
POWER SUPPLY AND RELIABILITY
See "Note 4 -- Commitments and Contingencies" for a discussion of Power Supply
and Reliability.
YEAR 2000
Passing from 1999 into 2000 creates a risk that computer-dependent processes
will fail because the date will be read as "1900." IP began its Year 2000
project in November 1996. A central organization is providing overall guidance
and coordination among the business groups, meeting monthly to share
information, conducting internal project reviews, and producing monthly status
reports to all levels of IP management. Bi-monthly Year 2000 readiness reports
are provided to IP's Board of Directors.
The Year 2000 project involves evaluation and testing of software,
hardware, and business processes, including mainframe and personal computer
software and hardware, process computer software and hardware, end-user
computing, telecommunications and networks, vendor-purchased packages, embedded
systems, facility control systems, vendors/suppliers, financial institutions,
and electronic interfaces with outside agencies.
The Year 2000 efforts are focused on those systems and processes necessary
to provide safe, reliable service and essential administrative support. Priority
is given to "mission critical" and "important to operations" systems,
components, and processes, including generation facilities (e.g. power plants
and fuel suppliers), transmission and distribution facilities (e.g. power lines,
transformers, gas lines, and meters), building systems (e.g. climate control and
security), and administrative systems (e.g. billing, payroll, and accounts
payable).
The project is divided into two focus areas. The first deals with IT
software, hardware, and infrastructure. This includes the billing system,
payroll system, accounts payable system, personal computers, telecommunications,
networks, and mainframes.
The second focus area targets non-IT operational systems and processes,
which encompass most of the systems and business processes actually used to
deliver electricity and gas to customers. This is also the area where embedded
systems and microprocessors are found. Included in this focus area are power
plant facilities, transportation systems such as railways and barges, fuel
suppliers, electric and gas transmission and distribution facilities,
substations and transformers, meters, building systems such as HVAC and
security, and financial institutions.
The project has six phases: awareness, inventory, process analysis,
assessment, implementation, and contingency planning. The awareness phase
focuses on raising visibility of the Year 2000 issue with employees, top
management, customers, suppliers, and other business partners. This is an
on-going activity. The inventory and process analysis phases identify systems,
hardware, and business processes that may be affected by the Year 2000 problem.
In the assessment phase, an analysis is performed on each inventoried item to
determine how it will be affected by Year 2000 and how critical the item may be.
In this phase, implementation plans and budgets are developed and documented.
The implementation phase consists of upgrading, replacing, or repairing "mission
critical" and "important to operations" items affected by Year 2000. Testing and
production implementation occur in this phase. In the contingency planning
phase, plans are developed and documented to ensure business continuity. These
plans address various ways of handling unusual and unexpected circumstances that
may occur due to Year 2000 problems.
Internal project reviews are performed to help ensure consistency of
project tasks and documentation and to identify weaknesses that need to be
addressed. In addition, these reviews help identify any issues that overlap
business groups which may need project sponsorship for resolution.
IP has completed its awareness, inventory, assessment, and process analysis
phases. The table below provides further details differentiating between IT and
non-IT.
IP Status -- February 1999
IT Non-IT
% Completion % Completion
Complete Date * Complete Date *
Awareness 100 02/01/97 a 100 04/29/98 a
Inventory 100 01/20/97 a 100 07/31/98 a
Assessment 100 05/09/97 a 100 09/30/98 a
Process Analysis 100 11/30/98 a 100 02/28/99 a
Implementation --
(Mission Critical) 69 06/30/99 e 52 11/30/99 e**
Implementation --
(Important to
Operations) 78 06/30/99 e 58 06/30/99 e
Contingency Planning 10 06/30/99 e 27 06/30/99 e
* "a" = Actual "e" = Estimated
** With the exception of four process computing systems at Clinton, it is
projected that all IP Year 2000 implementation activities will be completed by
June 30, 1999. However, Clinton still plans to be Year 2000 ready, per NRC
requirements, by developing contingency plans that will allow operation.
IT systems and infrastructure are approximately 74% complete, with 100%
completion projected by June 30, 1999. The customer billing system, materials
management system, accounts payable system, and power plant maintenance planning
system have been remediated and are now Year 2000 compliant. The payroll system
and shareholder system remediation will be completed during first quarter 1999.
Year 2000 work has not caused any IT projects to be delayed, and thus no
maintenance costs have been deferred.
The DOE has charged the NERC with taking the lead in facilitating North
America-wide coordination of electric utilities' Year 2000 efforts. The
collective efforts of the industry will minimize risks imposed by Year 2000 to
the reliable supply of electricity. NERC has in turn assigned the regional
reliability councils the responsibility of assessing their respective networks
to ensure reliable electric supply. IP is taking an active role within its
regional council (MAIN) in assessment and renovation of the grid and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.
NERC's second status report presented to the DOE on January 11, 1999,
stated that "with more than 44% of mission-critical components tested through
November 30, 1998, findings continue to indicate that transition through
critical Year 2000 (Y2k) rollover dates is expected to have minimal impact on
electric system operations in North America." IP's electric system operations
Year 2000 completion status through November 30, 1998 is at 57%, which compares
favorably to the average status of all utilities reported to NERC.
NERC has recommended that all "mission critical" systems needed to meet
demand and reliability obligations be Year 2000 ready by June 30, 1999. IP is
working diligently to meet the June 30, 1999, deadline. It is currently
projected that all IP fossil power plants and field transmission and
distribution items will be fully Year 2000 ready by that date. With the
exception of four process computing systems at Clinton, it is projected that all
IP Year 2000 implementation activities will be completed by June 30, 1999.
However, Clinton still plans to be Year 2000 ready, per NRC requirements, by
developing contingency plans that will allow operation.
IP is participating in the Year 2000 activities of other utility
organizations, such as Electric Power Research Institute, Nuclear Energy
Institute, American Gas Association, and Edison Electric Institute. Through
involvement in these organizations, IP is leveraging the combined knowledge and
expertise of all utilities to accelerate progress in resolving Year 2000 issues.
The total cost for achieving Year 2000 readiness for IP is estimated to be
approximately $20.6 million through 1999. Through the end of 1998, $8.4 million,
or 41%, of the total $20.6 million had been spent. Expenditures in 1999 are
expected to be higher than in 1998 due to $9.1 million yet to be spent for
Clinton.
IP has recently initiated contingency planning efforts. This work is planned
for completion by June 30, 1999. The majority of the work already completed
involves IP's role in MAIN's contingency planning efforts for electric systems
operations in accordance with NERC's guidelines.
The primary contingency planning activities in 1999 involve IP's "mission
critical" business processes. Contingency plans will be developed in accordance
with industry guidelines such as those of NERC and the General Accounting Office
and will require senior management review and approval. These plans will address
business continuity and the ability to maintain and deliver essential products
and services to customers in the event of unexpected Year 2000 problems.
IP is currently assessing potential worst-case scenarios. Such a scenario
might include one or both of the following events: winter storms coupled with a
significant Year 2000 system problem that compounds emergency response efforts
and/or loss of a major telecommunications carrier that causes disruptions in
dispatching generation, dispatching emergency response crews, and communicating
with financial institutions.
Contingency plans will address the above scenarios as well as any other
potential scenarios that could affect the ability to serve customers and
maintain the financial viability of IP.
IP is taking a proactive role in working with vendors and suppliers with
respect to Year 2000 issues. Each business group within IP has taken
responsibility for contacting vendors for each of the "mission critical" and
"important to operations" items supplied by them. Each vendor is requested to
provide detailed information on Year 2000 functionality and operability on
products supplied by them. In addition, the Purchasing and Material Control
Group has sent letters to more than 3,600 IP vendors used in recent years. These
letters provide an overview of the Year 2000 problem and ask the vendors to
provide a summary of their Year 2000 efforts so that IP can gain a better
understanding of their ability to provide products and services beyond January
1, 2000.
In addition to letters, face-to-face discussions were conducted with IP's 16
alliance suppliers. Alliance suppliers are key suppliers with which IP has
worked to establish a business relationship based on mutual expectations and
trust. Both parties work together to achieve a single set of objectives which
result in reduced costs to IP. IP's alliance suppliers currently account for
roughly 80% of IP's purchasing volume. Because of this high percentage, a
dialogue was established with each supplier to assess its approach to Year 2000
compliance. Based on these discussions, IP believes each of these 16 suppliers
has adequately addressed Year 2000 concerns.
IP is also taking numerous steps to keep customers informed of the status of
the Year 2000 efforts. IP can best address customers' concerns by providing
open, forthright communications on a timely basis. Year 2000 communication
efforts are multi-faceted to deal with all classes of customers, from
residential to major industries.
CONSOLIDATED RESULTS OF OPERATIONS
1998
IP is comprised of five business groups. The business groups and their principal
services are as follows:
- - IP Customer Service Business Group -- transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas.
- - IP Wholesale Energy Business Group -- fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities.
- - IP Nuclear Generation Business Group -- nuclear-fueled electric generation.
- - IP Financial Business Group -- provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - IP Support Services Business Group -provides specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
These business groups review information monthly that provides contribution
margin, cash flow, and return on net invested capital measures. These measures
for Customer Service were favorable. Generally, the other business groups
reflected unfavorable results as the Clinton restart activity and the summer
supply situation negatively impacted their outcomes.
Customer Service
Transmission, Distribution and Sale of Electric Energy: The Customer Service
Business Group derives its revenues through regulated tariffs. Its source of
electricity is the Wholesale Energy Business Group; electricity was provided to
the Customer Service Business Group at a fixed 2.5 cents per kwh.
Retail electric revenues, excluding interchange sales, decreased 1.6% due to
decreased sales to residential and commercial customers and the 15% residential
rate decrease mandated by P.A. 90-561, which became effective August 1, 1998.
Also contributing to the decrease in revenue was a voluntary one-time August
rate reduction of 7.5% for residential and small commercial customers.
Transmission, Distribution and Sale of Natural Gas: Revenues are derived through
regulated tariffs. Revenues from gas sales and transportation were down 18.6%,
while therms sold and transported were down 8.9%. The decrease in therm sales
was caused by milder than usual weather. The margin on gas sales and
transportation decreased 5.5%, resulting from decreases in both therms sold and
therms transported, partially offset by decreased gas costs.
Wholesale Energy
Contracts for increased interchange sales were entered into with the expectation
that the Clinton nuclear generating station would operate during 1998. When the
station did not operate, it was necessary to purchase replacement power on the
market. This replacement power was much more expensive than normal, causing
electric margin to decrease.
Wholesale Energy provided interchange power to the Customer Service Business
Group at 2.5 cents per kwh.
Nuclear
IP's only nuclear generating station, Clinton, did not generate electricity
during 1998. Its only revenues were those paid by customers under tariff riders
to fund the decommissioning trust. Nuclear's results were unfavorably affected
by higher operating and maintenance expenses and capital expenditures associated
with the Clinton outage. Additionally, Nuclear was assessed a cost of 1.43 cents
(which represents a higher level of costs over internal pricing due to market
conditions) times its actual historical average generation to simulate the cost
of replacement power.
Other
Included in this category are the Financial Business Group and the Support
Services Business Group. These segments did not individually meet the minimum
threshold requirements for separate disclosure.
See "Note 13 -- Segments of Business" for additional information regarding
IP's segments.
Overview
(Millions of dollars) 1998 1997 1996
Net income (loss) applicable
to common stock $ (1,376) $ (65) $ 206
Net income (loss) applicable
to common stock excluding
Clinton plant impairment
loss in 1998, extraordinary
item in 1997 and carrying
amount over (under)
consideration paid for
redeemed preferred stock
in 1997 and 1996 $ (49) $ 129 $ 206
1998: The decrease in 1998 earnings compared to 1997 was due primarily to the
Clinton impairment, an increase in power purchased cost due to unprecedented
summer price spikes, additional power purchases to serve increased volumes of
interchange sales, market losses recorded on forward power purchase and sales
contracts as part of the wholesale trading business, and higher operation and
maintenance expenses due to the extended outage at Clinton.
1997: The decrease in 1997 earnings compared to 1996 was due primarily to the
extraordinary item related to discontinued application of FAS 71 for the
generation segment, higher operation and maintenance expenses due to the
extended outage at Clinton, higher power purchased costs due to outages at
Clinton and Wood River, and an increase in uncollectible accounts expense.
1996: The increase in 1996 earnings per share over 1995 was due primarily to the
one-time charge in 1995 for the enhanced retirement and severance programs,
lower operations expense due to the reduction in number of employees, and lower
financing costs.
Regulators historically have determined IP's rates for electric service: the
ICC at the retail level and FERC at the wholesale level. The ICC determines IP's
rates for gas service. These rates have been designed to recover the cost of
service and allow shareholders the opportunity to earn a reasonable rate of
return. As described under "Competition" above, P.A. 90-561 phases in a
competitive marketplace for electric generation while maintaining cost-based
regulation for electric delivery services and gas service, protecting the
financial integrity of the company during the transition period. Future electric
and natural gas sales, including interchange sales, will continue to be affected
by an increasingly competitive marketplace, changes in the regulatory
environment, transmission access, weather conditions, competing fuel sources,
interchange market conditions, plant availability, fuel cost recoveries,
customer conservation efforts, and the overall economy.
Electric Operations: For the years 1996 through 1998, electric revenues,
including interchange, increased 32.9% and the gross electric margin decreased
22.5% as follows:
(Millions of dollars) 1998 1997 1996
Electric revenues $1,224.2 $1,244.4 $1,202.9
Interchange revenues 557.2 175.6 137.6
Fuel cost & power
purchased (985.4) (450.3) (313.3)
Electric margin $ 796.0 $ 969.7 $1,027.2
The components of annual changes in electric revenues were:
(Millions of dollars) 1998 1997 1996
Price $ (65.5) $ (11.5) $ (7.2)
Volume and other 35.1 9.7 6.4
Fuel cost recoveries 10.2 43.3 (48.9)
Revenue increase
(decrease) $ (20.2) $ 41.5 $(49.7)
1998: Electric revenues excluding interchange sales decreased 1.6% due to the
15% residential rate decrease mandated by P.A. 90-561 and effective August 1,
1998. Also contributing to the decrease in revenue was the one-time August
billing rate reduction of 7.5% for residential and small commercial customers
and the discontinuance of certain revenue related taxes, in accordance with P.A.
90-561. Interchange revenues increased 217.4% primarily due to increased
activity on the interchange market. Electric margin decreased primarily due to
higher power purchased costs and the elimination of the UFAC.
1997: Electric revenues excluding interchange sales increased 3.4%, primarily
due to an increase in revenues under the UFAC and increased wheeling revenues.
Interchange revenues increased 27.6% due to the receipt of an opt-out fee from
Soyland under the amended PCA and increased interchange activity. Electric
margin decreased primarily due to increased power purchased costs as a result of
outages at Clinton and the fossil stations.
1996: Electric revenues excluding interchange sales decreased 4%, primarily due
to a reduction in revenues under the UFAC. Volume changes by customer class were
insignificant, as kwh sales to ultimate consumers (excluding interchange sales
and wheeling) decreased .3%. Interchange revenues increased 18.3% as a result of
higher plant availability in the first half of the year.
The cost of meeting IP's system requirements was reflected in fuel costs for
electric plants and power purchased. Changes in these costs are detailed below:
(Millions of dollars) 1998 1997 1996
Fuel for electric plants
Volume and other $ 28.3 $ (37.7) $ 15.4
Price 5.7 (8.5) (12.0)
Emission allowances (7.5) 12.3 .8
Fuel cost recoveries (8.7) 18.2 (30.0)
17.8 (15.7) (25.8)
Power purchased 517.3 152.7 5.7
Total increase (decrease) $ 535.1 $ 137.0 $(20.1)
Weighted average system
generating fuel cost
($/MWH) $ 12.79 $ 12.06 $ 11.01
System load requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities, emission allowance
costs, and fuel cost recovery through UFAC caused changes in these costs.
Changes in factors affecting the cost of fuel for electric generation are
detailed below:
1998 1997 1996
Increase (decrease)
in generation 10.9% (25.4)% 5.4%
Generation mix
Coal and other 100% 100% 78%
Nuclear 0% 0% 22%
1998: The cost of fuel increased 7.6% and electric generation increased 10.9%.
The increase in fuel cost was primarily a result of running peaking units and
reactivation of oil-fired plants from cold shutdown. These factors were
partially offset by effects of the 1997 UFAC and decreased emission allowance
costs.
Power purchased increased $517.3 million. This amount consisted of higher
prices resulting in an increase of $274 million, a $215 million increase to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts. Income from interchange
sales was $382 million higher than in 1997 due to increased sales volumes and
higher prices. Although IP's margin on volumes between 1998 and 1997 resulted in
IP being a net seller, higher prices resulted in a $135 million net purchase
margin. See "Note 4 -- Commitments and Contingencies" for additional
information.
1997: The cost of fuel decreased 6.3% and electric generation decreased 25.4%.
The decrease in fuel cost was primarily attributable to decreased generation and
a favorable price variance. These factors were partially offset by effects of
the UFAC and increased emission allowance costs. Power purchased increased
$152.7 million primarily due to Clinton and Wood River being out of service.
1996: The cost of fuel decreased 9.4% and electric generation increased 5.4%.
The decrease in fuel cost was primarily attributable to the effects of the UFAC,
as well as a favorable price variance. These factors were partially offset by an
increase in fuel cost due to the increase in generation. Power purchased
increased $5.7 million primarily due to the Clinton outage. Clinton's equivalent
availability and generation were lower than in 1995 due to that outage.
Gas Operations: For the years 1996 through 1998, gas revenues, including
transportation, decreased 17.3%, while the gross margin on gas revenues
decreased 5.1% as follows:
(Millions of dollars) 1998 1997 1996
Gas revenues $ 281.1 $ 345.2 $ 341.4
Gas cost (149.6) (207.7) (202.6)
Transportation revenues 6.7 8.7 6.8
Gas margin $ 138.2 $ 146.2 $ 145.6
(Millions of therms)
Therms sold 503 537 703
Therms transported 267 309 251
Total consumption 770 846 954
Changes in the cost of gas purchased for resale were:
(Millions of dollars) 1998 1997 1996
Gas purchased for resale
Cost $ (5.3) $ 8.0 $ 49.0
Volume (23.2) (30.0) 8.5
Gas cost recoveries (29.6) 27.1 6.3
Total increase (decrease) $ (58.1) $ 5.1 $ 63.8
Average cost per therm
delivered 27.1(cents) 28.0(cents) 26.7(cents)
The 1998 decrease in gas costs was due to low gas prices and a decrease in
therm sales caused by mild weather. The 1997 increase in gas costs was due to
slightly higher prices from suppliers and effects of the UGAC, offset by a
decrease in volume. The 1996 increase in gas costs was primarily due to higher
prices from suppliers and the effects of the UGAC.
Other Expenses: A comparison of significant increases (decreases) in other
operating expenses, maintenance, and depreciation for the last three years is
presented in the following table:
(Millions of dollars) 1998 1997 1996
Other operating expenses $ 91.1 $ 40.6 $ (9.8)
Maintenance 44.6 12.0 (.3)
Depreciation and amortization 4.8 8.8 3.5
The increase in operating and maintenance expenses for 1998 is primarily due
to the outage at Clinton. Other increases include outside consulting fees,
customer marketing activities, and employee benefits.
