UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to __________
Commission Registrants; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-11327 Illinova Corporation 37-1319890
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
1-3004 Illinois Power Company 37-0344645
(an Illinois Corporation)
500 S. 27th Street
Decatur, IL 62521
(217) 424-6600
Indicate by check mark whether the registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) have been subject to such
filing requirements for the past 90 days.
Illinova Yes X No
Corporation ---- ----
Illinois Power Yes X No
Company ---- ----
Indicate the number of shares outstanding of each of the issuers'
classes of common stock, as of the latest practicable date:
Illinova Corporation Common stock, no par value, 69,919,287
shares outstanding at June 30, 1999
Illinois Power Company Common stock, no par value,
62,892,213 shares outstanding held by Illinova
Corporation at June 30, 1999
ILLINOVA CORPORATION
ILLINOIS POWER COMPANY
This combined Form 10-Q is separately filed by Illinova Corporation and Illinois
Power Company. Information contained herein relating to Illinois Power Company
is filed by Illinova Corporation and separately by Illinois Power Company on its
own behalf. Illinois Power Company makes no representation as to information
relating to Illinova Corporation or its subsidiaries, except as it may relate to
Illinois Power Company.
FORM 10-Q FOR THE QUARTER ENDED June 30, 1999
INDEX
PAGE NO.
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements
Illinova Corporation
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Income 5
Consolidated Statements of Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Illinois Power Company
Consolidated Balance Sheets 8 - 9
Consolidated Statements of Income 10
Consolidated Statements of Comprehensive Income 11
Consolidated Statements of Cash Flows 12
Notes to Consolidated Financial Statements of
Illinova Corporation and
Illinois Power Company 13 - 31
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of
Operations for Illinova Corporation
and Illinois Power Company 32 - 52
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 53 - 55
Part II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 56
Signatures 57 - 58
Exhibit Index 59
2
PART I. FINANCIAL INFORMATION
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 30, DECEMBER 31,
1999 1998
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant
Electric (includes construction work
in progress of $154.6 million and
$177.7 million, respectively) $5,584.1 $5,481.8
Gas (includes construction work
in progress of $13.2 million and
$15.3 million, respectively) 693.7 686.9
-------- --------
6,277.8 6,168.7
Less - Accumulated depreciation 1,756.4 1,713.7
-------- --------
4,521.4 4,455.0
Nuclear fuel 15.5 20.3
-------- --------
Total utility plant 4,536.9 4,475.3
-------- --------
Investments and Other Assets 265.9 246.9
-------- --------
Current Assets
Cash and cash equivalents 35.4 518.1
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 123.4 105.9
Other 129.8 116.1
Accrued unbilled revenue 70.7 82.6
Materials and supplies, at average cost 80.8 90.8
Assets from commodity price risk
management activities 58.3 51.5
Prepayments and other 58.2 51.5
-------- --------
Total current assets 556.6 1,016.5
-------- --------
Deferred Charges
Transition period cost recovery 778.1 783.0
Other 317.9 279.6
-------- --------
Total deferred charges 1,096.0 1,062.6
-------- --------
$6,455.4 $6,801.3
======== ========
3
ILLINOVA CORPORATION
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 30, DECEMBER 31,
1999 1998
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 200,000,000 shares authorized;
75,681,937 shares issued, stated at $1,319.8 $1,319.7
Less - Deferred compensation - ESOP 3.8 6.8
Retained deficit - accumulated since 1/1/99 (17.1) -
Accumulated other comprehensive income 1.8 -
Less - Capital stock expense 7.3 7.3
Less - 5,762,650 shares of common stock
in treasury, at cost 138.7 138.7
-------- --------
Total common stock equity 1,154.7 1,166.9