The increase in operating and maintenance expenses for 1997 is primarily due
to increased company and contractor labor at Clinton and the fossil plants. An
increase in uncollectible accounts expense and disposal of surplus inventory
also contributed to the increase.
The decrease in operating expenses for 1996 is due primarily to the savings
from the 1995 enhanced retirement and severance program, partially offset by the
costs of the Clinton outage and increased amortization of MGP site expenses. The
ICC approved tariff riders in March 1996 that resulted in the current
recognition of MGP site remediation costs in operating expenses. The 1996
increase amounted to $5.5 million. This increase is offset by increased revenues
collected under the riders.
The increases in depreciation and amortization for each of the three years
were due to increases in utility plant balances.
General Taxes: The decrease in general taxes of $10.6 million in 1998 is
primarily the result of P.A. 90-561, which shifted the revenue tax burden from
IP to its customers. The decrease was partially offset by costs to fund a
program, provided for in P.A. 90-561, that helps low-income customers avoid
shutoffs. The 1997 and 1996 changes in general taxes were negligible.
Clinton Plant Impairment Loss: See "Note 2 -- Clinton Impairment and
Quasi-Reorganization " for additional information.
Miscellaneous--Net: The 1996 through 1998 changes in miscellaneous-net were
negligible.
Interest Charges: Total interest charges, including AFUDC and preferred dividend
requirements, increased $.8 million in 1998, decreased $3.4 million in 1997, and
decreased $20.8 million in 1996. The increase in 1998 was negligible. The
decrease in 1997 is primarily due to the continued benefits of IP refinancing
efforts and capitalization reductions, partially offset by increased IP
short-term borrowings and lower AFUDC. The 1996 decrease was due to lower
short-term interest rates and the impact of IP refinancing efforts and
capitalization reduction during 1996.
Inflation: Inflation, as measured by the Consumer Price Index, was 1.6%, 2.3%,
and 3.0% in 1998, 1997, and 1996, respectively. IP recovers historical rather
than current plant costs in its regulated rates.
FINANCIAL CONDITION
Liquidity and Capital Resources
IP's financial condition is a product of its historical capital structure, the
terms of its existing indebtedness, various regulatory considerations, and the
cash flow generated by its businesses. In general, IP historically has been able
to either generate sufficient funds or raise sufficient funds at investment
grade credit quality to meet all of its financial needs. IP's sources of funds
and primary non-operating uses of funds are described below. See "Note 9 --
Long-Term Debt" and "Note 10 -- Preferred Stock" for additional information
regarding IP's outstanding indebtedness.
Mortgages: Historically, a substantial portion of the funds needed by IP have
been provided by indebtedness issued pursuant to its general obligation
mortgages. These include a 1943 mortgage (First Mortgage) and a 1992 mortgage
(New Mortgage) that is intended, over time, to replace the First Mortgage. Both
mortgages are secured by liens on substantially all of IP's properties. In
general, IP is able to issue debt secured by the mortgages provided that (i) its
"adjusted net earnings" are at least two times its "annual interest
requirements," and (ii) the aggregate amount of indebtedness secured by the
mortgages does not exceed three-quarters of the original cost of the property
subjected to the lien of the mortgages, reduced to reflect property that has
been retired or sold. It also generally can issue indebtedness in exchange for
repurchased and retired indebtedness independent of whether these two tests are
met.
At December 31, 1998, IP had outstanding approximately $1.6 billion in
indebtedness pursuant to the mortgages and could have issued approximately $550
million in additional indebtedness based on its property levels. In addition, IP
could have issued approximately $334 million in exchange for previously issued
indebtedness that had been repurchased by IP. The sale or shutdown of Clinton or
IP's fossil plants, or both, would eliminate IP's capacity to issue indebtedness
under these mortgages based on property additions. As a consequence, IP is
exploring various strategies under which the mortgages may be amended to permit
further issuances or means to release the indebtedness from the mortgage.
Regardless of the status of Clinton, IP is still able to issue new indebtedness
pursuant to the mortgage based on repurchased and retired indebtedness. Also, IP
had unsecured non-mortgage borrowing capacity totaling approximately $450
million at December 31, 1998. This capacity is higher than normal as a result of
securitization proceeds received in December 1998.
Cash Requirements and Cash Flow: IP needs cash for operating expenses, interest
and dividend payments, debt and certain IP preferred stock retirements,
construction programs, and decommissioning. IP has met these needs with
internally generated funds and external financings, including debt and revolving
lines of credit. The timing and amount of external financings depend primarily
on cash needs, economic conditions, financial market conditions, and
capitalization ratio objectives.
Cash flows from operations during 1998 were supplemented by external
financings to meet ongoing operating requirements and to service existing common
and preferred stock dividends, debt requirements, and IP's construction
requirements. Liquidity at IP has decreased in 1998 as a result of higher than
expected costs for purchased power and for Clinton expenditures, coupled with
lower electric revenues resulting from the rate decrease mandated by P.A.
90-561.
IP expects that future cash flows, supplemented by external financing, will
continue to be adequate to meet operating requirements and to service existing
debt, preferred dividends, anticipated construction requirements, and
decommissioning costs.
Dividends: Illinova is a holding company and depends upon its subsidiaries for
its non-financing cash flow. IP, as the provider of substantially all of this
cash flow, typically pays dividends on its common stock to provide Illinova cash
for operations. Contingent on IP meeting a free cash flow test, the ICC has
authorized IP to periodically repurchase its common stock from Illinova. IP did
not satisfy the test at year-end 1998 and does not anticipate satisfying the
test in 1999.
The provisions of Supplemental Indentures to IP's General Mortgage Indenture
and Deed of Trust contain certain restrictions with respect to the declaration
and payment of dividends. IP was not limited by any of these restrictions at
December 31, 1998. Under the Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock.
IP is also limited in its payment of dividends by the Illinois Public
Utilities Act, which requires retained earnings equal to or greater than the
amount of any proposed dividend declaration or payment and by the Federal Power
Act, which precludes declaration or payment of dividends by electric utilities
"out of money properly stated in a capital account." At December 31, 1998, IP
had a zero balance in retained earnings and was thus unable to declare a
dividend on its common or preferred stock. Payment of preferred dividends on
February 1, 1999, was made out of a trust created in November 1998 for this
purpose. IP's retained earnings balance is expected to grow sufficiently during
1999 to support payment of IP common and scheduled preferred dividends. Illinova
will secure payment of IP preferred dividends through 1999.
IP periodically reviews its dividend policies based on several factors,
including its present and anticipated future use of cash, level of retained
earnings, and business strategy.
Debt Ratings: The availability and cost of external financing depend to a
significant degree on the financial health of the company seeking those funds.
Security ratings are an indication of a company's financial position and may
affect the cost and the willingness of investors to invest in these securities.
IP's securities are currently rated by four principal rating agencies as
follows:
Standard Duff & Fitch
Moody's & Poor's Phelps IBCA
First/New mortgage
bonds Baa1 BBB BBB+ BBB+
Preferred stock baa2 BB+ BBB- BBB-
Commercial paper P-2 A-2 D-2 F2
Transitional funding
trust notes Aaa AAA AAA AAA
Under current market conditions, these ratings would afford IP the ability to
issue additional securities through external financing. IP has adequate
short-term and intermediate-term bank borrowing capacity.
In April 1994, S&P lowered IP's mortgage bond rating to BBB from BBB+. In
July 1996, Moody's upgraded IP's securities, raising mortgage bond ratings from
Baa2 to Baa1 and preferred stock ratings from baa3 to baa2. In July 1998, both
Moody's and S&P revised their ratings outlook for IP. Moody's rating went from
stable to negative and S&P from positive to stable, reflecting effects of the
extended Clinton outage and unprecedented prices for purchased power during late
June 1998. In November 1998, Fitch IBCA affirmed the ratings of IP's first and
new mortgage bonds at BBB+ and IP's preferred stock at BBB-. Fitch IBCA also
established a new commercial paper rating of F2 for IP.
In February 1999, S&P announced it had implemented a new single credit rating
scale for both debt and preferred stock. As a result, S&P rerated all the
preferred stock issues and similar debt/equity issues that carry ratings from
S&P to conform to the new scale. As a result of this change, the rating on IP's
preferred stock was changed to BB+ from BBB-. On March 4, 1999, Moody's placed
all of the securities of Illinova and IP under review for possible downgrade,
citing erosion of cash flow and an expected increase in leverage caused by the
extended Clinton outage. Moody's also acknowledged the positive impact of the
decision to exit Clinton and the progress made in bringing Clinton back to
on-line status. This review does not include the $864 million of Transitional
Funding Trust Notes issued by IPSPT, which are expected to remain rated Aaa.
In December 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes as allowed under the Illinois Electric Utility Transition Funding Law in
P.A. 90-561. All four agencies rated this debt triple A. See discussion of
"Securitization."
Recent Financing: Changes in principal amounts of capital sources for 1998,
1997, and 1996, including normal maturities and elective redemptions, were as
follows:
(Millions of dollars) 1998 1997 1996
Long-term debt 64 (11) (154)
Preferred stock -- (39) 71
Transitional funding
trust notes* 864 -- --
Total increase (decrease) $ 928 $ (50) $ (83)
*See discussion of "Securitization."
The amounts shown in the preceding table for debt retirements do not include
all mortgage sinking fund requirements. IP has generally met these requirements
by pledging property additions as permitted under IP's 1943 Mortgage and Deed of
Trust and the 1992 New Mortgage. For additional information, see "Note 9 --
Long-Term Debt" and "Note 10 -- Preferred Stock."
In March 1998, IP issued $18.7 million principal amount and $33.8 million
principal amount of 5.40% Pollution Control New Mortgage Bonds due 2028. In
April 1998, IP redeemed all principal amounts outstanding of its 6.00% Pollution
Control First Mortgage Bonds due 2007 ($18.7 million) and its 8.30% Pollution
Control First Mortgage Bonds due 2017 ($33.8 million). In May 1998, a $200
million debt shelf registration for IP debt securities became effective. In July
1998, IP issued $100 million principal amount of 6.25% New Mortgage Bonds due
2002 against this registration. In September 1998, IP issued $100 million
principal amount of 6.00% New Mortgage Bonds due 2003 against this same shelf
registration. In September 1998, IP issued a call notice on the principal amount
outstanding of its 6.60% Series A Pollution Control First Mortgage Bonds due
2004 ($6.0 million). The bonds were called at par in November 1998. All of the
remaining $68 million principal amount IP medium-term notes matured and were
retired in 1998.
Securitization: In December 1998, IPSPT issued $864 million of Transitional
Funding Trust Notes, with IP as servicer. This debt, secured by collections of
future electric energy deliveries, represents 25% of IP's total capitalization
at December 31, 1996, as allowed by the 1997 Electric Utility Transition Funding
Law and approved by the ICC. The law allows IP to use this lower cost debt to
repurchase debt and equity, which lowers IP's overall cost of capital. IP has to
have at least a 40% common equity ratio, exclusive of securitized debt, when the
process is completed.
On September 16, 1998, IP filed a SEC Form S-3 shelf registration statement
for this $864 million offering. On September 30, 1998, the Internal Revenue
Service issued to IP a private letter ruling that, among other things, the notes
will be obligations of IP for federal income tax purposes. Interest paid on the
notes generally will be taxable to a United States Noteholder as ordinary
interest income.
IP has used funds from this offering to redeem all principal amounts
outstanding of its 6.60% Pollution Control First Mortgage Bonds due 2004 ($6.0
million), its 8.75% First Mortgage Bonds due 2021 ($57.1 million), and its 8.00%
New Mortgage Bonds due 2023 ($229 million). A redemption notice was issued in
December 1998, and the 8.75% First Mortgage Bonds and the 8.00% New Mortgage
Bonds were called January 11, 1999. Through March 9, 1999, IP has also used
funds from the IPSPT issuance to repurchase in the open market $36.8 million
principal amount of its 6.5% First Mortgage Bonds due 1999, $55.9 million
principal amount of its 7.95% First Mortgage Bonds due 2004, and $28.5 million
principal amount of its 7.50% New Mortgage Bonds due 2025. In addition, IP
repurchased $6.6 million, net of premiums and discounts, of various series of
preferred stock and MIPS. IP has used another $49.3 million from the IPSPT to
repurchase approximately 2.3 million of its shares from Illinova.
Preferred Stock: At a special meeting in May 1998, IP preferred shareholders
voted on a proposal to amend the Articles of Incorporation to remove a
limitation on the amount of unsecured debt IP can issue. A majority of votes
cast favored the proposal, but not the two-thirds majority required.
Capital Expenditures: Construction expenditures for 1996 through 1998 were
approximately $723 million, including $14.7 million of AFUDC. IP estimates that
it will spend approximately $370 million for construction expenditures in 1999.
IP construction expenditures for 1999 through 2003 are expected to total
approximately $1.2 billion. In light of the December 1998 decision to exit
Clinton and resulting Clinton impairment entries, no nuclear construction is
included in the above estimates.
Due to the failure of Clinton to restart by January 31, 1999, a provision in
the lease agreement between IP and the Fuel Company requires IP to deposit $62
million cash, in March 1999, with the Fuel Company Trustee for the benefit of
investors in secured notes of the Fuel Company. These notes mature December 1,
1999, at which time these funds will be used to pay principal and interest on
the notes' principal amount of $60 million.
Additional expenditures may be required during this period to accommodate the
transition to a competitive environment, environmental compliance, system
upgrades, and other costs which cannot be determined at this time.
In addition to IP's construction expenditures, IP capital expenditures for
1999 through 2003 are expected to include $522 million for mandatory debt
retirements. In addition, IPSPT has long-term debt maturities of $86.4 million
in each of the above years.
Decommissioning: Because of IP's Board of Directors' decision to exit Clinton,
IP must be prepared to fund the cost of decommissioning the plant. Assuming the
most conservative immediate decommissioning method, IP estimates it will cost
approximately $376 million between 1999 and 2003. IP currently has $84 million
in decommissioning trust funds and would expect this amount to be used as well
as $37 million in additional collections from customers, including interest on
the trust, during this time period. In addition, IP will need to fund
approximately $255 million from other sources. IP is pursuing insurance and
other options, including a delayed decommissioning method which requires
significantly less cash in the next few years.
IP continues to pursue discussions with various parties interested in
purchasing Clinton. In the event of a sale of Clinton, IP expects to incur some
amount of obligation to provide decommissioning funds. The timing and amount of
such obligations cannot be determined at this time.
See "Note 4 -- Commitments and Contingencies" for additional information.
Internally generated cash, supplemented by external financing, will meet all
decommissioning, construction, and capital requirements.
Environmental Matters: See "Note 4 -- Commitments and Contingencies" for a
discussion of environmental matters that impact or could potentially impact IP.
Tax Matters See "Note 7 -- Income Taxes" for a discussion of effective tax rates
and other tax issues.
MARKET RISK
Risk Management: IP is exposed to both non-trading and trading market risks.
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rate or price changes. Non-trading market
risks include interest rate risk, equity price risk, and commodity price risk.
Trading market risk is comprised of commodity price risk. For a discussion of
credit risk exposure, see "Note 15 -- Financial and Other Derivative
Instruments." IP's risk management policy allows the use of derivative financial
instruments to manage its financial exposures. Market risk is measured through
various means, including VaR models. VaR represents the potential losses for an
instrument or portfolio resulting from hypothetical adverse changes in market
factors for a specified time period and confidence level. It does not represent
the maximum possible loss or an expected loss that may occur. Future gains and
losses will differ from those estimated, based on actual fluctuations in market
rates, operating exposures, and the timing thereof, and changes in the portfolio
of derivative financial instruments during the year.
Interest Rate Risk: IP is exposed to interest rate risk as a result of financing
through its issuance of fixed or variable-rate debt, including commercial paper
issuances or bank notes. Interest rate risk is the exposure of an entity's
financial condition to adverse movements in interest rates. Interest rate
exposure is managed according to policy by limiting variable-rate exposure to a
certain percentage of capitalization, utilizing derivative instruments when
deemed appropriate, and monitoring the effects of market changes in interest
rates. At December 31, 1998, there were no derivative financial instruments in
use related to interest rate risk.
IP's debt portfolio VaR was calculated quarterly based on variance/covariance
methodology using the RiskMetrics FourFifteen(TM) model. VaR was calculated
based on a 95 percent confidence factor and a holding period of one business
day. Interest rate risk as measured by VaR for 1998 follows:
Low High Average
(Millions of dollars) VaR VaR VaR
IP $ 6.7 $14.2 $ 9.9
Other Market Risk: IP is exposed to equity price risk. Equity price risk is the
risk of loss on equity investments from unfavorable movements in equity prices.
IP maintains trust funds, as required by the NRC, to fund certain costs of
nuclear decommissioning. See "Note 4 -- Commitments and Contingencies." As of
December 31, 1998, these funds were invested in domestic and international
equity securities, fixed income securities, and cash and cash equivalents. By
maintaining a portfolio that includes equity investments, IP is maximizing the
return to be used to fund nuclear decommissioning, which in the long term will
correlate better with inflationary increases in decommissioning costs. The
equity securities included in the corporation's portfolio are exposed to price
fluctuation in equity markets, and the fixed-rate, fixed-income securities are
exposed to market risk as a result of fluctuations in interest rates. IP
actively monitors its portfolio by benchmarking the performance of its
investments against equity and fixed-income indexes. It maintains and
periodically reviews established target allocations of the trust assets approved
in the investment policy statements. Nuclear decommissioning costs have
historically been recovered through IP's electric rates and the Soyland PCA.
Therefore, fluctuations in equity prices or interest rates have not affected the
earnings of the corporation. In the future, changes in the investments' fair
value will be reflected in the regulatory asset for probable future collections
from customers of decommissioning costs, and fluctuations in interest rates will
be reflected in earnings.
Commodity Price Risk: Commodity price risk is the risk of loss arising from
adverse movements in commodity prices. IP is exposed to the impact of market
fluctuations in the price of electricity. Established policies and procedures
are employed to manage its risks associated with those market fluctuations using
various commodity derivatives, including futures, forwards, swaps and options.
IP is exposed to trading commodity price risk through its energy trading
business and non-trading commodity price risk through its energy generation
business. To measure, monitor, and manage its commodity price risk, IP utilizes
"Monte Carlo" simulations of both trading and non-trading positions based on a
95 percent confidence level. At December 31, 1998, trading VaR utilizing a
four-day holding period was $1.3 million. Non-trading VaR utilizing a one-year
holding period was $13.7 million.
SAFE HARBOR
Certain of the statements contained in this report, including those in
Management's Discussion and Analysis, are forward-looking. Other statements,
particularly those using words like "expect," "intend," "predict," "estimate,"
and "believe," also are forward-looking. Although IP believes these statements
are accurate, its business is dependent on various regulatory issues, general
economic conditions and future trends, and these factors can cause actual
results to differ materially from the forward-looking statements that have been
made. In particular:
- - IP's activities are heavily regulated by both the federal government and
the State of Illinois. This regulation has changed substantially over the
past several years. The impacts of these changes include reductions in
rates pursuant to P.A. 90-561 and a phasing in of the opportunity for an
increasing number of customers to choose alternative energy suppliers. In
addition, future regulatory changes are certain to occur and their nature
and impact cannot be predicted.
- - IP is likely to face increased competition in the future. Deregulation of
certain aspects of IP's business at both the state and federal levels is
occurring, the primary results of which so far are that competing
generators of electricity will increasingly have the ability to sell
electricity to IP's customers and to require IP to transmit and distribute
that electricity. In addition, alternative sources of electricity, such as
co-generation facilities, are becoming increasingly popular. When customers
elect suppliers other than IP for their electricity, IP can avoid certain
costs and can gain revenue from transmitting and distributing that
electricity; however, the net effect of these elections generally is a
decrease in IP's revenue and operating income. Illinois transition law is
designed to protect utilities in three principal ways:
1) Departing customers are obligated to pay transition charges based on the
utility's lost revenue from that customer;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds; and
3) Utilities are permitted to seek rate relief in the event the change in law
leads to their ROE falling below a specified minimum based on a prescribed
test.
- - IP is exploring various strategies to best respond to its changing business
and regulatory environment. These strategies include acquisitions, focused
growth of unregulated businesses, and other options. Although IP would only
plan to undertake transactions that it believes are in the best interests
of its shareholders, there can be no certainty that any transaction will
fulfill these expectations.
- - To meet IP customers' electricity requirements, IP produces electricity in
Company-owned generation plants. Although IP has in place programs designed
to match its supplies with its needs, many circumstances can occur which
upset this balance. Specifically, generation facilities may experience
unplanned outages forcing the Company to acquire additional supplies in the
electricity marketplace. The availability and price of these additional
supplies are uncertain and at times highly volatile. Such situations can
lead to less profitable or even unprofitable outcomes.
- - Clinton is a nuclear-fueled generation facility. Although IP believes that
it operates this facility in accordance with all regulatory guidelines and
in a safe manner, accidents can occur. Liabilities and costs from such
accidents could exceed insurance provisions established for the Company and
have a significantly negative effect on IP.
- - There are various financial risks attendant to selling or shutting down
Clinton. These risks include the possibility that IP has underestimated the
costs necessary to effect a particular exit strategy. No nuclear facility
sale has been completed and relatively little financial information
regarding these transactions is available. Although the amounts used in
IP's analyses and in recording year-end accounting results represent
estimates based on guidance from industry experts, actual results may be
materially different from the estimates. In addition, the Company continues
to have ongoing nuclear operational exposures until the plant is sold or
shut down.
- - IP does not currently foresee any inability to obtain necessary financing
on reasonably favorable terms. However, events can occur in the Company's
business operations or in general economic conditions that could negatively
impact the Company's financial flexibility. In addition, restructuring
activities, such as the formation of an Illinova unregulated generation
subsidiary, can introduce other factors that could impact the Company's
financial flexibility. Further, the sale or shutdown of Clinton will
substantially reduce the Company's ability to issue indebtedness under its
existing mortgages. While the Company does not foresee any of these events
resulting in significant difficulties in obtaining future financing on
reasonably favorable terms, there can be no assurances that difficulties
will not occur.
- - The impact of environmental regulations on utilities is significant; and
the expectation is that more stringent requirements will be introduced over
time. Although IP believes it is in substantial compliance with all current
regulations, IP cannot predict the future impact of environmental
compliance. However, if more stringent requirements are introduced they are
likely to have a negative financial effect.
- - IP actively purchases and sells electricity and natural gas futures and
similar contracts with respect thereto. While IP has adopted various risk
management practices intended to minimize the risk of significant loss,
trading in assets of these types is inherently risky and these risk
management practices cannot guarantee that losses will not occur.
- - Although IP believes that it will complete its Year 2000 preparation in a
timely fashion, there can be no assurances that it will, or that unforeseen
problems will not arise. The consequences of Year 2000 problems are so
varied that IP can not predict this ultimate impact, if any. All
forward-looking statements in this report are based on information that
currently is available. IP disclaims any obligation to update any
forward-looking statement.
ILLINOIS POWER COMPANY
Responsibility for Information
The consolidated financial statements and all information in this annual report
are the responsibility of management. The consolidated financial statements have
been prepared in conformity with generally accepted accounting principles and
include amounts that are based on management's best estimates and judgments.
Management also prepared the other information in the annual report and is
responsible for its accuracy and consistency with the consolidated financial
statements. In the opinion of management, the consolidated financial statements
fairly reflect Illinois Power's financial position, results of operations and
cash flows.
Illinois Power believes that its accounting and internal accounting control
systems are maintained so that these systems provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition and
that the financial records are reliable for preparing the consolidated financial
statements.
The consolidated financial statements have been audited by Illinois Power's
independent accountants, PricewaterhouseCoopers LLP, in accordance with
generally accepted auditing standards. Such standards include the evaluation of
internal accounting controls to establish a basis for developing the scope of
the examination of the consolidated financial statements. In addition to the use
of independent accountants, Illinois Power maintains a professional staff of
internal auditors who conduct financial, procedural, and special audits. To
assure their independence, both PricewaterhouseCoopers LLP and the internal
auditors have direct access to the Audit Committee of the Board of Directors.
The Audit Committee is composed of members of the Board of Directors who are
not active or retired employees of Illinois Power. The Audit Committee meets
with PricewaterhouseCoopers LLP and the internal auditors and makes
recommendations to the Board of Directors concerning the appointment of the
independent accountants and services to be performed. Additionally, the Audit
Committee meets with PricewaterhouseCoopers LLP to discuss the results of their
annual audit, Illinois Power's internal accounting controls and financial
reporting matters. The Audit Committee meets with the internal auditors to
assess the internal audit work performed, including tests of internal accounting
controls.
Charles E. Bayless
Chairman, President
and Chief Executive Officer
Larry F. Altenbaumer
Senior Vice President
and Chief Financial Officer
ILLINOIS POWER COMPANY
Report of Independent Accountants
In our opinion, the accompanying consolidated balance sheets and the related
statements of income, statements of cash flows and statements of retained
earnings present fairly, in all material respects, the financial position of
Illinois Power Company and its subsidiaries (the "Company") at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit requires examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As explained in Note 2 to the consolidated financial statements, the
Company's commitment to exit nuclear operations resulted in an impairment of the
Clinton Power Station in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," in December 1998.
As explained in Note 2 to the consolidated financial statements, the Company
effected a quasi-reorganization in December 1998. In conjunction with the
accounting for a quasi-reorganization, the Company adjusted the recorded value
of specific assets and liabilities to fair value, including its fossil power
generation stations. In addition, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" and Emerging Issues Task Force Statement 98-10, "Accounting for
Energy Trading and Risk Management Activities."
As explained in Note 1 to the consolidated financial statements, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
for its generation segment of the business in December 1997.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 26, 1999
Illinois Power Company
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
- -------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Operating Revenues
Electric $ 1,224.2 $ 1,244.4 $ 1,202.9
Electric interchange 557.2 175.6 137.6
Gas 287.8 353.9 348.2
- -------------------------------------------------------------------------------------------------------------------------
Total 2,069.2 1,773.9 1,688.7
- -------------------------------------------------------------------------------------------------------------------------
Operating Expenses and Taxes
Fuel for electric plants 250.2 232.4 248.1
Power purchased 735.2 217.9 65.2
Gas purchased for resale 149.6 207.7 202.6
Other operating expenses 381.6 290.5 249.9
Maintenance 156.3 111.7 99.7
Depreciation and amortization 203.6 198.8 190.0
General taxes 123.2 133.8 131.3
Income taxes (30.9) 102.4 140.5
Income tax - impairment loss (853.6) - -
Clinton plant impairment loss (Note 2) 2,341.2 - -
- -------------------------------------------------------------------------------------------------------------------------
Total 3,456.4 1,495.2 1,327.3
- -------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (1,387.2) 278.7 361.4
- -------------------------------------------------------------------------------------------------------------------------
Other Income
ITC - Clinton impairment 160.4 - -
Miscellaneous - net 2.6 3.0 1.5
- -------------------------------------------------------------------------------------------------------------------------
Total 163.0 3.0 1.5
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges (1,224.2) 281.7 362.9
- -------------------------------------------------------------------------------------------------------------------------
Interest Charges
Interest expense 134.9 135.9 140.8
Allowance for borrowed funds used during construction (3.2) (5.0) (6.5)
- -------------------------------------------------------------------------------------------------------------------------
Total 131.7 130.9 134.3
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item (1,355.9) 150.8 228.6
Extraordinary item net of income tax benefit
of $ 118.0 million (Note 1) - (195.0) -
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1,355.9) (44.2) 228.6
Less - Preferred dividend requirements 19.8 21.5 22.3
Plus - Carrying amount over (under) consideration
paid for redeemed preferred stock - 0.2 (0.7)
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (1,375.7) $ (65.5) $ 205.6
- -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of
these statements. Prior years restated to conform to new financial format.
Illinois Power Company
C O N S O L I D A T E D B A L A N C E S H E E T S
- --------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
ASSETS
Utility Plant
Electric (includes construction work in progress
of $177.7 million and $214.3 million, respectively) $ 5,481.8 $ 6,690.4
Gas (includes construction work in progress of
$15.3 million and $10.7 million, respectively) 686.9 663.0
- --------------------------------------------------------------------------------------------------------------
6,168.7 7,353.4
Less -- accumulated depreciation 1,713.7 2,808.1
- --------------------------------------------------------------------------------------------------------------
4,455.0 4,545.3
Nuclear fuel in process - 6.3
Nuclear fuel under capital lease 20.3 126.7
- --------------------------------------------------------------------------------------------------------------
4,475.3 4,678.3
- --------------------------------------------------------------------------------------------------------------
Investments and Other Assets 2.6 5.9
- --------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 504.5 17.8
Accounts receivable (less allowance for doubtful accounts
of $5.5 million)
Service 105.9 115.6
Other 32.5 16.6
Accrued unbilled revenue 82.6 86.3
Materials and supplies, at average cost
Fossil fuel 25.6 12.6
Gas in underground storage 28.9 29.3
Operating materials 35.9 75.4
Assets from commodity price risk management activities 26.0 -
Prepayments and other 42.8 61.2
- --------------------------------------------------------------------------------------------------------------
884.7 414.8
- --------------------------------------------------------------------------------------------------------------
Deferred Charges
Transition period cost recovery 783.0 -
Other 284.2 192.5
- --------------------------------------------------------------------------------------------------------------
1,067.2 192.5
- --------------------------------------------------------------------------------------------------------------
$ 6,429.8 $ 5,291.5
- --------------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
Capitalization
Common stock -- No par value, 100,000,000 shares
authorized; 75,643,937 shares issued, stated at $ 1,382.4 $ 1,424.6
Retained earnings - 89.5
Less -- Capital stock expense 7.3 7.3
Less -- 12,751,724 and 9,428,645 shares of common stock in treasury,
respectively, at cost 286.4 207.7
- --------------------------------------------------------------------------------------------------------------
Total common stock equity 1,088.7 1,299.1
Preferred stock 57.1 57.1
Mandatorily redeemable preferred stock 199.0 197.0
Long-term debt 2,158.5 1,617.5
- --------------------------------------------------------------------------------------------------------------
Total capitalization 3,503.3 3,170.7
- --------------------------------------------------------------------------------------------------------------
Current Liabilities
Accounts payable 216.2 102.7
Notes payable 147.6 376.8
Long-term debt and lease obligations maturing within
one year 506.6 87.5
Dividends declared - 22.9
Taxes accrued 29.4 27.5
Interest accrued 34.9 33.0
Liabilities from commodity price risk management activities 61.6 -
Other 86.2 78.7
- --------------------------------------------------------------------------------------------------------------
1,082.5 729.1
- --------------------------------------------------------------------------------------------------------------
Deferred Credits
Accumulated deferred income taxes 978.7 980.6
Accumulated deferred investment tax credits 39.6 208.3
Decommissioning liability 567.4 62.5
Other 258.3 140.3
- --------------------------------------------------------------------------------------------------------------
1,844.0 1,391.7
- --------------------------------------------------------------------------------------------------------------
$ 6,429.8 $ 5,291.5
- --------------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 4)
See notes to consolidated financial statements which are an integral part of
these statements. Prior year restated to conform to new financial format.
ILLINOIS POWER COMPANY
C O N S O L I D A T E D S T A T E M E N T S O F C A S H FL O W S
- ----------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Cash Flows from Operating Activities
Net income (loss) ($1,355.9) ($44.2) $228.6
Items not requiring (providing) cash--
Depreciation and amortization 203.4 202.1 195.3
Allowance for funds used during construction (3.2) (5.0) (6.5)
Deferred income taxes (37.8) 29.4 64.2
Extraordinary item - 195.0 -
Impairment loss, net of tax 1,327.2 - -
Changes in assets and liabilities--
Accounts and notes receivable 11.9 57.7 (35.2)
Accrued unbilled revenue 3.7 19.7 (16.9)
Materials and supplies (15.9) (5.1) (1.2)
Accounts payable 38.3 (31.2) 29.8
Deferred revenue 87.4 - -
Interest accrued and other, net 51.0 0.3 (14.8)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 310.1 418.7 443.3
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Construction expenditures (311.5) (223.9) (187.3)
Allowance for funds used during construction 3.2 5.0 6.5
Other investing activities 5.1 27.8 5.0
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (303.2) (191.1) (175.8)
- ----------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Dividends on common stock and preferred stock (126.1) (114.6) (107.9)
Repurchase of common stock (78.6) (121.5) (18.9)
Redemptions--
Short-term debt (560.5) (164.1) (355.8)
Long-term debt (188.3) (160.8) (153.7)
Preferred stock - (39.0) (29.5)
Issuances--
Short-term debt 331.3 231.0 306.2
Long-term debt 1,116.5 150.0 -
Preferred stock - - 100.0
Other financing activities (14.5) (3.3) 0.3
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 479.8 (222.3) (259.3)
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 486.7 5.3 8.2
Cash and cash equivalents at beginning of year 17.8 12.5 4.3
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $504.5 $17.8 $12.5
- ----------------------------------------------------------------------------------------------------------------------
ILLINOIS POWER COMPANY
Consolidated Statements of Retained Earnings
- --------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1998 1997 1996
Balance at beginning of year $ 89.5 $ 245.9 $ 129.6
Net income (loss) before dividends and carrying amount adjustment (1,355.9) (44.2) 228.6
- --------------------------------------------------------------------------------------------------------------------------
(1,266.4) 201.7 358.2
- --------------------------------------------------------------------------------------------------------------------------
Less-
Dividends-
Preferred stock 20.1 21.7 22.6
Common stock 82.9 90.7 86.6
Investment transfer to Illinova - - 2.4
Plus-
Carrying amount over (under) consideration
paid for redeemed preferred stock - 0.2 (0.7)
Quasi-Reorganization adjustment (Note 2) 1,327.2 - -
Transfer from other paid-in capital to
eliminate retained earnings deficit (Note 2) 42.2 - -
- --------------------------------------------------------------------------------------------------------------------------
1,266.4 (112.2) (112.3)
- --------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ - $ 89.5 $ 245.9
- --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of
these statements.
Notes to Consolidated Financial Statements
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IP is a subsidiary of Illinova, a holding company. IP is engaged in the
generation, transmission, distribution, and sale of electric energy and the
distribution, transportation, and sale of natural gas in the state of Illinois.
The consolidated financial statements include the accounts of IP; Illinois Power
Securitization Limited Liability Company, a special purpose LLC whose sole
member is IP; IPSPT, a special purpose trust whose sole owner is Illinois Power
Securitization Limited Liability Company; Illinois Power Capital, L.P.; and
IPFI. See "Note 9 -- Long-Term Debt" and "Note 10 -- Preferred Stock" for
additional information.
All significant intercompany balances and transactions have been eliminated
from the consolidated financial statements. Preparation of financial statements
in conformity with generally accepted accounting principles requires the use of
management's estimates. Actual results could differ from those estimates.
Clinton Impairment and Quasi-Reorganization: In December 1998, IP's Board of
Directors decided to exit the nuclear portion of the business by either sale or
shutdown of Clinton. FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," requires that all
long-lived assets for which management has committed to a plan of disposal be
reported at the lower of carrying amount or fair value less cost to sell.
Consequently, IP wrote off the value of Clinton and accrued Clinton-related exit
costs, which resulted in an accumulated deficit in retained earnings.
IP's Board of Directors also voted in December 1998 to effect a
quasi-reorganization. A quasi-reorganization is an accounting procedure that
eliminates an accumulated deficit in retained earnings and permits the company
to proceed on much the same basis as if it had been legally reorganized. A
quasi-reorganization involves restating a company's assets and liabilities to
their fair values, with the net amount of these adjustments added to or deducted
from the deficit. Any remaining deficit in retained earnings is then eliminated
by a transfer from paid-in capital, giving the company a "fresh start" with a
zero balance in retained earnings.
For additional information, see "Note 2 -- Clinton Impairment and
Quasi-Reorganization."
Regulation: IP is regulated primarily by the ICC, FERC, and the NRC. Prior to
the enactment of P.A. 90-561, IP prepared its consolidated financial statements
in accordance with FAS 71, "Accounting for the Effects of Certain Types of
Regulation." Reporting under FAS 71 allows companies whose service obligations
and prices are regulated to maintain balance sheet assets representing costs
they expect to recover through inclusion in future rates. In July 1997, the EITF
concluded that application of FAS 71 accounting should be discontinued at the
date of enactment of deregulation legislation for business segments for which a
plan of deregulation has been established. The EITF further concluded that
regulatory assets and liabilities that originated in the portion of the business
being deregulated should be written off unless their recovery is specifically
provided for through future cash flows from the regulated portion of the
business.
Because P.A. 90-561 provides for market-based pricing of electric generation
services, IP discontinued application of FAS 71 for its generating segment in
December 1997 when P.A. 90-561 was enacted. IP evaluated the regulatory assets
and liabilities associated with its generation segment and determined that
recovery of these costs was not probable through rates charged to transmission
and distribution customers, i.e., the regulated portion of its business. In
December 1997, IP wrote off generation-related regulatory assets and liabilities
of approximately $195 million (net of income taxes). These net assets related to
previously incurred costs expected to be recoverable through future revenues,
including deferred Clinton post-construction costs, unamortized losses on
reacquired debt, previously recoverable income taxes, and other
generation-related regulatory assets. At December 31, 1998, the value of IP's
non-nuclear generation facilities was $2.9 billion.