Preferred stock of subsidiary 50.4 57.1
Company obligated mandatorily redeemable
preferred stock of subsidiary 194.0 199.0
Long-term debt 175.4 176.1
Long-term debt of subsidiary 2,137.2 2,158.5
-------- --------
Total capitalization 3,711.7 3,757.6
-------- --------
Current Liabilities
Accounts payable 232.6 256.5
Notes payable 122.0 147.6
Long-term debt and lease obligations
of subsidiary maturing within one year 287.1 506.6
Liabilities from commodity price
risk management activities 100.0 99.8
Other 219.1 203.8
-------- --------
Total current liabilities 960.8 1,214.3
-------- --------
Deferred Credits
Accumulated deferred income taxes 961.4 964.0
Accumulated deferred investment tax credits 38.8 39.6
Decommissioning liability 528.5 567.4
Other 254.2 258.4
-------- --------
Total deferred credits 1,782.9 1,829.4
-------- --------
$6,455.4 $6,801.3
======== ========
4
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(Unaudited)
(Millions except per share)
Operating Revenues:
Electric $276.7 $304.5 $ 531.9 $ 581.1
Electric interchange 56.2 112.7 150.2 209.0
Gas 45.2 49.8 168.3 166.4
Diversified enterprises 101.2 80.3 177.3 166.2
------ ------ -------- --------
Total 479.3 547.3 1,027.7 1,122.7
------ ------ -------- --------
Operating Expenses:
Fuel for electric plants 60.0 53.9 111.4 109.6
Power purchased 46.7 229.4 98.4 326.5
Gas purchased for resale 17.0 22.4 89.5 88.4
Diversified enterprises 114.5 85.0 196.0 179.7
Other operating expenses 81.0 87.9 191.4 167.7
Maintenance 26.1 35.0 67.4 64.0
Depreciation and amortization 44.9 50.5 89.4 101.2
Amortization of regulatory asset 6.2 - 7.7 -
General taxes 22.9 34.3 52.8 73.0
------ ------ -------- --------
Total 419.3 598.4 904.0 1,110.1
------ ------ -------- --------
Operating Income (Loss) 60.0 (51.1) 123.7 12.6
------ ------ -------- --------
Other Income and Deductions:
Miscellaneous-net 6.3 2.8 17.2 1.3
Equity earnings in affiliates 2.9 3.4 3.4 8.9
------ ------ -------- --------
Total 9.2 6.2 20.6 10.2
------ ------ -------- --------
Income (Loss) Before Interest
Charges and Income Taxes 69.2 (44.9) 144.3 22.8
------ ------ -------- --------
Interest Charges:
Interest expense 46.8 35.9 89.9 72.5
Allowance for borrowed funds
used during construction (2.0) (1.2) (3.2) (2.3)
Preferred dividend
requirements of subsidiary 4.7 5.0 9.7 9.9
------ ------ -------- --------
Total 49.5 39.7 96.4 80.1
------ ------ -------- --------
Income (Loss) Before Income Taxes 19.7 (84.6) 47.9 (57.3)
------ ------ -------- --------
Income Taxes 10.7 (37.6) 22.0 (33.3)
------ ------ -------- --------
Net Income (Loss) 9.0 (47.0) 25.9 (24.0)
Carrying amount (under) over
consideration paid for redeemed
preferred stock of subsidiary (0.3) - 0.5 -
------ ------ -------- --------
Net Income (Loss) Applicable to
Common Stock $ 8.7 $(47.0) $ 26.4 $ (24.0)
====== ====== ======== ========
Earnings (Loss) per common share (basic
and diluted) $0.12 ($0.66) $0.38 ($0.34)
Cash dividends declared per
common share $0.31 $0.31 $0.62 $0.62
Cash dividends paid per
common share $0.31 $0.31 $0.62 $0.62
Weighted average number of
common shares outstanding
during period 69,919,287 71,712,791 69,919,287 71,707,054
5
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(Unaudited)
(Millions of Dollars)
Net Income (Loss) Applicable to Common Stock $8.7 ($47.0) $26.4 ($24.0)
----- ------ ------ -------
Other Comprehensive Income, before tax
Foreign currency translation adjustments (0.1) - (0.2) -
Unrealized gains on securities 2.8 - 3.3 -
----- ------ ------ -------
Other comprehensive income, before tax 2.7 - 3.1 -
Income taxes on other comprehensive income (1.1) - (1.3) -
----- ------ ------ -------
Other comprehensive income, net of tax 1.6 - 1.8 -
------ ------ ------ -------
Comprehensive Income (Loss) $10.3 ($47.0) $28.2 ($24.0)
====== ====== ====== =======
6
ILLINOVA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
SIX MONTHS ENDED
JUNE 30,
1999 1998
(Unaudited)
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 25.9 $ (24.0)
Items not requiring cash, net 139.6 29.4
Changes in assets and liabilities (124.0) 229.3
------- -------
Net cash provided by operating activities 41.5 234.7
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (150.5) (115.0)
Other investing activities (31.0) (28.3)
------- -------
Net cash used in investing activities (181.5) (143.3)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock (43.3) (44.4)
Reissuance of common stock - 0.7
Capital lease repayment (61.1) -
Redemptions -
Short-term debt (451.4) (154.8)
Long-term debt of subsidiary (428.8) (109.2)
Preferred stock of subsidiary (11.7) -
Issuances -
Short-term debt 425.8 107.8
Long-term debt 250.0 92.4
Other financing activities (22.2) 0.5
------- -------
Net cash used in financing activities (342.7) (107.0)
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (482.7) (15.6)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 518.1 33.0
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 35.4 $ 17.4
======= =======
7
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 30, DECEMBER 31,
1999 1998
ASSETS (Unaudited) (Audited)
(Millions of Dollars)
Utility Plant
Electric (includes construction work
in progress of $154.6 million and
$177.7 million, respectively) $5,584.1 $5,481.8
Gas (includes construction work
in progress of $13.2 million and
$15.3 million, respectively) 693.7 686.9
-------- --------
6,277.8 6,168.7
Less - Accumulated depreciation 1,756.4 1,713.7
-------- --------
4,521.4 4,455.0
Nuclear fuel 15.5 20.3
-------- --------
Total utility plant 4,536.9 4,475.3
-------- --------
Investments and Other Assets 2.8 2.6
-------- --------
Current Assets
Cash and cash equivalents 17.0 504.5
Accounts receivable (less allowance
for doubtful accounts of $5.5 million)
Service 123.4 105.9
Other 43.1 32.5
Accrued unbilled revenue 70.7 82.6
Materials and supplies, at average cost 80.3 90.4
Assets from commodity price risk
management activities 27.6 26.0
Prepayments and other 40.0 42.8
-------- --------
Total current assets 402.1 884.7
-------- --------
Deferred Charges
Transition period cost recovery 778.1 783.0
Other 318.5 284.2
-------- --------
Total deferred charges 1,096.6 1,067.2
-------- --------
$6,038.4 $6,429.8
======== ========
8
ILLINOIS POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(See accompanying Notes to Consolidated Financial Statements)
JUNE 30, DECEMBER 31,
1999 1998
CAPITAL AND LIABILITIES (Unaudited) (Audited)
(Millions of Dollars)
Capitalization
Common stock -
No par value, 100,000,000 shares
authorized; 75,643,937 shares issued,
stated at $1,382.5 $1,382.4
Retained earnings - accumulated since 1/1/99 14.3 -
Accumulated other comprehensive income 1.9 -
Less - Capital stock expense 7.3 7.3
Less - 12,751,724 shares of
common stock in treasury, at cost 286.4 286.4
-------- --------
Total common stock equity 1,105.0 1,088.7
Preferred stock 50.4 57.1
Company obligated mandatorily
redeemable preferred stock 194.0 199.0
Long-term debt 2,137.2 2,158.5
-------- --------
Total capitalization 3,486.6 3,503.3
-------- --------
Current Liabilities
Accounts payable 201.1 216.2
Notes payable 80.0 147.6
Long-term debt and lease obligations
maturing within one year 287.1 506.6
Liabilities from commodity price
risk management activities 61.0 61.6
Other 132.4 150.5
-------- --------
Total current liabilities 761.6 1,082.5
-------- --------
Deferred Credits
Accumulated deferred income taxes 968.8 978.7
Accumulated deferred investment tax credits 38.8 39.6
Decommissioning liability 528.5 567.4
Other 254.1 258.3
-------- --------
Total deferred credits 1,790.2 1,844.0
-------- --------
$6,038.4 $6,429.8
======== ========
9
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(Unaudited)
(Millions of dollars)
Operating Revenues:
Electric $276.7 $304.5 $531.9 $581.1
Electric interchange 56.2 112.7 150.2 209.0
Gas 45.2 49.8 168.3 166.4
------ ------ ------ ------
Total 378.1 467.0 850.4 956.5
------ ------ ------ ------
Operating Expenses and Taxes:
Fuel for electric plants 60.0 53.9 111.4 109.6
Power purchased 46.7 229.4 98.4 326.5
Gas purchased for resale 17.0 22.4 89.5 88.4
Other operating expenses 81.0 87.9 191.4 167.7
Maintenance 26.1 35.0 67.4 64.0