IP's principal accounting policies are:
Regulatory Assets: Regulatory assets represent probable future revenues to IP
associated with certain costs that are expected to be recovered from customers
through the ratemaking process. Significant regulatory assets are as follows:
(Millions of dollars) 1998 1997
Unamortized losses on reacquired debt $ 40.1 $ 32.3
Manufactured-gas plant
site cleanup costs $ 44.7 $ 64.8
DOE decontamination and
decommissioning fees -- $ 6.3
Transition period cost recovery $783.0 --
Clinton decommissioning cost recovery $ 72.3 --
Utility Plant: The cost of additions to utility plant and replacements for
retired property units is capitalized. Cost includes labor, materials, and an
allocation of general and administrative costs, plus AFUDC as described below.
Maintenance and repairs, including replacement of minor items of property, are
charged to maintenance expense as incurred. When depreciable property units are
retired, the original cost and dismantling charges, less salvage value, are
charged to accumulated depreciation.
After 1998's write-off of Clinton, costs which would have been considered
capital additions at Clinton will be expensed. See "Note 2 -- Clinton Impairment
and Quasi-Reorganization."
Allowance for Funds Used During Construction: The FERC Uniform System of
Accounts defines AFUDC as the net costs for the period of construction of
borrowed funds used for construction purposes and a reasonable rate on other
funds when so used. AFUDC is capitalized as a component of construction work in
progress by those business segments applying the provisions of FAS 71. In 1998,
1997, and 1996, the pre-tax rate used for all construction projects was 5.7%,
5.6%, and 5.8%, respectively. Although cash is not currently realized from the
allowance, it is realized through the ratemaking process over the service life
of the related property through increased revenues resulting from a higher rate
base and higher depreciation expense. Non-regulated business segments capitalize
interest under the guidelines in FAS 34, "Capitalization of Interest Cost."
Depreciation: For financial statement purposes, IP depreciates the various
classes of depreciable property over their estimated useful lives by applying
composite rates on a straight-line basis. In each of the years 1996 through
1998, the provision for depreciation was 2.8% of the average depreciable cost
for Clinton. Provisions for depreciation for all other electric plant facilities
were 2.3%, 2.8%, and 2.6% in 1998, 1997, and 1996, respectively. Provisions for
depreciation of gas utility plant, as a percentage of the average depreciable
cost, were 3.5% in 1998, 3.3% in 1997, and 3.9% in 1996.
Depreciation of Clinton has been discontinued in 1999. See "Note 2 -- Clinton
Impairment and Quasi-Reorganization."
Amortization of Nuclear Fuel: IP leases nuclear fuel from the Fuel Company under
a capital lease. Amortization of nuclear fuel (including related financing
costs) is determined on a unit of production basis. A provision for spent fuel
disposal costs is charged to fuel expense based on kwh generated. See "Note 4 --
Commitments and Contingencies" for discussion of decommissioning and nuclear
fuel disposal costs. See "Note 2 -- Clinton Impairment and Quasi-Reorganization"
for discussion of the effect of the Clinton impairment on nuclear fuel.
Unamortized Debt Discount, Premium, and Expense: Discount, premium, and expense
associated with long-term debt are amortized over the lives of the related
issues. Costs related to refunded debt for business segments applying the
provisions of FAS 71 are amortized over the lives of the related new debt issues
or the remaining life of the old debt if no new debt is issued. Costs related to
refunded debt for the generating segment are expensed when incurred.
Revenue and Energy Cost: To more closely match revenues with expenses, IP
records revenue for services provided but not yet billed. Unbilled revenues
represent the estimated amount customers will be billed for service delivered
from the time meters were last read to the end of the accounting period. Until
August 1998, operating revenues included related taxes that had been billed to
customers. In August 1998, the practice of including revenue-related taxes in
operating revenues was discontinued for the electric portion of the business.
Taxes included in operating revenues were $54 million in 1998, $71 million in
1997, and $68 million in 1996. The cost of gas purchased for resale is recovered
from customers pursuant to the UGAC. Accordingly, allowable gas costs that are
to be passed on to customers in a subsequent accounting period are deferred. The
recovery of costs deferred under this clause is subject to review and approval
by the ICC. Prior to March 1998, the costs of fuel for electric generation and
purchased power costs were deferred and recovered from customers pursuant to the
UFAC. On March 6, 1998, IP initiated an ICC proceeding to eliminate the UFAC in
accordance with P.A. 90-561. A new base fuel cost recoverable under IP's
electric tariffs was established, effective on the date of the filing. UFAC
elimination prevents IP from automatically passing cost increases through to its
customers and exposes IP to the risks and opportunities of cost fluctuations and
operating efficiencies.
Under UFAC, IP was subject to annual ICC audits of its actual allowable fuel
costs. Costs could be disallowed, resulting in negotiations and/or litigation
with the ICC. In 1998, IP agreed to settlements with the ICC which closed the
audits for all previously disputed years. As a result of the settlements, IP
electric customers are receiving refunds totaling $15.1 million in the first
quarter of 1999. These refunds complete the process of eliminating the UFAC at
IP.
Income Taxes: Deferred income taxes result from temporary differences between
book income and taxable income and the tax bases of assets and liabilities on
the balance sheet. The temporary differences relate principally to plant and
depreciation.
Prior to December 31, 1998, investment tax credits used to reduce federal
income taxes had been deferred and were being amortized to income over the
service life of the property that gave rise to the credits. As a result of IP's
decision to exit Clinton operations, all previously deferred investment tax
credits associated with nuclear property were recorded as a credit to income at
December 31, 1998. For further discussion of Clinton-related investment tax
credits, see "Note 2 -- Clinton Impairment and Quasi-Reorganization."
IP is included in Illinova's consolidated federal income tax return. Income
taxes are allocated to the individual companies based on their respective
taxable income or loss. See "Note 7 -- Income Taxes" for additional discussion.
Preferred Dividend Requirements: Preferred dividend requirements reflected in
the Consolidated Statements of Income are recorded on the accrual basis.
Consolidated Statements of Cash Flows: Cash and cash equivalents include cash on
hand and temporary investments purchased with an initial maturity of three
months or less. Capital lease obligations not affecting cash flows increased by
$5 million, $30 million, and $31 million during 1998, 1997, and 1996,
respectively. Income taxes and interest paid are as follows:
Years ended December 31,
(Millions of dollars) 1998 1997 1996
Income taxes $ 14.6 $ 94.3 $ 65.9
Interest $ 151.6 $ 140.0 $ 147.4
New Accounting Pronouncements: Implementation of a quasi-reorganization requires
the adoption of any accounting standards that had not yet been adopted because
their required implementation date had not occurred. All applicable accounting
standards were adopted as of December 1998. For additional information, see
"Note 2 -- Clinton Impairment and Quasi-Reorganization."
The FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging
Activities" in June 1998. FAS 133 supersedes FAS 80, "Accounting for Futures
Contracts," FAS 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk," and FAS 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments." FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. FAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. FAS
133 was adopted early in connection with the requirements for
quasi-reorganization accounting. It did not have a significant impact on IP's
1998 financial statements. For additional information, see "Note 15 -- Financial
and Other Derivative Instruments."
The EITF reached a final consensus on Issue 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities" in November 1998,
effective for fiscal years beginning after December 15, 1998. EITF Issue 98-10
creates a distinction between energy trading and non-trading activities and
establishes guidance for the accounting treatment of contracts used in energy
trading activities. The EITF concluded that contracts involved in energy trading
activities should be measured at fair value as of the balance sheet date with
gains and losses included in earnings. EITF Issue 98-10 was adopted early in
connection with the requirements for quasi-reorganization accounting. It did not
have a significant impact on IP's 1998 financial statements.
For additional information, see "Note 15 -- Financial and Other Derivative
Instruments."
The Accounting Standards Executive Committee of the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in March 1998, effective for financial statements for fiscal years
beginning after December 15, 1998. SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use.
Specifically, the nature of the costs incurred, not the timing of their
occurrence, determines whether costs are capitalized or expensed. SOP 98-1 was
adopted early in connection with the requirements for quasi-reorganization
accounting. SOP 98-1 did not have a significant impact on IP's 1998 financial
statements.
The Accounting Standards Executive Committee of the AICPA issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities" in April 1998, effective for
financial statements for fiscal years beginning after December 15, 1998. SOP
98-5 provides guidance on the financial reporting of start-up and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. SOP 98-5 was adopted early in connection with the
requirements for quasi-reorganization accounting. SOP 98-5 did not have a
significant impact on IP's 1998 financial statements.
The FASB issued FAS 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" in February 1998, effective for periods beginning after
December 15, 1997. FAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are not as useful as they were when they were originally
adopted. The statement suggests combined formats for presentation of pension and
other postretirement benefit disclosures. IP has complied with the requirements
of FAS 132. See "Note 12 -- Pension and Other Benefits Costs."
NOTE 2 -- CLINTON IMPAIRMENT AND QUASI-REORGANIZATION
In December 1998, IP's Board of Directors voted to exit Clinton operations,
resulting in an impairment of Clinton-related assets and accrual of exit-related
costs. The impairment and accrual of costs resulted in a $1,327.2 million, net
of income taxes, charge against earnings. Concurrent with the decision to exit
Clinton, IP's Board of Directors also voted to effect a quasi-reorganization, in
which IP's consolidated accumulated deficit in retained earnings of $1,369.4
million was eliminated. A quasi-reorganization is an accounting procedure
whereby a company adjusts its accounts to obtain a "fresh start." In a
quasi-reorganization, a company restates its assets and liabilities to their
fair value, adopts accounting pronouncements issued but not yet adopted, and
eliminates any remaining deficit in retained earnings by a transfer from other
paid-in capital.
Background
IP owns one nuclear generating station, Clinton, a 930-megawatt unit that
represents approximately 20 percent of IP's generating capacity. Significant
Clinton write-offs have weakened earnings and led to a 10-year decline in IP's
retained earnings balance. Clinton has not operated since September 1996. See
"Note 3 -- Clinton Power Station" for additional information.
In December 1997, the State of Illinois enacted P.A. 90-561, legislation
designed to introduce competition for electric generation service over a defined
transition period. P.A. 90-561 creates uncertainty regarding IP's ability to
recover electric generating costs and earn a reasonable rate of return on
generating assets. Uncertainties about deregulated generation pricing in
Illinois, coupled with IP's experience with nuclear operations, led management
to several conclusions:
- - Efficiency in nuclear operations can best be attained through scale,
including ownership of multiple plants over which to spread costs and
leverage talent and management systems.
- - Clinton requires disproportionate management attention.
- - Success in a deregulated generation market will require generation cost
efficiency.
Beginning in late 1997 and continuing through 1998, IP's management prepared
detailed evaluations of the expected shareholder value from various options
related to Clinton. These analyses ultimately identified that either the sale or
closure of Clinton would create more shareholder value than its continued
operation. Management determined that this strategic decision would provide a
fundamental change necessary for IP to achieve success in the new environment of
deregulation and competition.
In anticipation of a possible decision to exit Clinton, IP submitted a letter
to the SEC describing IP's proposed accounting for an impairment loss under the
"assets to be disposed of" provisions of FAS 121. The letter also requested
concurrence with IP's proposed accounting for a quasi-reorganization, whereby
the fossil generation assets would be written up to their fair value
simultaneous with recording the impairment loss for Clinton. In November 1998,
the SEC confirmed that it would not object to IP's proposed accounting.
In December 1998, IP's Board of Directors voted to exit Clinton operations
and proceed with the quasi-reorganization. The decision to implement the
quasi-reorganization did not require the approval of shareholders.
IP is pursuing potential opportunities to sell Clinton. However, substantial
uncertainty exists with regard to the ability to convert any tentative agreement
into an executable transaction. As a result, IP has accounted for the Clinton
exit based on the expectation of plant closure as of August 31, 1999. See "Note
3 -- Clinton Power Station" for additional information.
Clinton Impairment and Accrual of Exit Costs
Prior to impairment, the book value of Clinton plant, including construction
work in progress, nuclear fuel, and materials and supplies, net of accumulated
depreciation, was $2,594.4 million. FAS 121 requires that assets to be disposed
of be stated at the lower of their carrying amount or their fair value. The fair
value of Clinton is estimated to be zero. This estimate is consistent with
possible management decisions to sell or close Clinton. The adjustment of
Clinton plant, nuclear fuel, and materials and supplies to fair value resulted
in impairments of $1,385.6 million, $68.4 million, and $25.9 million,
respectively, for a total impairment loss of $1,479.9 million, net of
accumulated depreciation, income taxes, and ITC. Nuclear fuel and materials and
supplies of $23.2 million remain on IP's books after the impairment, given
management's expectation that such amounts will be consumed in 1999 prior to
Clinton's ultimate disposal. The impairment of Clinton plant, nuclear fuel, and
materials and supplies was recognized as a charge to earnings. Consistent with
Clinton's estimated fair value of zero and the provisions of FAS 121,
depreciation of Clinton has been discontinued. Clinton depreciation expense was
$94.4 million in 1998.
Concurrent with the decision to exit Clinton operations, IP accrued the
estimated cost to decommission the facility. Recognition of this liability, net
of previously accrued amounts, resulted in a $293.5 million, net of income
taxes, charge to earnings. This liability is based on the DECON method of
decommissioning. The DECON method requires the prompt removal of radioactive
materials from the site following the cessation of operations and results in
significant expenditures in the early years of the decommissioning process. IP
expects to complete decommissioning in 2028. The ultimate disposition of
Clinton, as well as the decommissioning method chosen, could have a material
impact on IP's ultimate decommissioning liability. See "Note 4 -- Commitments
and Contingencies."
Also concurrent with the decision to exit Clinton operations, IP recorded
$4.3 million, net of income taxes, of contract termination fees for nuclear fuel
contracts and $46.5 million, net of income taxes, of costs to transition the
plant from an operating mode to a decommissioning mode. In addition, IP recorded
employee severance costs of $25.8 million, net of income taxes; pension
curtailment benefits of $(7.2) million, net of income taxes; and other
postretirement benefit costs of $.4 million, net of income taxes. See "Note 12
- -- Pension and Other Benefits Costs" for additional information. These costs
were recognized as charges to earnings. Costs to transition the plant from an
operating mode to a decommissioning mode and employee severance costs would be
paid within 11 months of the expected plant closure date of August 31, 1999.
Regulatory Assets
P.A. 90-561 allows utilities to recover potentially non-competitive investment
costs ("stranded costs") from retail customers during the transition period,
which extends until December 31, 2006, with possible extension to December 31,
2008. During this period, IP is allowed to recover stranded costs through frozen
bundled rates and transition charges from customers who select other electric
suppliers.
P.A. 90-561 contains floor and ceiling provisions for utilities' allowed ROE.
During the transition period, a utility may request an increase in its base
rates if its ROE falls below a specified minimum based on a prescribed test.
Utilities are also subject to an overearnings test which requires sharing of
earnings in excess of specified levels with customers. See "Note 4 --
Commitments and Contingencies" for additional information.
In May 1998, the SEC staff issued interpretive guidance on the appropriate
accounting treatment during regulatory transition periods for asset impairments
and the related regulated cash flows designed to recover such impairments. The
staff's guidance established that an impaired portion of plant assets identified
in a state's legislation or rate order for recovery by means of a regulated cash
flow should be treated as a regulatory asset in the separable portion of the
enterprise from which the regulated cash flows are derived. Based on this
guidance and on provisions of P.A. 90-561, IP recorded a regulatory asset of
$472.4 million, net of income taxes, for the portion of its stranded costs
deemed probable of recovery during the transition period. The regulatory asset
was recognized as a credit to earnings, offsetting a portion of the Clinton
impairment. Under P.A. 90-561, amortization of the regulatory asset is included
in the overearnings test but is not included in the calculation for the floor
test.
IP also recorded a regulatory asset of $43.6 million, net of income taxes,
reflecting probable future collections from customers of decommissioning costs.
This regulatory asset was also recognized as a credit to earnings, offsetting a
portion of the Clinton impairment. This regulatory asset is also based on P.A.
90-561, which allows for continued recovery of decommissioning costs over the
originally anticipated 27-year remaining life of Clinton. See "Note 4 --
Commitments and Contingencies" for additional information.
Revaluation of Assets and Liabilities
In conjunction with effecting its quasi-reorganization, IP reviewed its assets
and liabilities to determine whether the book value of such items needed to be
adjusted to reflect their fair value. IP determined that its fossil generation
assets were not stated at fair value. With the help of a third-party consultant,
management conducted an economic assessment of its fossil generation assets to
determine their fair value. The assessment was based on projections of on-going
operating costs, future prices for fossil fuels, and market prices of
electricity in IP's service area.
Management concluded that IP's fossil generation assets have a fair value of
$2,867.0 million. This fair value was determined using the after-tax cash flows
of the fossil assets. Prior to the quasi-reorganization, the fossil generation
assets' book value, net of accumulated depreciation, was $631.7 million. The
adjustment to fair value resulted in a write-up of $1,348.6 million, net of
income taxes, which was recognized as an increase in retained earnings. The
estimated amortization of the adjustment to fair value is $71 million in 1999.
IP determined that the book value of its mandatorily redeemable preferred
stock and long-term debt attributable to the generation portion of the business
required an adjustment to fair value of $16.4 million, net of income taxes. This
adjustment to fair value was recognized as a decrease in retained earnings. The
book value of current assets and liabilities equals fair value and therefore
required no adjustments. IP's electric transmission and distribution assets and
its gas distribution assets are still subject to cost-based rate regulation and
therefore required no adjustment.
Early Adoption of Accounting Pronouncements
As part of the quasi-reorganization, IP was required to adopt all existing
accounting pronouncements. The following accounting pronouncements, which have
future mandatory adoption dates, were adopted in connection with the
quasi-reorganization:
- - FAS 133, "Accounting for Derivatives and Hedging Activities"
- - EITF 98-10, "Accounting for Energy Trading and Risk Management Activities"
- - SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use"
- - SOP 98-5, "Reporting on the Costs of Start-up Activities"
The effect of adopting the accounting pronouncements was $5.0 million, net of
income taxes, which was recognized as a direct charge to retained earnings. See
"Note 1 -- Summary of Significant Accounting Policies" and "Note 15 -- Financial
and Other Derivative Instruments."
Remaining Deficit in Retained Earnings
After the revaluation of other assets and liabilities to their fair value and
the early adoption of accounting pronouncements, the accumulated deficit in
retained earnings was $42.2 million, which was eliminated by a transfer from
other paid-in capital.
A summary of consolidated retained earnings and the effects of the Clinton
impairment and quasi-reorganization on the retained earnings balance follows:
(Millions of dollars)
Retained earnings at December 31, 1998,
prior to Clinton impairment and
quasi-reorganization $ (42.2)
- -------------------------------------------------------------------------------
Clinton impairment (charged)/credited to earnings:
Clinton plant, nuclear fuel, and materials
and supplies* (1,479.9)
Decommissioning costs, net of regulatory asset* (249.9)
Other exit costs* (69.8)
- -------------------------------------------------------------------------------
(1,799.6)
Transition period cost recovery* 472.4
- -------------------------------------------------------------------------------
Total Clinton impairment (1,327.2)
- -------------------------------------------------------------------------------
Accumulated deficit in retained earnings (1,369.4)
- -------------------------------------------------------------------------------
Quasi-reorganization (charged)/credited to retained earnings:
Generation assets fair value adjustment* 1,348.6
Mandatorily redeemable preferred stock and
long-term debt fair value adjustment* (16.4)
Early adoption of accounting pronouncements* (5.0)
- -------------------------------------------------------------------------------
Total quasi-reorganization 1,327.2
- -------------------------------------------------------------------------------
Retained earnings deficit at December 31, 1998 (42.2)
Transfer from other paid-in capital 42.2
- -------------------------------------------------------------------------------
Retained earnings balance at December 31, 1998,
after quasi-reorganization $ 0.0
- -------------------------------------------------------------------------------
*Amounts are net of income taxes.