Depreciation and amortization 44.9 50.5 89.4 101.2
Amortization of regulatory asset 6.2 - 7.7 -
General taxes 22.9 34.3 52.8 73.0
Income taxes 23.0 (36.6) 36.7 (25.9)
------ ------ ------ ------
Total 327.8 476.8 744.7 904.5
------ ------ ------ ------
Operating Income (Loss) 50.3 (9.8) 105.7 52.0
------ ------ ------ ------
Other Income and Deductions, Net 11.6 1.3 17.8 2.9
------ ------ ------ ------
Income (Loss) Before Interest Charges 61.9 (8.5) 123.5 54.9
------ ------ ------ ------
Interest Charges and Other:
Interest expense 43.9 33.3 83.7 67.4
Allowance for borrowed funds
used during construction (2.0) (1.2) (3.2) (2.3)
------ ------ ------ ------
Total 41.9 32.1 80.5 65.1
------ ------ ------ ------
Net Income (Loss) 20.0 (40.6) 43.0 (10.2)
Less-Preferred dividend
requirements 4.7 5.0 9.7 9.9
Plus - Carrying amount (under) over
consideration paid for
redeemed preferred stock (0.3) - 0.5 -
------ ------ ------ ------
Net Income (Loss) Applicable to
Common Stock $15.0 ($45.6) $33.8 ($20.1)
====== ======= ====== ======
10
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(See accompanying Notes to Consolidated Financial Statements)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
(Unaudited)
(Millions of Dollars)
Net Income (Loss) Applicable to Common Stock $15.0 ($45.6) $33.8 ($20.1)
----- ------ ----- ------
Other Comprehensive Income, before tax
Unrealized gains on securities 2.7 - 3.1 -
Income taxes on other comprehensive income (1.0) - (1.2) -
----- ------ ----- ------
Other comprehensive income, net of tax 1.7 - 1.9 -
----- ------ ----- ------
Comprehensive Income (Loss) $16.7 ($45.6) $35.7 ($20.1)
===== ====== ===== ======
11
ILLINOIS POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(See accompanying Notes to Consolidated Financial Statements)
SIX MONTHS ENDED
JUNE 30,
1999 1998
(Unaudited)
(Millions of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 43.0 $(10.2)
Items not requiring cash, net 133.0 34.0
Changes in assets and liabilities (137.8) 222.9
------- ------
Net cash provided by operating activities 38.2 246.7
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (150.4) (115.0)
Other investing activities (5.3) 3.9
------- ------
Net cash used in investing activities (155.7) (111.1)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on preferred and common stock (28.6) (52.7)
Repurchase of common stock - (29.4)
Capital lease repayment (61.1) -
Redemptions -
Short-term debt (385.4) (107.4)
Long-term debt (428.8) (109.2)
Preferred stock (11.7) -
Issuances -
Short-term debt 317.8 98.9
Long-term debt 250.0 52.4
Other financing activities (22.2) 0.3
------- ------
Net cash used in financing activities (370.0) (147.1)
------- ------
NET CHANGE IN CASH AND CASH EQUIVALENTS (487.5) (11.5)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 504.5 17.8
------- ------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 17.0 $ 6.3
======= ======
12
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GENERAL
Financial statement note disclosures, normally included in financial
statements prepared in conformity with generally accepted accounting principles,
have been omitted from this Form 10-Q pursuant to the Rules and Regulations of
the Securities and Exchange Commission (SEC). However, in the opinion of
Illinova Corporation (Illinova) and Illinois Power Company (IP), the disclosures
and information contained in this Form 10-Q are adequate and not misleading. See
the consolidated financial statements and the accompanying notes in Illinova's
1998 Annual Report to Shareholders, (included in the Proxy Statement), the
consolidated financial statements and the accompanying notes in IP's 1998 Annual
Report to Shareholders (included in the Information Statement), Illinova's and
IP's 1998 Form 10-K filings to the SEC, and Illinova's and IP's 1998 Form 8-K
filings to the SEC for information relevant to the consolidated financial
statements contained herein, including information as to certain regulatory and
environmental matters and as to the significant accounting policies followed.