See "Note 1 -- Summary of Significant Accounting Policies" for a discussion
of other accounting issues.
NOTE 3--CLINTON POWER STATION
Clinton Operations
Clinton was placed in service in 1987 and represents approximately 20% of IP's
installed generation capacity. Clinton has not operated since September 1996,
when a leak in a recirculation pump seal caused IP operations personnel to shut
down the plant.
In January 1997, the NRC named Clinton among plants having a trend of
declining performance and, in January 1998, placed Clinton on its "Watch List"
of nuclear plants that require additional regulatory oversight.
In late 1997, an independent team conducted an ISA to thoroughly assess
Clinton's performance, and an NRC team performed an evaluation to validate the
ISA results. Both teams concluded that the underlying reasons for Clinton's
performance problems were ineffective leadership throughout the organization in
providing standards of excellence, complacency throughout the organization,
barrier weaknesses, and weaknesses in teamwork.
In January 1998, IP and PECO announced an agreement under which PECO provides
management services for Clinton, with IP maintaining the operating license and
ultimate oversight for the plant. PECO employees have assumed senior positions
at Clinton but the plant remains staffed primarily by IP employees. IP selected
PECO because it believed that bringing in PECO's experienced management team
would be the fastest and most efficient way to return Clinton to service and to
a superior level of operation.
In February 1998, IP filed with the NRC Clinton's Summary Plan for
Excellence, a comprehensive set of strategies and associated actions necessary
to improve performance, permit safe restart of the plant, and achieve excellence
in operations. IP is implementing the actions required prior to plant restart.
The NRC is conducting a formal review process in parallel with IP's recovery and
restart program.
In November 1998, a resource-loaded integrated schedule was developed which
identified work to be completed prior to restart. This schedule indicated that
restart of the plant would occur in the spring of 1999. As of early March, work
on the schedule has generally occurred as planned with restart still expected in
the spring of 1999.
Public meetings with the NRC to review remaining restart issues are occurring
approximately every two or three weeks. Major on-site NRC inspections to
evaluate key plant areas were initiated in February and are still in progress.
Transfer of Soyland's Ownership Share to IP
For discussion of the transfer of Soyland's ownership share to IP, see "Note 6
- -- Facilities Agreements."
Clinton Cost and Risks
IP's Clinton-related costs represented 41% of IP's total 1998 other operating
and maintenance expenses. Clinton's equivalent availability was 0% for 1998 and
1997 and 66% for 1996.
Currently, commercial reprocessing of spent nuclear fuel is not allowed in
the United States. The NWPA was enacted to establish a government policy on
disposal of spent nuclear fuel and/or high-level radioactive waste. Although the
DOE has failed to comply with its obligation under the NWPA to provide spent
nuclear fuel retrieval and storage by 1998, IP has on-site underwater storage
capacity that will accommodate its spent fuel storage needs for approximately 10
years. IP is currently an equity partner with seven other utilities in an effort
to develop a private temporary repository. A spent fuel storage license was
filed with the NRC in 1997, initiating a process which will take the NRC up to
three years to complete. Safe, dry, on-site storage is technologically feasible
but is subject to licensing and local permitting requirements, for which there
may be effective opposition. See "Note 4 -- Commitments and Contingencies" for
additional information.
Ownership of a nuclear generating unit exposes IP to significant risks,
including increased and changing regulatory, safety and environmental
requirements, and the uncertain future cost of closing and dismantling the unit.
Exiting the Nuclear Business
In December 1998, IP's Board of Directors voted to exit the nuclear business by
selling Clinton or closing it permanently. IP has entered into discussions with
parties interested in purchasing Clinton. Principal concerns of interested
parties are plant restart, funding the decommissioning liability, terms of any
purchase agreement for power generated by Clinton including the length of the
agreement and price of the electricity sold, market price projections for
electricity in the region, property tax obligations of the purchaser, and income
tax issues. These concerns create substantial uncertainty with regard to the
ability to convert any tentative agreement into an executable transaction. In
light of these significant uncertainties with respect to IP's ability to sell
Clinton, IP is preparing to permanently decommission the facility. See "Note 4
- -- Commitments and Contingencies" and "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Commitments
IP estimates that it will spend approximately $370 million for construction
expenditures in 1999. IP construction expenditures for the period 1999 through
2003 are expected to total about $1.2 billion. With the planned sale or shutdown
of Clinton, no nuclear construction is included in the above estimates. Nuclear
construction will be expensed. In addition, in March 1999, IP will be required
to deposit $62 million in cash with the Fuel Company Trustee for noteholders and
take title to the partially depleted nuclear fuel in the reactor at Clinton.
Additional expenditures may be required during this period to accommodate
transitional expenditures related to a competitive environment, environmental
compliance costs and system upgrades, which cannot be determined at this time.
IP's capital expenditures for 1999 through 2003, in addition to IP
construction expenditures, are expected to include $522 million for mandatory
debt retirement. In addition, IPSPT has long-term debt maturities of $86.4
million in each of the above years.
In addition, IP has substantial commitments for the purchase of coal and
coal transportation under long-term contracts. Estimated coal contract
commitments for 1999 through 2003 are $664 million (excluding price escalation
provisions). Total coal purchases were $210 million in 1998, $181 million in
1997, and $184 million in 1996. IP has contracts with various natural gas
suppliers and interstate pipelines to provide natural gas supply, transportation
and leased storage. Estimated committed natural gas, transportation and leased
storage costs for 1999 through 2003 total $81 million. Total natural gas
purchased was $157 million in 1998, $185 million in 1997, and $207 million in
1996. IP anticipates that all gas-related costs will be recoverable under IP's
UGAC. See the subcaption "Fuel Cost Recovery" below for discussion of the UFAC.
IP has accrued contract cancellation fees of $7.1 million to cover minimum
purchase commitments under uranium procurement, conversion, and enrichment
contracts. For more information, see "Note 2 -- Clinton Impairment and
Quasi-Reorganization." IP is committed to purchase approximately $9 million of
emission allowances in 1999 and has contingent commitments for up to $5.5
million in additional 1999 emission allowances purchases, depending on whether
certain options are exercised.
Fuel Cost Recovery: On March 6, 1998, IP initiated an ICC proceeding for
elimination of the UFAC. This established a new base fuel cost recoverable under
IP's electric tariffs which includes a component for recovery of fuel costs, but
not a direct pass-through of such costs. Elimination of the UFAC exposes IP to
the risks and opportunities of market price volatility and operating
efficiencies. By eliminating the UFAC, IP eliminated exposure for potential
disallowed fuel and purchased power costs for the periods after December 31,
1996. Whether electric energy production costs will continue to be recovered
depends on a number of factors, including the number of customers served, demand
for electric service, and changes in fuel cost components. Furthermore, IP's
base electric rates to residential customers were reduced beginning in August
1998 and certain customers will be free to choose their electric generation
suppliers beginning in October 1999. These variables will be influenced, in
turn, by market conditions, availability of generating capacity, future
regulatory proceedings, and environmental protection costs, among other things.
IP's electric customers are receiving refunds totaling $15.1 million during the
first quarter of 1999 related to fuel cost disallowances as the final phase of
the elimination of the UFAC. These refunds close the ICC review process related
to the UFAC cost pass-through for the four years 1989, 1994, 1995, and 1996.
Utility Earnings Cap: P.A. 90-561 also contains floor and ceiling provisions
regarding ROE. During the transition period ending in 2006 (or 2008 at the
option of the utility), a utility may request an increase in its base rates if
the two-year average of its earned ROE is below the two-year average of the same
two years of the monthly average yields of 30-year U.S. Treasury bonds.
Conversely, if during the transition period the two-year average of its earned
ROE exceeds the two-year average for the same two years of the monthly average
yields of the 30-year U.S. Treasury bonds for annual periods ending September
30, plus 5.5% in 1999 or 6.5% in 2000 through 2004, the utility must refund to
customers 50 percent of the "overearnings." Regulatory asset amortization is
included in the calculation of ROE for the ceiling, or overearnings, test but is
not included in the calculation for the floor test.
Insurance: IP maintains insurance for certain losses involving the operation of
Clinton. For physical damage to the plant, IP purchases $1.6 billion of
insurance coverage from an industry-owned mutual insurance company. In the event
of a major nuclear accident with an estimated cost of reactor stabilization and
site decontamination exceeding $100 million, NRC regulations require that
insurance proceeds be dedicated and used first to return the reactor to and
maintain it in a safe and stable condition, and second to decontaminate the
reactor station site. Coverage is provided for a shortfall in the
Decommissioning Trust Fund if premature decommissioning of the reactor is
required due to an accident. If insurance limits are not exhausted by the above
coverages, the remaining coverage is applied to property damage and a portion of
the value of the undamaged property. If a major nuclear accident occurred at
Clinton, claims for property damage and other costs could exceed the limits of
current or available insurance coverage.
IP purchases business interruption coverage through the
industry-owned mutual insurance company. After a 17-week waiting period, the
insurance provides coverage if Clinton is out of service due to an accidental
property damage loss. Thereafter, the insurance provides weekly indemnity for up
to 162 weeks. Total coverage from this business interruption insurance, if
Clinton were out of service for the entire 162 weeks, would be $223.8 million.
Multiple major losses covered under the current property damage and business
interruption insurance coverages involving Clinton or other stations insured by
the industry-owned mutual insurance company could result in retrospective
premium assessments up to $11.6 million. IP is not collecting any business
interruption insurance payments for Clinton.
All U.S. nuclear reactor licensees are subject to the Price-Anderson Act
which currently limits public liability for a nuclear incident to $9.7 billion.
Private insurance covers the first $200 million. Retrospective premium
assessments against each licensed nuclear reactor in the United States provide
excess coverage. Currently, the liability to these nuclear reactor licensees for
such an assessment would be up to $88.1 million per incident, not including any
premium taxes assessed by the State of Illinois which may be applicable, payable
in annual installments of not more than $10 million.
As a licensee of a commercial nuclear power plant in the United States, IP
is required to maintain financial protection to cover claims of certain nuclear
workers. Prior to January 1998, IP met this requirement with insurance purchased
under a Master Worker Policy. On January 1, 1998, a new insurance policy was
issued that applies to claims first reported on or after January 1, 1998. This
policy has a limit of $200 million (reinstated annually if certain conditions
are met) for radiation injury claims against IP or other licensees who are
insured by this policy. If these claims exceed the $200 million limit of primary
coverage, the SFP provisions of the Price-Anderson Act would apply. Since
reserves for outstanding claims under former policies would be insufficient and
certain claims may still be made under former policies due to a discovery
period, IP could be assessed under these former policies along with the other
policyholders. IP's share could be up to $3.1 million in any one year.
IP may be subject to other risks that are not insurable, or its insurance
coverage to offset the various risks may be insufficient to meet potential
liabilities and losses. There is no assurance that IP will be able to maintain
insurance coverage at its present level. Under those circumstances, such losses
or liabilities could have a material adverse effect on IP's financial position.
If Clinton is sold, the purchaser will assume the decision-making
responsibilities for securing required insurance coverages.
If Clinton is decommissioned, IP will work jointly with the regulators to
modify its nuclear insurance program to reflect decommissioned plant status.
Nuclear property insurance will initially be reduced to the Property Rule's
minimum coverage limits of $1.06 billion. IP will proceed with filing a waiver
of the Property Rule's minimum insurance requirements which will reflect the
maximum probable decontamination event applicable to the decommissioned plant.
Regulations require any licensed plant to continue its purchase of full nuclear
liability limits and participation in the SFP program for a specified period
following shutdown or until decay heat removal capacity is reduced to acceptable
levels. IP will consider requesting a waiver to suspend participation in the SFP
program and reduce the level of liability insurance limits. Since business
interruption coverage is optional, IP will review the value of continuing this
coverage and adjust accordingly.
Decommissioning and Nuclear Fuel Disposal: IP is responsible for the costs of
decommissioning Clinton and for spent nuclear fuel disposal costs. In May 1997,
consistent with IP's assumption of all of Soyland's ownership obligations of
Clinton, Soyland's nuclear decommissioning trust assets of approximately $6
million were transferred to IP.
P.A. 90-561 provides for the continued recovery of decommissioning costs
through rates charged to IP's delivery service customers. An ICC approved
site-specific decommissioning study projected a cost of $538 million in 1996
dollars for decommissioning based on the assumption of the DECON method (prompt
removal and dismantlement of Clinton), which results in material expenditures in
the early years of decommissioning Clinton. The projected cost estimate in 2026
dollars, assuming a 2 percent annual inflation factor, is $988 million. This
estimate continues as the basis for assessing decommissioning costs to IP's
customers.
External decommissioning trusts, as prescribed by Illinois law and
authorized by the ICC, accumulate funds for the future decommissioning of
Clinton based on the expected service life of the plant. Decommissioning funds
are recorded as assets on the balance sheet. Beginning in 1999, IP will
recognize earnings and expenses of the trust on the income statement as they
occur. The trust summary is as follows:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Market value,
beginning of period $ 62.5 $ 41.4 $ 32.7
Company contributions 6.5 5.3 3.9
Appreciation in market value 15.1 15.8 4.8
- --------------------------------------------------------------------------------
Market value, end of period $ 84.1 $ 62.5 $ 41.4
- --------------------------------------------------------------------------------
In December 1998, IP's Board of Directors voted to exit Clinton operations
which resulted in an impairment of Clinton-related assets and accrual of
exit-related costs. As a result of the decision to exit Clinton operations, IP
accrued the estimated cost to decommission the facility. IP recognized the
present value of the decommissioning liability for Clinton not previously
accrued, in the amount of $293.5 million, net of income taxes. IP also recorded
a regulatory asset for the present value of the estimated future collections
from customers for decommissioning costs in the amount of $43.6 million, net of
taxes. A discount rate of 5.10%, the 30-year Treasury bond rate at December 31,
1998, was used to calculate the regulatory asset and decommissioning liability.
The ultimate disposition of Clinton, as well as the decommissioning method
chosen, could have a material impact on the total decommissioning liability.
If Clinton is closed, the estimated decommissioning expenditures under the
DECON method for the next five years are $376.2 million. IP currently has $84
million in decommissioning trust funds and would expect this amount to be used,
as well as $37 million in additional collections from customers, including
interest on the trust, during this time period. In addition, IP will need to
fund approximately $255 million from other sources. The estimated
decommissioning expenditures to be incurred as follows:
(Millions of dollars)
1999 $ 21.0
2000 63.9
2001 79.3
2002 105.0
2003 107.0
Thereafter 405.8
- --------------------------------------------------------------------------------
Total estimated liability 782.0
Discount at 5.10% 214.6
- --------------------------------------------------------------------------------
Total discounted liability $ 567.4
- --------------------------------------------------------------------------------
Under the NWPA, the DOE is responsible for the permanent storage and disposal
of spent nuclear fuel. The DOE currently charges one mill ($0.001) per net kwh
(one dollar per MWH) generated and sold for future disposal of spent fuel. IP is
recovering these charges through rates. In 1996, at the request of
nuclear-owning utilities and state regulatory agencies, the District of Columbia
Circuit Court of Appeals issued an order confirming DOE's unconditional
obligation to take responsibility for spent nuclear fuel commencing in 1998. The
DOE argued that it had no such obligation because of its inability to site and
license a permanent repository. Notwithstanding this decision, which the DOE did
not appeal, the DOE has indicated to all nuclear utilities that it will
experience delay in performance. The impact of any such delay on IP will depend
on many factors, including the duration of such delay and the cost and
feasibility of interim, on-site storage. Nuclear plant owners and others are
pursuing litigation against DOE at the D.C. Circuit Court of Appeals, the
Federal Court of Claims, federal district court, and in administrative
proceedings. These lawsuits are focused on establishing DOE liability for
damages caused by its failure to perform, the scope of those damages, and other
remedies. IP is participating in such litigation before the D.C. Circuit Court
of Appeals. To date, the unconditional nature of DOE's obligation has been
upheld but no court has yet quantified damages or ordered specific performance.
The outcome of these lawsuits is uncertain. See "Note 3 -- Clinton Power
Station" for additional information.
Power Supply and Reliability: Electricity was in short supply during the 1998
summer cooling season because of an unusually high number of plant outages in
the Midwest region. IP bought generation and transmission capacity to prevent
firm load curtailment and took additional steps to avoid power outages,
including upgrading transmission lines and equipment, readying emergency
procedures, and returning to service five units that had been in cold shutdown.
Expenses incurred as a result of the shortage have had a material adverse impact
on IP.
The electric energy market experienced unprecedented prices for power
purchases during the last week of June 1998. IP's power purchases for 1998 were
$517 million higher than 1997 due to summer price spikes resulting in a $274
million increase in power purchased, additional purchases of $215 million to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts as part of the wholesale
trading business. Income from interchange sales was $382 million higher than in
1997 due to increased sales volumes and higher prices. Although IP's margin on
volumes between 1998 and 1997 resulted in IP being a net seller, higher prices
resulted in a $135 million net purchase margin. For more information, see
subcaption below titled "IP Wholesale Energy Markets" and "Note 15 -- Financial
and Other Derivative Instruments."
IP expects to have in excess of 400 MW of additional generation on line for
the summer of 1999. This includes approximately 235 MW from five oil-fired units
which were brought up from cold shutdown during the summer of 1998 and 176 MW
from four natural gas turbines that IP plans to install before the summer of
1999. Total cost for the two projects is estimated at $87 million. IP also plans
to refurbish nine gas turbines already in service at a cost of $13 million. At
an October 1998 public ICC proceeding on reliability, IP said that even though
it expects Clinton to be available by summer 1999, for purposes of advance
coverage of anticipated summer demand it is assuming Clinton will not be
operating. However, IP expects to have sufficient generating capacity to serve
firm load during the periods of peak summer demand using demand-side and
supply-side initiatives taken in response to the 1998 regional supply crisis. If
generation is lost or demand is at unprecedented levels, firm load could be
curtailed. In addition, the restructuring of the Soyland PCA agreement is also
expected to free up an additional 287 MW of capacity. For more information, see
"Note 7 -- Facilities Agreements" concerning the Soyland PCA.
IP Wholesale Energy Markets: IP buys and sells electricity in the Midwest,
Southern, and Northeastern U.S. markets. In the normal course of business, IP
incurs price exposure on the electricity bought or sold. Where the markets
allow, IP will hedge such exposure through the use of electricity futures,
forward, and option contracts with qualified counterparties. In 1998, market
losses of approximately $33 million were recorded in connection with these
agreements based on forward market prices. Of this amount, approximately $28
million was charged to purchased power. The remaining $5 million resulted from
the early adoption of FAS 133 and was accounted for as part of the
quasi-reorganization. The ultimate financial impact of these contracts will
depend primarily on wholesale prices and IP's system availability. If system
availability is limited and market conditions cause wholesale prices to rise to
the levels seen in 1998, IP could incur significant costs to meet its wholesale
contract obligations. For more information, see "Note 1 -- Summary of
Significant Accounting Policies," subcaption New Accounting Pronouncements and
"Note 2 -- Clinton Impairment and Quasi-Reorganization."
Environmental Matters
Clean Air Act: IP continues to purchase emission allowances to comply with the
SO2 emission reduction requirements of Phase I (1995-1999) of the Acid Rain
Program (Title 4) of the 1990 Clean Air Act Amendments (CAAA). An emission
allowance is the authorization by the U.S. EPA to emit one ton of SO2. The ICC
approved IP's Phase I Acid Rain Compliance Plan in September 1993, and IP is
continuing to implement that plan. IP has acquired sufficient emission
allowances to cover more than 70 percent of its anticipated needs for 1999 and
expects to purchase the remainder on the spot market. Baldwin and Hennepin are
switching from high-sulfur Illinois coal to low-sulfur Wyoming coal to attain
compliance with Phase II (2000 and beyond) of the Acid Rain SO2 provisions of
the CAAA. The cost to convert Baldwin and Hennepin is estimated to be $125
million.
To comply with the Phase I NOx emission reduction requirements of the acid
rain provisions of the Clean Air Act, IP installed low-NOx burners at Baldwin
Unit 3 and Vermilion Unit 2. On November 29, 1994, the Phase I NOx rules were
remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA reinstated, with some
modifications, the Phase I NOx rules effective January 1, 1996. IP was and
continues to be positioned to comply with these revised rules without additional
modifications to any of its generating plants.
The U.S. EPA issued revised Phase II NOx emission limits on December 10,
1996. IP has prepared a Phase II Compliance Plan. Capital expenditures for IP's
NOx Compliance Plan are expected to total $118 million when the project is
complete in early 2000. Approximately $58 million was spent through the end of
1998. The majority of this investment is for installation of SCR equipment on
Baldwin Units 1 and 2. This work is being done in conjunction with replacement
of the air heaters on these units.
In addition, regulators are continuing to finalize rulemaking to comply with
current federal air quality standards for ozone. On October 27, 1998, the U.S.
EPA finalized air pollution rules that will require substantial reductions of
NOx emissions in Illinois and 21 other states. This rule will require the
installation of NOx controls by May 2003, with each Illinois utility's exact
reduction requirement to be specified in 1999. Preliminary estimates of the
capital expenditures needed in 2000 through 2003 to comply with these new NOx
limitations are $90 million to $140 million. The legality of this proposal,
along with its technical feasibility, is being challenged by a number of states,
utility groups, and utilities, including IP.
Global Warming: In December 1997, international negotiations to reduce
greenhouse gas emissions concluded with the adoption of the Kyoto Protocol. This
Protocol requires the United States to reduce greenhouse gas emissions to 7
percent below 1990 levels during the years 2008 through 2012 and to make further
reductions thereafter. Before it can take effect, this Protocol must be ratified
by the U.S. Senate. However, United States Senate Resolution 98, which passed
95-0 in July 1997, says the Senate would not ratify an agreement that fails to
involve all countries or would damage the economy of the United States. Since
the Protocol does not contain key elements that Senate Resolution 98 specifies
are necessary, ratification will be a major political issue. It is anticipated
that a ratification vote will be delayed until the current administration
decides whether it can meet the provisions of Senate Resolution 98.
IP will face major changes in the way it generates electricity if the Kyoto
Protocol is ratified or if the Protocol's reduction goals are incorporated into
other environmental regulations. IP would have to repower some generating units
and change from coal to natural gas in other units to reduce greenhouse gas
emissions. IP estimates that compliance with these proposed regulations may
require significant capital outlays and annual operating expenses which could
have a material adverse impact on IP.
Manufactured-Gas Plant: IP's estimated liability for MGP site remediation is $61
million. This amount represents IP's current estimate of the costs it will incur
to remediate the 24 MGP sites for which it is responsible. Because of the
unknown and unique characteristics at each site, IP cannot currently determine
its ultimate liability for remediation of the sites.
In October 1995, to offset some of the burden imposed on its customers, IP
initiated litigation against a number of its insurance carriers. As of June
1998, settlements or settlements in principle have been reached with all 30 of
the carriers. Settlement proceeds recovered from the carriers will offset a
significant portion of the MGP remediation costs and will be credited to
customers through the tariff rider mechanism which the ICC has previously
approved. Cleanup costs in excess of insurance proceeds will be fully recovered
from IP's transmission and distribution customers.
Electric and Magnetic Fields: The possibility that exposure to EMF emanating
from power lines, household appliances, and other electric sources may result in
adverse health effects continues to be the subject of litigation and
governmental, medical, and media attention. Litigants have also claimed that EMF
concerns justify recovery from utilities for the loss in value of real property
adjacent to power lines, substations, and other such sources of EMF. The number
of EMF cases has declined as national and international science commission
studies have failed to confirm EMF health risks. Additional research is being
conducted. On July 3, 1997, President Clinton signed legislation extending the
National EMF Research and Public Information Dissemination Program through 1998.
Research results, policy decision, and public information developments will
continue into 1999. It is too soon to tell what impact, if any, these actions
may have on IP's financial position.
Other
Legal Proceedings: IP is involved in legal or administrative proceedings before
various courts and agencies with respect to matters occurring in the ordinary
course of business, some of which involve substantial amounts of money.
Management believes that the final disposition of these proceedings will not
have a material adverse effect on the consolidated financial position or the
results of operations.
Accounts Receivable: IP sells electric energy and natural gas to residential,
commercial, and industrial customers throughout Illinois. At December 31, 1998,
59%, 24%, and 17% of "Accounts receivable -- Service" were from residential,
commercial, and industrial customers, respectively. IP maintains reserves for
potential credit losses and such losses have been within management's
expectations. The reserve for doubtful accounts remained at $5.5 million in
1998.
Contingencies
Soyland: For more information, see "Note 6 -- Facilities Agreements" for
discussion of Soyland contingencies.
Nuclear Fuel Lease: For more information, see "Note 8 -- Capital Leases" for
discussion of contingencies related to IP's nuclear fuel lease.
Internal Revenue Service Audit: The Internal Revenue Service is currently
auditing IP's federal income tax returns for the years 1994 through 1997. At
this time, the outcome of the audit cannot be determined. Management does not
expect that the results will have a material adverse effect on IP's financial
position or results of operations. For a detailed discussion of income taxes,
see "Note 7 -Income Taxes."
NOTE 5--LINES OF CREDIT AND SHORT-TERM LOANS
IP has total lines of credit represented by bank commitments amounting to $354
million, all of which were unused at December 31, 1998. These lines of credit
are renewable in May 1999, November 1999 and May 2002. These bank commitments
support the amount of commercial paper outstanding at any time, limited only by
the amount of unused bank commitments, and are available to support IP
activities. At December 31, 1998, the level of IP short-term debt was
significantly lower than historical levels due to using the December
securitization proceeds to redeem commercial paper and short-term borrowings.
This level is expected to increase as funds are expended to redeem long-term
debt and equity.
IP pays facility fees up to .10% per annum on $350 million of the total lines
of credit, regardless of usage. The interest rate on borrowings under these
agreements is, at IP's option, based upon the lending banks' reference rate,
their Certificate of Deposit rate, the borrowing rate of key banks in the London
interbank market, or competitive bid.
IP has letters of credit capacity totaling $201 million, all of which were
undrawn at December 31, 1998. IP pays fees up to .95% per annum on the undrawn
amount of credit. On February 12, 1999, IP acquired an additional letter of
credit for $30 million with a .425% per annum fee on the undrawn amount of
credit.
In addition, IP and the Fuel Company each have a short-term financing option
to obtain funds not to exceed $30 million. IP and the Fuel Company pay no fees
for this uncommitted facility and funding is subject to availability upon
request.
For the years 1998, 1997, and 1996, IP had short-term borrowings consisting
of bank loans, commercial paper, extendible floating rate notes, and other
short-term debt outstanding at various times as follows:
(Millions of dollars, except rates) 1998 1997 1996
Short-term borrowings
at December 31, $ 147.6 $ 376.8 $ 310.0
Weighted average interest
rate at December 31, 6.0% 6.0% 5.7%
Maximum amount outstanding
at any month end $ 370.9 $ 376.8 $ 310.0
Average daily borrowings
outstanding during
the year $ 317.2 $ 284.4 $ 261.9
Weighted average interest
rate during the year 5.7% 5.8% 5.6%
NOTE 6--FACILITIES AGREEMENTS
On March 13, 1997, the NRC issued an order approving transfer to IP of the
Clinton operating license related to Soyland's 13.2% ownership obligations in
connection with the transfer from Soyland to IP of all of Soyland's interest in
Clinton pursuant to an agreement reached in 1996. Soyland's title to the plant
and directly related assets such as nuclear fuel were transferred to IP on May
1, 1997. Soyland's nuclear decommissioning trust assets were transferred to IP
on May 19, 1997, consistent with IP's assumption of all of Soyland's ownership
obligations, including those related to decommissioning.
FERC approved an amended PCA between Soyland and IP in July 1997. The amended
PCA obligates Soyland to purchase all of its capacity and energy needs from IP
for at least 10 years. The amended PCA provides that a contract cancellation fee
will be paid by Soyland to IP in the event that a Soyland member terminates its
membership in Soyland. In May 1997, three distribution cooperative members
terminated their membership by buying out of their respective long-term
wholesale power contracts with Soyland. This action resulted in Soyland paying a
fee of $20.8 million to IP in June 1997 to reduce its future base capacity
charges. Fee proceeds of $2.9 million were used to offset IP's costs of
acquiring Soyland's share of Clinton, and the remaining $17.9 million was
recorded as interchange revenue. In December 1997, Soyland signed a letter of
intent to pay in advance the remainder of its base capacity charges in the PCA,
approximately $70 million. Soyland received the necessary financing and
regulatory approvals in the second quarter of 1998. IP received $30 million and
$40 million from Soyland during the first and second quarters of 1998,
respectively. The prepayment was deferred and is being recognized as interchange
revenue evenly over the initial term of the PCA, September 1, 1996, through
August 31, 2006. In December 1998, Soyland and IP signed an agreement to
restructure the PCA in which IP acts as an agent for Soyland in obtaining and
scheduling power and energy and related transmission from other parties. The two
parties intend to establish a final agreement in March 1999.
NOTE 7 -- INCOME TAXES
Deferred tax assets and liabilities were comprised of the following:
Balances as of December 31,
(Millions of dollars) 1998 1997
Deferred tax assets:
- --------------------------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ 9.2 $ 11.2
- --------------------------------------------------------------------------------
Noncurrent:
Depreciation and other property related 150.4 46.2
Alternative minimum tax 140.5 156.8
Unamortized investment tax credit 18.1 116.9
Misc. book/tax recognition differences 375.0 40.3
- --------------------------------------------------------------------------------
684.0 360.2
- --------------------------------------------------------------------------------
Total deferred tax assets $ 693.2 $ 371.4
- --------------------------------------------------------------------------------
Deferred tax liabilities:
- --------------------------------------------------------------------------------
Current:
Misc. book/tax recognition differences $ .1 $ .9
- --------------------------------------------------------------------------------
Noncurrent:
Depreciation and other property related 1,292.8 1,348.0
Misc. book/tax recognition differences 369.9 (7.1)
- --------------------------------------------------------------------------------
1,662.7 1,340.9
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ 1,662.8 $ 1,341.8
- --------------------------------------------------------------------------------
Income taxes included in the Consolidated Statements of Income consist of
the following components:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Current taxes--
Included in operating
expenses and taxes $ 7.6 $ 72.7 $79.2
Included in other income
and deductions (4.2) (.7) (14.5)
- --------------------------------------------------------------------------------
Total current taxes 3.4 72.0 64.7
- --------------------------------------------------------------------------------
Deferred taxes--
Included in operating
expenses and taxes
Property related differences (30.0) 9.2 60.4
Alternative minimum tax 16.4 41.7 1.1
Gain/loss on reacquired debt 3.4 .4 (1.6)
Clinton plant impairment (853.6) -- --
Enhanced retirement
and severance -- .5 2.6
Misc. book/tax recognition
differences (20.0) (16.7) 6.1
Included in other income
and deductions
Property related differences .3 (.4) 10.2
Misc. book/tax recognition
differences .3 1.5 1.7
- --------------------------------------------------------------------------------
Total deferred taxes (883.2) 36.2 80.5
- --------------------------------------------------------------------------------
Deferred investment tax
credit--net
Included in operating
expenses and taxes (8.3) (7.3) (7.3)
Included in other income
and deductions--
Clinton plant impairment (160.4) -- --
- --------------------------------------------------------------------------------
Total investment
tax credit (168.7) (7.3) (7.3)
- --------------------------------------------------------------------------------
Total income taxes from
continuing operations (1,048.5) 100.9 137.9
- --------------------------------------------------------------------------------
Income tax--
Extraordinary item
Current tax expense -- (17.8) --
Deferred tax expense -- (100.2) --
- --------------------------------------------------------------------------------
Total extraordinary item -- (118.0) --
- --------------------------------------------------------------------------------
Total income taxes $(1,048.5) $ (17.1) $ 137.9
- --------------------------------------------------------------------------------
The reconciliations of income tax expense to amounts computed by applying the
statutory tax rate to reported pretax income from continuing operations for the
period are set-out below:
Years Ended December 31,
(Millions of dollars) 1998 1997 1996
Income tax expense at the
federal statutory tax rate $ (781.1) $ 88.1 $ 128.3
Increases/(decreases) in taxes
resulting from--
State taxes,
net of federal effect (172.6) 11.8 13.7
Investment tax credit
amortization (8.3) (7.3) (7.3)
Clinton plant impairment (85.4) -- --
Depreciation not normalized 4.4 11.3 9.4
Interest expense on
preferred securities (6.8) (6.9) (6.9)
Other--net 1.3 3.9 .7
- --------------------------------------------------------------------------------
Total income taxes from
continuing operations $(1,048.5) $ 100.9 $ 137.9
- --------------------------------------------------------------------------------
Combined federal and state effective income tax rates were 43.6%, 40.1%,
and 37.6% for the years 1998, 1997, and 1996 respectively.
IP is subject to the provisions of the Alternative Minimum Tax System. As a
result, IP has an Alternative Minimum Tax credit carryforward at December 31,
1998, of approximately $140.5 million. This credit can be carried forward
indefinitely to offset future regular income tax liabilities in excess of the
tentative minimum tax.
The Internal Revenue Service is currently auditing IP's consolidated
federal income tax returns for the years 1994 through 1997. At this time, the
outcome of the audit cannot be determined; however, the results of the audit are
not expected to have a material adverse effect on IP's consolidated financial
position or results of operations.
The tax effect of the Clinton plant impairment and quasi-reorganization are
included in the above amounts. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
Because of the passage of P.A. 90-561 in 1997, IP's electric generation
business no longer meets the criteria for application of FAS 71. As required by
FAS 101, "Regulated Enterprises -- Accounting for the Discontinuation of
Application of FASB Statement No. 71," the income tax effects of the write-off
of regulatory assets and liabilities related to electric generation are
reflected in the extraordinary item for the cumulative effect of a change in
accounting principle.
NOTE 8 -- CAPITAL LEASES
The Fuel Company, which is 50 percent owned by IP, was formed in 1981 for the
purpose of leasing nuclear fuel to IP for Clinton. Lease payments are equal to
the Fuel Company's cost of fuel as consumed (including related financing and
administrative costs). Billings under the lease agreement were $4 million in
1998, $4 million in 1997, and $35 million in 1996, including financing costs of
$4 million, $4 million, and $5 million, respectively. IP is required to pay
financing costs whether or not fuel is consumed. IP is obligated to make
subordinated loans to the Fuel Company at any time the obligations of the Fuel
Company that are due and payable exceed the funds available to the Fuel Company.
Lease terms stipulate that, in the event Clinton is out of service for 24
consecutive months, IP is obligated to purchase Clinton's incore nuclear fuel
from the Fuel Company. In accordance with this provision, IP will purchase the
fuel for $62.1 million in the first quarter of 1999. IP has an obligation for
nuclear fuel disposal costs of leased nuclear fuel. See "Note 4 -- Commitments
and Contingencies" for discussion of decommissioning and nuclear fuel disposal
costs. Nuclear fuel lease payments are included with "Fuel for electric plants"
on IP's Consolidated Statements of Income.
Current obligations under capital lease for nuclear fuel were $62.1 million
at December 31, 1998, and $18.7 million at December 31, 1997.
NOTE 9 -- LONG-TERM DEBT
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
First mortgage bonds--
6 1/2% series due 1999 $ 72.0 $ 72.0
6.60% series due 2004 (Pollution Control Series A) - 6.3
7.95% series due 2004 39.0 72.0
6.0% series due 2007 (Pollution Control Series B) - 18.7
8.30% series due 2017 (Pollution Control Series I) - 33.8
7 3/8% series due 2021 (Pollution Control Series J) 84.7 84.7
8 3/4% series due 2021 57.1 57.1
5.70% series due 2024 (Pollution Control Series K) 35.6 35.6
7.40% series due 2024 (Pollution Control Series L) 84.1 84.1
- --------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds 372.5 464.3
- --------------------------------------------------------------------------------------------------------------------------
New mortgage bonds--
6 1/8% series due 2000 40.0 40.0
5.625% series due 2000 110.0 110.0
6.25% series due 2002 100.0 -
6.0% series due 2003 100.0 -
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
8.0% series due 2023 229.0 229.0
7 1/2% series due 2025 148.5 177.0
5.40% series due 2028 (Pollution Control Series A) 18.7 -
5.40% series due 2028 (Pollution Control Series B) 33.8 -
Adjustable rate series due 2028
(Pollution Control Series M, N, and O) 111.8 111.8
Adjustable rate series due 2032
(Pollution Control Series P, Q, and R) 150.0 150.0
- --------------------------------------------------------------------------------------------------------------------------
Total new mortgage bonds 1,211.8 987.8
- --------------------------------------------------------------------------------------------------------------------------
Total mortgage bonds 1,584.3 1,452.1
- --------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes--
5.39% due 2000 110.0 -
5.26% due 2001 100.0 -
5.31% due 2002 80.0 -
5.34% due 2003 85.0 -
5.38% due 2005 175.0 -
5.54% due 2007 175.0 -
5.65% due 2008 139.0 -
-------------------------------------------------------------------------------------------------------------------------
Total transitional funding trust notes 864.0 -
-------------------------------------------------------------------------------------------------------------------------
Medium-term notes, series A - 68.0
Variable rate long-term debt due 2017 75.0 75.0
- --------------------------------------------------------------------------------------------------------------------------
Total other long-term debt 75.0 143.0
- --------------------------------------------------------------------------------------------------------------------------
2,523.3 1,595.1
Adjustment to Fair Value 25.3 -
Unamortized discount on debt (15.5) (16.8)
- --------------------------------------------------------------------------------------------------------------------------
Total long-term debt excluding capital lease obligations 2,533.1 1,578.3
Obligations under capital leases 132.0 126.7
- --------------------------------------------------------------------------------------------------------------------------
2,665.1 1,705.0
Long-term debt and lease obligations maturing within one year (506.6) (87.5)
- --------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 2,158.5 $ 1,617.5
- --------------------------------------------------------------------------------------------------------------------------
In the above table, the "adjustment to fair value" is the total adjustments of
debt to fair value in the quasi-reorganization. The adjustments to the fair
value of each debt series will be amortized over its remaining life to interest
expense. See "Note 2 -Clinton Impairment and Quasi-Reorganization" for more
information.