In the opinion of Illinova, the accompanying unaudited June 30, 1999,
and audited December 31, 1998, consolidated financial statements for Illinova
reflect all adjustments necessary to present fairly the Consolidated Balance
Sheets as of June 30, 1999, and December 31, 1998, the Consolidated Statements
of Income for the three and six months ended June 30, 1999 and 1998, the
Consolidated Statements of Comprehensive Income for the three and six months
ended June 30, 1999 and 1998, and the Consolidated Statements of Cash Flows for
the three and six months ended June 30, 1999 and 1998. In addition, it is
Illinova's and IP's opinion that the accompanying unaudited June 30, 1999, and
audited December 31, 1998, consolidated financial statements for IP reflect all
adjustments necessary to present fairly the Consolidated Balance Sheets as of
June 30, 1999, and December 31, 1998, the Consolidated Statements of Income for
the three and six months ended June 30, 1999 and 1998, the Consolidated
Statements of Comprehensive Income for the three and six months ended June 30,
1999 and 1998, and the Consolidated Statements of Cash Flows for the three and
six months ended June 30, 1999 and 1998. Due to seasonal and other factors which
are characteristic of electric and gas utility operations, interim period
results are not necessarily indicative of results to be expected for the year.
The consolidated financial statements of Illinova include the accounts
of Illinova, IP, Illinova Generating Company (IGC), Illinova Insurance Company
(IIC), Illinova Energy Partners, Inc. (IEP), and Illinova Business Enterprises,
Inc. (IBE). All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements. All transactions for
Illinova's unregulated subsidiaries are included in the sections titled
"Diversified Enterprises," "Interest Charges," "Income Taxes" and "Other Income
and Deductions" in Illinova's Consolidated Statements of Income.
The consolidated financial statements of IP include the accounts of
Illinois Power Capital, L.P., Illinois Power Financing I (IPFI), Illinois Power
Securitization Limited Liability Company, and Illinois Power Special Purpose
Trust (IPSPT). All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements. All non-utility operating
transactions are included in the section titled "Other Income and Deductions,
Net" in IP's Consolidated Statements of Income.
13
REGULATORY AND LEGAL MATTERS
OPEN ACCESS AND COMPETITION
The Illinois Customer Choice and Rate Relief Act of 1997, P.A. 90-561,
Illinois electric utility restructuring legislation, was enacted in December
1997. P.A. 90-561 gives IP's residential customers a 15 percent decrease in base
electric rates beginning August 1, 1998, and an additional 5 percent decrease
effective May 1, 2002. The rate decreases result in revenue reductions of
approximately $35 million in 1998, and expected revenue reductions of
approximately $70 million in each of the years 1999 through 2001, approximately
$90 million in 2002, and approximately $100 million in 2003, based on 1997
levels of consumption and compared to rates in effect in 1997.
Under P.A. 90-561, customers with demand greater than 4 MW at a single
site and customers with at least 10 sites which aggregate at least 9.5 MW in
total demand will be free to choose their electric generation suppliers ("direct
access") starting October 1999. Direct access for the remaining non-residential
customers will occur in two phases: customers representing one-third of the
remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002. IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates and remains obligated to provide delivery service to all at
regulated rates. Rates for delivery services for non-residential customers will
be established in 1999, in proceedings mandated by P.A. 90-561.