In March 1998, IP issued $18.7 million of 5.4% Pollution Control Bonds
Series A due 2028 and used the proceeds to redeem $18.7 million of 6.0%
Pollution Control Bonds Series B due 2007 in April 1998. In March 1998, IP
issued $33.8 million of 5.4% Pollution Control Bonds Series B due 2028 to
refinance $33.8 million of 8.3% Pollution Control Bond Series I due 2017 in
April 1998. $100 million of 6.25% New Mortgage Bonds due 2002 were issued in
July 1998, and $100 million of 6% New Mortgage Bonds due 2003 were issued in
September 1998.
In December 1998, IPSPT issued $864 million of Transitional Funding Trust
Notes as allowed under the Illinois Electric Utility Transition Funding Law in
P.A. 90-561. The proceeds of the notes were used by IP to retire debt and equity
securities. These notes have maturity dates ranging from one to 10 years, with
an average interest rate of 5.41%.
In November 1998, IP called $6.3 million of 6.6% Pollution Control Bonds
Series A due 2004. In December 1998, $28.5 million of 7.50% New Mortgage Bonds
due 2025 and $33.0 million of 7.95% First Mortgage Bonds were purchased on the
open market.
In January 1999, $57.1 million of 8.75% First Mortgage Bonds due 2021 and
$229 million of 8% New Mortgage Bonds due 2023 were purchased through a
redemption notice. IP also redeemed $5.4 million of 7.95% First Mortgage Bonds
due 2004 in January 1999. In February 1999, IP redeemded $36.8 million of 6.5%
First Mortgage Bonds due 1999 and $5 million of 7.95% First Mortgage Bonds due
2004.
In 1989 and 1991, IP issued a series of fixed rate medium-term notes. At
December 31, 1998, all these notes have matured and been retired. Interest rates
on variable rate long-term debt due 2017 are adjusted weekly and ranged from
3.75% to 4.20% at December 31, 1998.
For the years 1999, 2000, 2001, 2002, and 2003, IP has long-term debt
maturities in the aggregate of (in millions) $72, $150, $0, $100, and $200,
respectively. In addition, IPSPT has long-term debt maturities of $86.4 million
in each of the above years. These amounts exclude capital lease requirements.
See "Note 8 -- Capital Leases."
At December 31, 1998, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $64.7 million.
In 1992, IP executed a new general obligation mortgage (New Mortgage) to
replace, over time, IP's 1943 Mortgage and Deed of Trust (First Mortgage). Both
mortgages are secured by liens on substantially all of IP's properties. A
corresponding issue of First Mortgage Bonds, under the First Mortgage, secures
any bonds issued under the New Mortgage. In October 1997, at a special
bondholders meeting, the 1943 First Mortgage was amended to be generally
consistent with the New Mortgage. The remaining balance of net bondable
additions at December 31, 1998, was approximately $1.9 billion.
NOTE 10 -- PREFERRED STOCK
(Millions of dollars)
December 31, 1998 1997
Serial Preferred Stock, cumulative, $50 par value--
Authorized 5,000,000 shares; 1,139,110 shares outstanding
Series Shares Redemption Prices
4.08% 283,290 $ 51.50 $ 14.1 $ 14.1
4.26% 136,000 51.50 6.8 6.8
4.70% 176,000 51.50 8.8 8.8
4.42% 134,400 51.50 6.7 6.7
4.20% 167,720 52.00 8.4 8.4
7.75% 241,700 50.00 after July 1, 2003 12.1 12.1
Net premium on preferred stock .2 .2
- -----------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock, $50 par value $ 57.1 $ 57.1
- -----------------------------------------------------------------------------------------------------------------------------------
Serial Preferred Stock, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Preference Stock, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Serial Preferred Stock, Preference Stock and Preferred Securities $ 57.1 $ 57.1
- -----------------------------------------------------------------------------------------------------------------------------------
Company Obligated Mandatorily Redeemable Preferred Securities of:
Illinois Power Capital, L.P.
Monthly Income Preferred Securities, cumulative, $25 liquidation preference--
3,880,000 shares authorized and outstanding $ 97.0 $ 97.0
Illinois Power Financing I
Trust Originated Preferred Securities, cumulative, $25 liquidation preference--
4,000,000 shares authorized and outstanding 100.0 100.0
Adjustment to Fair Value 2.0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Mandatorily Redeemable Preferred Stock $ 199.0 $ 197.0
- -----------------------------------------------------------------------------------------------------------------------------------
In the above table, only the MIPS and TOPrS were restated to their fair
value in the quasi-reorganization. The serial preferred stock was not restated
because it is equity rather than an asset or a liability. The increase in the
value of the MIPS and the TOPrS will be amortized to interest expense over the
remaining life of these securities. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for more information.
Serial Preferred Stock ($50 par value) is redeemable at the option of IP in
whole or in part at any time with not less than 30 days and not more than 60
days notice by publication. The MIPS are redeemable at the option in whole or in
part on or after October 6, 1999, with not less than 30 days and not more than
60 days notice by publication. The TOPrS mature on January 31, 2045, and may be
redeemed in whole or in part at any time on or after January 31, 2001.
Illinois Power Capital, L.P., is a limited partnership in which IP serves
as a general partner. Illinois Power Capital issued (1994) $97 million of
tax-advantaged MIPS at 9.45% (5.67% after-tax rate) with a liquidation
preference of $25 per share. IP consolidates the accounts of Illinois Power
Capital, L.P.
IPFI is a statutory business trust in which IP serves as sponsor. IPFI
issued (1996) $100 million of TOPrS at 8% (4.8% after-tax rate). IP consolidates
the accounts of IPFI.
NOTE 11 -- COMMON STOCK AND RETAINED EARNINGS
As of December 31, 1998, IP effected a quasi-reorganization in which IP's
accumulated deficit in retained earnings of $1,369.4 million was eliminated by a
$1,327.2 million restatement of other assets and liabilities to their fair value
and a transfer of $42.2 million from additional paid-in capital. See "Note 2 --
Clinton Impairment and Quasi-Reorganization" for additional information
regarding the effects upon retained earnings.
On May 31, 1994, common shares of IP began trading as common shares of
Illinova. Illinova is the sole shareholder of IP common stock.
On December 22, 1998, IPSPT issued $864 million of Transitional Funding
Trust Notes, with IP as servicer. As of December 31, 1998, IP used $49.3 million
of the funds to repurchase 2.3 million of its common shares from Illinova.
In 1998, IP repurchased 3,323,079 shares of its common stock from Illinova.
In 1997 and 1996, IP repurchased 6,017,748 shares and 714,811 shares,
respectively, of its common stock from Illinova. Under Illinois law, such shares
may be held as treasury stock and treated as authorized but unissued, or may be
canceled by resolution of the Board of Directors. IP holds the common stock as
treasury stock and deducts it from common equity at the cost of the shares.
IP employees participate in an ESOP that includes an incentive compensation
feature which is tied to achievement of specified corporate performance goals.
This arrangement began in 1991 when IP loaned $35 million to the Trustee of the
Plans, which used the loan proceeds to purchase 2,031,445 shares of IP's common
stock on the open market. The loan and common shares were converted to Illinova
instruments with the formation of Illinova in May 1994. These shares are held in
a suspense account under the plans and are being distributed to the accounts of
participating employees as the loan is repaid by the Trustee with funds
contributed by IP, together with dividends on the shares acquired with the loan
proceeds. IP financed the loan with funds borrowed under its bank credit
agreements.
For the year ended December 31, 1998, 86,020 common shares were allocated
to salaried employees and 77,019 shares to employees covered under the
Collective Bargaining Agreement through the matching contribution feature of the
ESOP arrangement. Under the incentive compensation feature, 56,315 common shares
were allocated to employees for the year ended December 31, 1998. During 1998,
IP contributed $4.7 million to the ESOP and, using the shares allocated method,
recognized $5.2 million of expense. Interest paid on the ESOP debt was
approximately $.9 million in 1998 and dividends used for debt service were
approximately $2.2 million.
In 1992, the Board of Directors adopted and the shareholders approved a
Long-Term Incentive Compensation Plan (the Plan) for officers or employee
members of the Board, but excluding directors who are not officers or employees.
The types of awards that may be granted under the Plan are restricted stock,
incentive stock options, non-qualified stock options, stock appreciation rights,
dividend equivalents and other stock-based awards. The Plan provides that any
one or more types of awards may be granted for up to 1,500,000 shares of
Illinova's common stock. The following table outlines the activity under this
Plan at December 31, 1998. No options were exercised through February 1999.
Year Options Grant Year Expiration Options Options
Granted Granted Price Exercisable Date Exercised Forfeited
1992 62,000 $23.375 1996 6/10/02 20,000 10,500
1993 73,500 $24.250 1997 6/09/03 22,000 10,500
1994 82,650 $20.875 1997 6/08/04 29,450 4,400
1995 69,300 $24.875 1998 6/14/05 3,900 11,000
1996 80,500 $29.750 1999 2/07/06 -- 6,500
1997 82,000 $26.125 2000 2/12/07 -- 6,000
1998 120,500 $29.094 2001 2/11/08 -- --
1998 165,000 $30.250 2001 6/24/08 -- --
In October 1995, the FASB issued FAS 123, "Accounting for Stock-Based
Compensation" effective for fiscal years beginning after December 15, 1995.
Based on the current and anticipated use of stock options, the impact of FAS 123
is not material on the current period and is not envisioned to be material in
any future period. As permitted by FAS 123, IP continues to account for its
stock options in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees."
The provisions of Supplemental Indentures to IP's General Mortgage
Indenture and Deed of Trust contain certain restrictions with respect to the
declaration and payment of dividends. IP was not limited by any of these
restrictions at December 31, 1998. Under the Restated Articles of Incorporation,
common stock dividends are subject to the preferential rights of the holders of
preferred and preference stock.
NOTE 12 -- PENSION AND OTHER BENEFITS COSTS
Illinova offers certain benefit plans to employees of Illinova and its principal
subsidiaries. IP is sponsor and administrator of the benefit plans disclosed
below.
IP is reimbursed by the other Illinova subsidiaries for their share of the
expenses of the benefit plans. The values and discussion below represent the
plans in total, including the amounts attributable to the other subsidiaries.
(Millions of dollars)
Pension Benefits Other Benefits
1998 1997 1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 417.6 $ 361.6 $ 89.4 $ 81.7
Service cost 12.8 10.2 2.6 1.9
Interest cost 30.4 28.2 6.3 5.9
Plan participants' contributions - - 0.4 0.4
Amendments 2.0 - - -
Actuarial (gain) / loss 45.2 43.1 3.8 5.4
Benefits paid (32.8) (25.5) (7.0) (5.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 475.2 $ 417.6 $ 95.5 $ 89.4
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year $ 432.1 $ 357.2 $ 49.7 $ 34.3
Actual return on plan assets 73.7 95.6 9.2 8.0
Employer contribution 4.5 4.8 11.4 12.9
Plan participants' contributions - - 0.4 0.4
Benefits paid (32.8) (25.5) (7.0) (5.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 477.5 $ 432.1 $ 63.7 $ 49.7
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets greater/(less) than benefit obligation $ 2.3 $ 14.5 $ (31.8) $ (39.7)
Unrecognized net actuarial (gain)/loss (32.1) (38.9) (7.3) (6.3)
Unrecognized prior service cost 17.6 17.4 - -
Unrecognized net asset/liability at transition (21.9) (26.1) 36.0 38.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net amounts recognized $ (34.1) $ (33.1) $ (3.1) $ (7.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amounts recognized consist of:
Prepaid benefit cost $ 1.9 $ 1.9 $ - $ -
Accrued benefit liability (36.0) (35.0) (3.1) (7.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amounts recognized $ (34.1) $ (33.1) $ (3.1) $ (7.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
1998 1997 1998 1997
Weighted-average assumptions as of December 31
Discount rate 7.0% 7.5% 7.0% 7.0%
Expected return on plan assets 9.5% 9.5% 9.5% 9.0%
Rate of compensation increase 4.5% 4.5% 5.5% 5.5%
(Millions of dollars)
Pension Benefits Other Benefits
1998 1997 1996 1998 1997 1996
Components of net periodic benefit cost
Service cost $ 12.8 $ 10.2 $ 10.1 $ 2.6 $ 1.9 $ 2.2
Interest cost 30.4 28.2 26.8 6.3 5.9 6.1
Expected return on plan assets (35.3) (31.7) (30.4) (4.4) (3.0) (2.2)
Amortization of prior service cost 1.9 1.9 1.9 - - -
Amortization of transitional liability/(asset) (4.2) (4.2) (4.2) 2.7 2.7 2.7
Recognized net actuarial (gain)/loss - 4.2 - - (0.3) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 5.6 $ 8.6 $ 4.2 $ 7.2 $ 7.2 $ 8.8
- ------------------------------------------------------------------------------------------------------------------------------------
For measurement purposes, a 6.9% health care trend rate was used for 1999.
Trend rates were assumed to decrease gradually to 5.5% in 2005 and remain at
this level going forward. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan.
A one percentage point change in assumed health care cost trend rates would
have the following effects for 1998:
1 Percentage 1 Percentage
(Millions of dollars) Point Increase Point Decrease
Effect on total of service and
interest cost components $ 1.2 $ (1.0)
Effect on postretirement
benefit obligation 11.3 (9.5)
IP changed the measurement date for the pension obligation of the plan from
September 30 to December 31 which is reflected in the 1998 fiscal year. As a
result, the time frame for the 1998 reporting period is October 1, 1997, through
December 31, 1998. The unrecognized prior service cost is amortized on a
straight-line basis over the average remaining service period of employees who
are expected to receive benefits under the plan.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets, specifically the nonqualified supplemental retirement
plan for management employees, were $6.3 million, $5.6 million, and $0 as of
December 31, 1998, and $4.8 million, $3.9 million, and $0 as of December 31,
1997.
On December 9, 1998, IP's Board of Directors voted to exit Clinton
operations. Concurrent with the decision to exit Clinton operations, IP accrued
estimated employee severance and retention costs of $25.8 million, net of income
taxes; pension curtailment benefits of $(7.2) million, net of income taxes; and
other postretirement benefit costs of $.4 million, net of income taxes. These
amounts are not reflected in the above tables. If the decision is made to
permanently close Clinton, the number of Clinton employees would decrease from
950 to 240 over an 11-month transition period as the plant moves from an
operating to a decommissioning mode. Employees expected to be released include
engineering, plant technical and operational, office administration, and
maintenance employees. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for additional information.
NOTE 13 -- SEGMENTS OF BUSINESS
In 1997, the FASB issued FAS 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement supersedes FAS 14, "Financial Reporting
for Segments of a Business Enterprise," and establishes new standards for
defining a company's segments and disclosing information about them.
The new statement requires that segments be based on the internal structure
and reporting of a company's operations. Because of the realignment of Illinois
Power into five operating segments during 1998, Illinois Power has determined
that it is not practicable to present the new segment information for 1997 and
1996 because it is not available and the cost to develop it is excessive.
Therefore, the information for 1998 is presented under the format specified by
FAS 131; the comparative information for 1998, 1997, and 1996 is presented in
accordance with FAS 14.
1998
IP is comprised of five business groups. The business groups and their principal
services are as follows:
- - IP Customer Service Business Group -- transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas.
- - IP Wholesale Energy Business Group -- fossil-fueled electric generation,
wholesale electricity transactions, and dispatching activities.
- - IP Nuclear Generation Business Group -- nuclear-fueled electric generation.
- - IP Financial Business Group -- provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - IP Support Services Business Group -- provides specialized support
functions, including information technology, human resources, environmental
resources, purchasing and materials management, and public affairs.
Of the above-listed segments, the IP Financial Business Group and the IP
Support Services Business Group did not individually meet the minimum threshold
requirements for separate disclosure and are combined in the Other category.
Three measures were used to judge segment performance: contribution margin,
cash flow, and return on net invested capital.
(Millions of dollars)
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
- ------------------------------------------------------------------------------------------------------
Revenues from external customers $1,505.7 $ 557.2 $ 6.3 $ - $2,069.2
Intersegment revenue (1) - 482.3 (2.4) - 479.9
- ------------------------------------------------------------------------------------------------------
Total revenue 1,505.7 1,039.5 3.9 - 2,549.1
Depreciation and amortization expense 68.3 30.3 99.1 5.9 203.6
Other operating expenses(1) 894.4 999.0 379.2 3.4 2,276.0
- ------------------------------------------------------------------------------------------------------
Operating income (loss) 543.0 10.2 (474.4) (9.3) 69.5
Interest expense 70.4 13.8 59.3 (8.6) 134.9
AFUDC (0.1) (0.9) (2.5) 0.3 (3.2)
- ------------------------------------------------------------------------------------------------------
Net income (loss) before taxes 472.7 (2.7) (531.2) (1.0) (62.2)
Income tax expense (benefit) 194.4 (1.9) (232.3) 5.4 (34.4)
Miscellaneous--net 0.5 (1.0) 0.1 3.2 2.8
Interest revenue - - - (1.9) (1.9)
- ------------------------------------------------------------------------------------------------------
Net income (loss) after taxes 277.8 0.2 (299.0) (7.7) (28.7)
Preferred dividend requirement 9.7 2.2 7.9 0.0 19.8
- ------------------------------------------------------------------------------------------------------
Net income (loss)(2) $ 268.1 $ (2.0) $ (306.9) $ (7.7) $ (48.5)
Clinton plant impairment loss 1,327.2 1,327.2
- ------------------------------------------------------------------------------------------------------
Net income (loss) available to common $ 268.1 $ (2.0) $(1,634.1) $ (7.7) $(1,375.7)
- ------------------------------------------------------------------------------------------------------
Other information --
Total assets(3) $1,831.8 $3,039.0 $ 1,010.2 $548.8 $ 6,429.8
Total expenditures for additions to
long-lived assets 124.4 116.0 62.5 8.6 311.5
- ------------------------------------------------------------------------------------------------------
Corporate Measures --
Contribution margin(4) $ 315.7 $ 7.0 $ (268.5) $(13.7) $ 40.5
Cash flow(5) 237.4 27.2 (280.8) 23.1 6.9
Return on net invested capital(6) 24.28% 0.33% N/A (2.65)% 1.01%
- ------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.5 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service.
Nuclear reflects a replacement power expense for the increment of market
price over the intersegment price.