Although the specified residential rate reductions and the introduction
of direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
Illinois Commerce Commission (ICC). The transition charges are calculated
by subtracting from a customer's fully bundled rate an amount equal to: a)
delivery charges the utility will continue to receive from the customer, b)
the market value of the freed-up energy, and c) a mitigation factor, which
is the higher of a fixed rate per kwh or a percentage of the customer's
bundled base rate. The mitigation factor increases during the transition
period. By Specifically preventing IP from being held completely harmless
with regard to revenue loss, the mitigation factor is designed to provide
incentive for management to continue cost reduction efforts and generate
new sources of revenue;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) Utilities are permitted to seek rate relief in the event that the change in
law leads to their return on equity falling below a specified minimum based
on a prescribed test. Utilities are also subject to an "over-earnings" test
which requires them, in effect, to share with customers earnings in excess
of specified levels.
The extent to which revenues are affected by P.A. 90-561 will depend on
a number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's service territory. The impact on
net income will depend on, among other things, actual revenues and the cost of
doing business.
14
ACCOUNTING MATTERS
Prior to the enactment of P.A. 90-561, IP prepared its consolidated
financial statements in accordance with FAS 71, "Accounting for the Effects of
Certain Types of Regulation." Because P.A. 90-561 provides for market-based
pricing of electric generation services, IP discontinued application of FAS 71
for its generating segment in December 1997, when P.A. 90-561 was enacted.
In December 1998, Illinova's and IP's Boards of Directors decided to
exit the nuclear portion of the business by either sale or shutdown of Clinton
Power Station (Clinton). FAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," requires that all
long-lived assets for which management has committed to a plan of disposal be
reported at the lower of carrying amount or fair value less costs to sell.
Consequently, IP wrote off the value of Clinton and accrued Clinton-related exit
costs, which resulted in a $1,372.2 million loss, net of income taxes, and an
accumulated deficit in Illinova's consolidated retained earnings balance of
$1,419.5 million.
Illinova's and IP's Boards of Directors also chose in December 1998 to
effect a quasi-reorganization. The quasi-reorganization is an accounting
procedure that eliminated the accumulated deficit in retained earnings and
permitted the Company to proceed on much the same basis as if it had been
legally reorganized by restating the Company's assets and liabilities to their
fair values, with the net amount of these adjustments added to or deducted from
the deficit. The remaining deficit in retained earnings was then eliminated by a
transfer from paid-in capital, giving the Company a "fresh start" with a zero
balance in retained earnings. The quasi-reorganization eliminated Illinova's
consolidated accumulated deficit in retained earnings of $1,419.5 million.
IP recognized the impairment of Clinton-related assets and accrued
exit-related costs in December 1998, based on expected plant closure as of
August 31, 1999. IP now expects to consummate the sale of the Clinton-related
assets by the end of 1999. On receipt of various regulatory approvals necessary
to consummate the sale, IP will adjust its accruals for exit-related costs in
accordance with the terms of the sale. The estimated effect of adjusting the
accruals for exit-related costs is a $292 million decrease. Reduction of
exit-related accruals will not immediately impact earnings. The decrease in the
accruals will result in a decrease in the book value of IP's fossil generation
assets, which were written up to fair value in conjunction with the December
1998 quasi-reorganization, which occurred coincident with the establishment of
such exit-related accruals. The $292 million decrease in the book value of IP's
fossil generation assets will result in an estimated annual decrease in
depreciation of the fair value adjustment of $9.5 million.
Implementation of a quasi-reorganization required the adoption of any
accounting standards that had not yet been adopted because their required
implementation date had not occurred. All applicable accounting standards were
adopted as of December 1998. The standards adopted included FAS 133, "Accounting
for Derivative Instruments and Hedging Activities," EITF Issue 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities," SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities."
Illinova and IP recognized other comprehensive income for the six months
ended June 30, 1999, as required by FAS 130, "Reporting Comprehensive Income."
FAS 130 established standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
15
Illinova and IP have adopted the two-statement approach, as provided for by FAS
130 and present a separate statement of comprehensive income in addition to the
income statement. Items included in Illinova's other comprehensive income for
the three and six months ended June 30, 1999, include unrealized gains on
securities, foreign currency translations, and related income taxes. IP's other
comprehensive income for the three and six months ended June 30, 1999, comprised
unrealized gains on securities held in IP's nuclear decommissioning trust and
related income taxes. There were no items reported as other comprehensive income
in 1998.
MANUFACTURED GAS PLANT SITES
IP has recorded an estimated liability for Manufactured Gas Plant (MGP)
site remediation of $59 million. This amount represents IP's current estimate of
the costs it will incur to remediate the 24 MGP sites for which it is
responsible. Because of the unknown and unique characteristics at each site, IP
cannot currently determine its ultimate liability for remediation of the sites.
In October 1995, to offset the burden imposed on its customers, IP
initiated litigation against a number of insurance carriers. Settlements or
settlements in principle have been reached with all thirty of the carriers.
Settlement proceeds recovered from the carriers will offset a significant
portion of the MGP remediation costs and will be credited to customers through
the tariff rider mechanism which the ICC has previously approved. Cleanup costs
in excess of insurance proceeds will be fully recovered from IP's transmission
and distribution customers.
TREASURY STOCK
Through June 30, 1999, IP has purchased a total of 12,751,724 shares of
its common stock from Illinova, all of which are held as treasury stock and
deducted from common equity at the cost of the shares purchased. No shares of IP
common stock were purchased during the first six months of 1999. In October
1998, the Illinova Board approved the repurchase of up to 12 million shares of
Illinova common stock over the next six to twelve months in conjunction with
IP's issuance of securitized debt. No additional repurchases are planned at
present. For more information, see "Liquidity and Capital Resources" of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 34 of this report.
As part of the contemplated merger with Dynegy, on June 13, 1999,
Illinova entered into a forward purchase agreement allowing purchases on the
open market of up to 6.64 million shares of Illinova common stock over the next
two years. At present no shares have been purchased under this agreement.
FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
Trading Activities- Illinova, through its subsidiaries, IP and IEP,
engages in the brokering and marketing of electricity and natural gas. IP and
IEP use a variety of instruments, including fixed-price swap agreements,
variable-price swap agreements, exchange-traded energy futures and options
contracts, and over-the-counter forwards, swaps, and options.
As of December 31, 1998, Illinova and its subsidiaries adopted EITF
98-10. For more information regarding Illinova's adoption of new accounting
pronouncements, see Accounting Matters of this section on page 15 of this
report. At June 30, 1999, IP's and IEP's derivative assets and liabilities were
16
recorded in the Consolidated Balance Sheets at fair value with unrealized gains
and losses shown net in the Consolidated Statements of Income. IP and IEP record
realized gains and losses as components of operating revenues and operating
expenses in the Consolidated Statements of Income.
The notional quantities and average terms of commodity instruments held
for trading purposes at June 30, 1999, are presented below:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 1,650 MW 1,550 MW 1 year
IEP 11,475 MW 11,339 MW 1 year
Gas
IEP (in thousands) 5,980 MMBtu 5,980 MMBtu 1 year
All notional amounts reflect the volume of transactions but do not
represent the dollar amounts or actual megawatts exchanged by the parties to the
contracts. Accordingly, notional amounts do not accurately measure Illinova's
exposure to market or credit risk.
The estimated fair value of commodity instruments held for trading
purposes at June 30, 1999, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $23.5 $49.0
IEP 28.8 37.5
---- ----
52.3 86.5
Gas
IEP 1.8 1.1
--- ---
$53.8 $87.6
The fair value was estimated using quoted prices and indices where
available and the liquidity of the market for the instrument was considered. The
fair values are subject to volatility based on changing market conditions.
The weighted average term of the trading portfolio, based on volume, is
less than one year. The maximum and average terms disclosed herein are not
indicative of likely future cash flows as these positions may be modified by new
transactions in the trading portfolio at any time in response to changing market
conditions, market liquidity, and Illinova's risk management portfolio needs and
strategies. Terms regarding cash settlements of these contracts vary with
respect to the actual timing of cash receipts and payments.
Non-Trading Activities- To reduce the risk from market fluctuations in the price
of electricity and related transmission, Illinova, through its subsidiary IP,
enters into forward transactions, swaps, and options (energy derivatives). These
instruments are used to hedge expected purchases, sales, and transmission of
electricity (a portion of which are firm commitments at the inception of the
hedge). The weighted average maturity of these instruments is less than one
year.