(2) Net income (loss) before Clinton plant impairment loss.
(3) Primary assets for Nuclear include transition period cost recovery,
decommissioning assets, shared general and intangible plant, and nuclear
fuel.
(4) Contribution margin represented by net income before financing costs (net
of tax), preferred dividend requirement, and Clinton plant impairment loss.
(5) Cash flow before financing activities.
(6) Return on net invested capital calculated as contribution margin divided by
net invested capital (includes Clinton plant impairment loss and
quasi-reorganization).
GEOGRAPHIC INFORMATION
(Millions of dollars)
December 31, 1998 1997 1996
Revenues: (1)
United States $2,069.2 $1,773.9 $1,688.7
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,440.5 $4,534.1 $4,559.2
- --------------------------------------------------------------------------------
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include plant, equipment, and investments in subsidiaries.
1998, 1997, and 1996
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Total Total Total
Electric Gas Company Electric Gas Company Electric Gas Company
- ------------------------------------------------------------------------------------------------------------------------------------
Operation information -
Operating revenues $1,781.4 $287.8 $2,069.2 $1,420.0 $353.9 $1,773.9 $1,340.5 $348.2 $1,688.7
Operating expenses,
excluding provision for
income taxes 1,747.6 252.1 1,999.7 1,081.3 311.5 1,392.8 886.2 300.5 1,186.7
Clinton plant impairment loss 2,341.2 - 2,341.2 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income (2,307.4) 35.7 (2,271.7) 338.7 42.4 381.1 454.3 47.7 502.0
AFUDC 3.1 0.1 3.2 4.9 0.1 5.0 6.3 0.2 6.5
- ------------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income,
including AFUDC $(2,304.3) $ 35.8 $(2,268.5) $343.6 $42.5 $386.1 $460.6 $ 47.9 $508.5
- ---------------------------------------------------------- ------------------ ------------------
Other deductions, net 1.0 (1.5) 1.2
Interest charges 134.9 135.9 140.8
Income tax - Clinton impairment (1,014.0) - -
Provision for income taxes (34.5) 100.9 137.9
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (1,355.9) 150.8 228.6
Extraordinary item
(net of taxes) - (195.0) -
Preferred dividend
requirements (19.8) (21.5) (22.3)
Carrying value over
(under) consideration
paid for redeemed
preferred stock - 0.2 (0.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)
applicable to common stock $(1,375.7) $(65.5) $205.6
- ------------------------------------------------------------------------------------------------------------------------------------
Other information -
Depreciation $ 177.9 $ 25.7 $ 203.6 $171.5 $ 24.1 $195.6 $164.0 $ 22.5 $186.5
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 285.6 $ 25.9 $ 311.5 $201.3 $ 22.6 $223.9 $164.0 $ 23.3 $187.3
- ------------------------------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets* $ 5,169.0 $457.9 $5,626.9 $4,508.1 $453.8 $4,961.9 $4,577.1 $481.9 $5,059.0
- ---------------------------------------------------------- -------------------- ------------------------------
Nonutility plant and
other investments 2.3 5.7 14.3
Assets utilized for
overall operations 800.6 323.9 495.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $6,429.8 $5,291.5 $5,568.5
- ------------------------------------------------------------------------------------------------------------------------------------
* 1998: Utility plant, nuclear fuel, materials and supplies, prepaid and
deferred energy costs, and transition period cost recovery.
1997 and 1996: Utility plant, nuclear fuel, materials and supplies,
deferred Clinton costs, and prepaid and deferred energy costs.
NOTE 14 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
presented in accordance with the requirements of FAS 107, "Disclosures about the
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and valuation
methodologies discussed below.
Illinois Power has early-adopted FAS 133 due to the quasi-reorganization.
Accordingly, assets and liabilities were adjusted to reflect current fair value.
See "Note 2 -- Clinton Impairment and Quasi-Reorganization" for more
information.
1998 1997
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
Nuclear decommissioning
trust funds $ 84.1 $ 84.1 $ 62.5 $ 62.5
Cash and cash equivalents 504.5 504.5 17.8 17.8
Mandatorily redeemable
preferred stock* 199.0 200.0 197.0 202.7
Long-term debt* 2,533.1 2,545.2 1,578.3 1,627.6
Notes payable 147.6 147.6 376.8 376.8
Other Financial Instruments:
Trading/Energy futures
and forward contracts 28.0 28.0 -- --
Non-trading/Energy futures
and forward contracts 5.4 5.4 -- --
Non-trading/Emission Allowances
Forward contracts 2.0 2.0 -- --
Option contracts .2 .2 -- --
* In the above table, the 1998 carrying value of mandatorily redeemable
preferred stock and long-term debt reflect an adjustment in carrying value
to fair value due to the quasi-reorganization. The portion of these items
which relate to electric generation has been adjusted to fair value. The
remainder is attributed to the regulated part of the business in which
return on assets is based on book value of debt. Therefore no adjustment to
fair value was made for the portion of mandatorily redeemable preferred
stock and long-term debt relating to Illinois Power's regulated business.
The fair values represent 100 percent of the current fair value for
mandatorily redeemable preferred stock and long-term debt.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments listed in the table above:
Nuclear Decommissioning Trust Funds: The fair values of available-for-sale
marketable debt securities and equity investments held by the Nuclear
Decommissioning Trust are based on quoted market prices at the reporting date
for those or similar investments.
Cash and Cash Equivalents: The carrying amount of cash and cash equivalents
approximates fair value due to the short maturity of these instruments.
Mandatorily Redeemable Preferred Stock and Long-Term Debt: The fair value of
mandatorily redeemable preferred stock and long-term debt is estimated based on
the quoted market prices for similar issues or by discounting expected cash
flows at the rates currently offered for debt of the same remaining maturities,
as advised by IP's bankers.
Notes Payable: The carrying amount of notes payable approximates fair value due
to the short maturity of these instruments.
Other Financial Instruments: Other financial instruments are comprised of
derivative financial instruments which have been restated to market according to
FAS 133. See "Note 15 -- Financial and Other Derivative Instruments" for more
information. Fair Value is determined using quoted market prices or indices.
NOTE 15 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
Trading Activities: IP engages in the brokering and marketing of electricity. IP
uses a variety of instruments, including fixed-price swap agreements,
variable-price swap agreements, exchange-traded energy futures and options
contracts, and over-the-counter forwards, swaps, and options.
As of December 31, 1998, IP adopted EITF 98-10. IP has recorded its trading
instruments at fair value in accordance with EITF 98-10's application criteria.
For more information regarding Illinois Power's adoption of new accounting
pronouncements, see "Note 1 -Summary of Significant Accounting Policies." At
December 31, 1998, derivative assets and liabilities were recorded on the
Consolidated Balance Sheets at fair value with unrealized gains and losses shown
net in the Consolidated Statements of Income. IP records realized gains and
losses as components of operating revenues and operating expenses in the
Consolidated Statements of Income.
The notional quantities and maximum terms of commodity instruments held for
trading purposes at December 31, 1998, are presented below:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity 5,174 MW 5,524 MW 1 yr
All notional amounts reflect the volume of transactions but do not represent
the dollar amounts or actual megawatts exchanged by the parties to the
contracts. Accordingly, notional amounts do not accurately measure IP's exposure
to market or credit risk.
The estimated fair value of commodity instruments held for trading purposes
at December 31, 1998, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity $ 21.8 $ 49.8
The fair value was estimated using quoted prices and indices where available
and considering the liquidity of the market for the instrument. The fair values
are subject to volatility based on changing market conditions.
The weighted average term of the trading portfolio, based on volume is less
than one year. The maximum and average terms disclosed herein are not indicative
of likely future cash flows as these positions may be modified by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and IP's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Non-Trading Activities: To reduce the risk from market fluctuations in the price
of electricity and related transmission, IP enters into forward transactions,
swaps, and options (energy derivatives). These instruments are used to hedge
expected purchases, sales, and transmission of electricity (a portion of which
are firm commitments at the inception of the hedge). The weighted average
maturity of these instruments is less than one year.
Periodically, IP has utilized interest rate derivatives (principally interest
rate swaps and caps) to adjust the portion of its overall borrowings subject to
interest rate risk. As of December 31, 1998, there were no interest rate
derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP has entered
into swap agreements, forward contracts, and written put options with other
utilities to mitigate the risk from market fluctuations in the price of the
allowances. At December 31, 1998, the notional amount of two emission allowance
swaps was 126,925 units, with a recorded liability of $15.6 million, based on
fair value at delivery date. The maximum maturity of the swap agreements is 10
years. These agreements do not fall under the scope of FAS 133. The notional
amount of the two forward contracts is 32,000 emission allowances with a fair
value of $2 million. The maximum term of the forward contracts is five years,
commencing in 1993. Both contracts expired in January 1999. Due to the remote
probability of exercise, three put options written by IP are considered to be
immaterial.
As of December 31, 1998, IP adopted FAS 133. For more information regarding
IP's adoption of new accounting pronouncements, see "Note 1 -- Summary of
Significant Accounting Policies." IP's derivative assets and liabilities were
recorded on the Consolidated Balance Sheets at fair value with unrealized gains
and losses shown net in the equity section of the Consolidated Balance Sheets as
part of the quasi-reorganization. See "Note 2 -- Clinton Impairment and
Quasi-Reorganization" for more information. In the future, unless hedge
accounting is applied, unrealized gains and losses will be shown net in the
Consolidated Statements of Income. IP records realized gains and losses as
components of operating revenues and operating expenses in the Consolidated
Statements of Income.
Hedge accounting is appropriate only if the derivative is effective at
offsetting cash flows from or changes in the fair value of the underlying hedged
item and is designated as a hedge at its inception. Additionally, changes in the
market value of the hedge must move in an inverse direction or limit an adverse
result from changes in the market value of the item being hedged, (the
effectiveness of the hedge). This effectiveness is measured both at the
inception of the hedge and on an ongoing basis, with an acceptable level of
effectiveness being at least 80 percent and not more than 125 percent for hedge
designation. If and when hedge effectiveness ceases to exist at an acceptable
level, hedge accounting ceases and mark-to-market accounting is applied. As of
December 31, 1998, all non-trading derivative instruments were accounted for
using mark-to-market accounting.
The notional quantities and the average term of the energy derivative
commodity instruments held for other than trading purposes at December 31, 1998,
follows:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity 1,450 MW 1,050 MW 1 yr
In addition to the fixed-price notional volumes above, IP has also recorded a
$25 million liability in 1998 for two "commodity for commodity" energy swap
agreements totaling 350 MW. However, these swap agreements do not meet the
definition of a derivative under FAS 133.
The notional amount is intended to be indicative of the level of activity in
such derivatives, although the amounts at risk are significantly smaller because
changes in the market value of these derivatives generally are offset by changes
in the value associated with the underlying physical transactions or in other
derivatives. When energy derivatives are closed out in advance of the underlying
commitment or anticipated transaction, the market value changes may not be
offset because price movement correlation ceases to exist when the positions are
closed.
The estimated fair value of energy derivative commodity instruments held for
non-trading purposes at December 31, 1998, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity $ 4.2 $ 9.6
The fair value was estimated using quoted prices and indices where available,
and considering the liquidity of the market for the instrument. The fair values
are subject to significant volatility based on changing market conditions.
The average maturity and fair value discussed above are not necessarily
indicative of likely future cash flows. These positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions, market liquidity, and IP's risk management portfolio needs
and strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Trading and Non-Trading -- General Policy: In addition to the risk associated
with price movements, credit risk is also part of IP's risk management
activities. Credit risk relates to the risk of loss resulting from
non-performance of contractual obligations by a counterparty. While IP has
experienced no significant losses due to credit risk, off-balance-sheet risk
exists to the extent that counterparties to these transactions may fail to
perform as required by the terms of each contract. In order to minimize this
risk, IP enters into such contracts with those counterparties only after an
appropriate credit review has been performed. IP periodically reviews the
effectiveness of these financial contracts in achieving corporate objectives.
Should the counterparties to these contracts fail to perform, IP could be forced
to acquire alternative hedging arrangements or be required to honor the
underlying commitment at then current market prices. In such an event, IP might
incur additional loss to the extent of amounts, if any, already paid to the
counterparties. In view of its criteria for selecting counterparties and its
experience to date in successfully completing these transactions, IP believes
that the risk of incurring a significant financial statement loss due to the
non-performance of counterparties to these transactions is remote.
An Executive Risk Management Committee has been established to oversee all
corporate risk management. The Executive Risk Management Committee's
responsibilities include reviewing IP's overall risk management strategies, as
well as monitoring and assessing risk exposure and risk management activities to
ensure compliance with all applicable risk management limitations, policies, and
procedures.
NOTE 16 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK DATA (UNAUDITED)
(Millions of dollars)
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First Quarter Second Quarter Third Quarter Fourth Quarter
1998 1998 1998 1998
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Operating revenues $489.5 $467.0 $715.3 $397.4
Operating income (loss) 61.8 (9.8) 66.5 (1,505.7)
Net income (loss) 30.4 (40.6) 35.4 (1,381.1)
Net income (loss) applicable to common stock 25.5 (45.6) 30.4 (1,386.0)
Cash dividends declared on common stock - 42.8 - 40.4
Cash dividends paid on common stock 22.2 20.5 22.2 40.4
First Quarter Second Quarter Third Quarter Fourth Quarter
1997 1997 1997 1997
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Operating revenues $472.8 $415.3 $497.1 $388.7
Operating income 88.9 82.6 101.8 5.4
Net income (loss) before extraordinary item 55.0 51.4 71.9 (27.5)
Net income (loss) after extraordinary item 55.0 51.4 71.9 (222.5)
Net income (loss) applicable to common stock 49.5 46.0 67.5 (228.5)
Cash dividends declared on common stock 23.5 23.2 22.2 22.2
Cash dividends paid on common stock 23.5 23.5 23.2 22.2
Illinois Power Company
S E L E C T E D C O N S O L I D A T E D F I N A N CI A L D A T A
(Millions of dollars)
1998 1997 1996 1995 1994 1988
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Operating revenues
Electric $ 1,224.2 $ 1,244.4 $ 1,202.9 $ 1,252.6 $ 1,177.5 $ 949.9
Electric interchange 557.2 175.6 137.6 116.3 110.0 109.7
Gas 287.8 353.9 348.2 272.5 302.0 334.8
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Total operating revenues $ 2,069.2 1,773.9 1,688.7 1,641.4 1,589.5 1,394.4
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Extraordinary item net of income tax benefit $ - $(195.0) $ - $ - $ - $ -
Cumulative effect of change in
accounting principle net of income taxes $ - $ - $ - $ - $ - $ 34.0
Net income (loss) after extraordinary item &
change in accounting principle $ (1,355.9) (44.2) 228.6 182.7 180.3 189.4
Effective income tax rate 43.6% 40.1% 37.6% 39.1% 38.4% 29.4%
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Net income (loss) applicable
to common stock $(1,375.7) (65.5) 205.6 155.5 161.8 151.9
Cash dividends declared on common stock 83.2 91.1 87.1 77.9 49.1 188.9
Cash dividends paid on common stock 105.4 92.4 84.8 75.3 60.5 185.9
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Total assets $ 6,429.8 $ 5,291.5 $ 5,568.5 $ 5,567.2 $ 5,595.8 $ 6,053.1
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Capitalization
Common stock equity $ 1,088.7 $ 1,299.1 $ 1,576.1 $ 1,478.1 $ 1,466.0 $ 1,895.6
Preferred stock 57.1 57.1 96.2 125.6 224.7 315.2
Mandatorily redeemable preferred stock 199.0 197.0 197.0 97.0 133.0 160.0
Long-term debt 2,158.5 1,617.5 1,636.4 1,739.3 1,946.1 2,341.2
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Total capitalization $ 3,503.3 $ 3,170.7 $ 3,505.7 $ 3,440.0 $ 3,769.8 $ 4,712.0
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Retained earnings $ - $ 89.5 $ 245.9 $ 129.6 $ 51.1 $ 517.9
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Capital expenditures $ 311.5 $ 223.9 $ 187.3 $ 209.3 $ 193.7 $ 115.5
Cash flows from operations $ 310.1 $ 418.7 $ 443.3 $ 473.7 $ 280.2 $ 225.2
AFUDC as a percent of earnings
applicable to common stock (0.2)% (7.6)% 3.2% 3.9% 5.7% 40.3%
Ratio of earnings to fixed charges N/A 0.57 3.40 2.77 2.73 1.83
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Illinois Power Company
SELECTED ILLINOIS POWER COMPANY STATISTICS
1998 1997 1996 1995 1994 1988
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Electric Sales in kwh (Millions)
Residential 4,893 4,734 4,782 4,754 4,537 4,411
Commercial 4,053 3,943 3,894 3,804 3,517 2,939
Industrial 8,701 8,403 8,493 8,670 8,685 7,415
Other 375 426 367 367 536 964
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Sales to ultimate consumers 18,022 17,506 17,536 17,595 17,275 15,729
Interchange 16,199 7,230 5,454 4,444 4,837 4,903
Wheeling 2,710 3,253 928 642 622 -
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Total electric sales 36,931 27,989 23,918 22,681 22,734 20,632
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Electric Revenues (Millions of dollars)
Residential $469 $489 $483 $500 $471 $373
Commercial 329 325 318 321 295 215
Industrial 374 376 360 392 378 312
Other 39 40 38 37 30 50
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Revenues from ultimate consumers 1,211 1,230 1,199 1,250 1,174 950
Interchange 557 176 138 116 110 110
Wheeling 13 14 4 3 3 -
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Total electric revenues $1,781 $1,420 $1,341 $1,369 $1,287 $1,060
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Gas Sales in Therms (Millions)
Residential 305 343 427 356 359 367
Commercial 131 147 177 144 144 148
Industrial 67 47 99 88 81 155
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Sales to ultimate consumers 503 537 703 588 584 670
Transportation of customer-owned gas 267 309 251 273 262 235
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Total gas sold and transported 770 846 954 861 846 905
Interdepartmental sales 26 19 9 21 5 9
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Total gas delivered 796 865 963 882 851 914
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Gas Revenues (Millions of dollars)
Residential $183 $238 $216 $173 $192 $207
Commercial 65 77 79 60 66 71
Industrial 24 20 40 24 31 48
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Revenues from ultimate consumers 272 335 335 257 289 326
Transportation of customer-owned gas 7 9 7 8 9 13
Miscellaneous 9 10 6 7 4 (4)
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Total gas revenues $288 $354 $348 $272 $302 $335
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System peak demand (native load) in kw (thousands) 3,694 3,532 3,492 3,667 3,395 3,508
Firm peak demand (native load) in kw (thousands) 3,617 3,469 3,381 3,576 3,232 3,077
Net generating capability in kw (thousands) 3,838 3,289 4,148 3,862 4,121 3,938
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Electric customers (end of year) 580,356 580,257 549,957 529,966 553,869 546,443
Gas customers (end of year) 408,428 405,710 389,223 374,299 388,170 385,336
Employees (end of year) 3,965 3,655 3,635 3,559 4,350 4,663
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