Periodically, IP has used interest rate derivatives (principally
interest rate swaps and caps) to adjust the portion of its overall borrowings
subject to interest rate risk. As of June 30, 1999, there were no interest rate
derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP has
entered into swap agreements and written put options with other utilities to
mitigate the risk from market fluctuations in the price of the allowances. At
17
June 30, 1999, the notional amount of two emission allowance swaps was 126,925
units, with a recorded liability of $19.9 million, based on fair value at
delivery date. The maximum maturity of the swap agreements is 10 years. These
swap agreements do not fall under the scope of FAS 133. Due to the remote
probability of exercise, the three put options written by IP are considered
immaterial.
As of December 31, 1998, Illinova and its subsidiaries adopted FAS 133.
IP's derivative assets and liabilities are currently recorded on the
Consolidated Balance Sheets at fair value with unrealized gains and losses shown
net in the Consolidated Statements of Income. Hedge accounting was not applied.
In the future, if hedge accounting is applied, unrealized gains and losses will
be shown as a component of Comprehensive Income in the equity section of the
Consolidated Balance Sheets. IP records realized gains and losses as components
of operating revenues and operating expenses in the Consolidated Statements of
Income. As of June 30, 1999, all non-trading derivative instruments were
accounted for using mark-to-market accounting.
The notional quantities and the average term of energy derivative
commodity instruments held for other than trading purposes at June 30, 1999,
follows:
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
Electricity
IP 650 MW 150 MW 1 year
In addition to the fixed-price notional volumes above, IP recorded a $25
million liability in 1998 for two "commodity for commodity" energy swap
agreements totaling 350 MW which are not considered derivatives as defined by
FAS 133. As of June 30, 1999, the swap liability decreased to $21.6 million. The
decrease in the liability is due to IP's commencing repayment of one power swap
in January 1999.
The notional amount is intended to be indicative of the level of
activity in such derivatives, although the amounts at risk are significantly
smaller because changes in the market value of these derivatives generally are
offset by changes in the value associated with the underlying physical
transactions or in other derivatives. When energy derivatives are closed out in
advance of the underlying commitment or anticipated transaction, the market
value changes may not be offset because price movement correlation ceases to
exist when the positions are closed.
The estimated fair values of energy derivative commodity instruments,
held for non-trading purposes at June 30, 1999, are presented below:
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
Electricity
IP $4.1 $12.0
The fair value was estimated using quoted prices and indices where
available, and considering the liquidity of the market for the instrument. The
fair values are subject to significant volatility based on changing market
conditions.
The average maturity and fair values discussed above are not necessarily
indicative of likely future cash flows. These positions may be modified by new
offsetting transactions at any time in response to changing generation forecast,
market conditions, market liquidity, and Illinova's risk management portfolio
needs and strategies. Terms regarding cash settlements of these contracts vary
with respect to the actual timing of cash receipts and payments.
18
ILLINOVA - SEGMENTS OF BUSINESS
In 1997, the FASB issued FAS 131, "Disclosures about Segments of an Enterprise
and Related Information." This statement superseded FAS 14, "Financial Reporting
for Segments of a Business Enterprise," and established new standards for
defining a company's segments and disclosing information about them. The new
statement requires that segments be based on the internal structure and
reporting of a company's operations.
The Illinova enterprise comprises six separate corporations and eight functional
business groups. The business groups and their principal activities are as
follows:
o IP Customer Service Business Group - transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas
in Illinois.
o IP Wholesale Energy Business Group - fossil-fueled electric generation in
Illinois, wholesale electricity transactions throughout the United States,
and dispatching activities.
o IP Nuclear Generation Business Group - nuclear-fueled electric generation
in Illinois.
o Illinova Energy Partners - energy-related products and services throughout
the United States and Canada.
o Illinova Generating Company - independent power projects throughout the
world.
o IP Financial Business Group - financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
o IP Support Services Business Group - specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
o Corporate - Illinova Corporation, Illinova Insurance Company and Illinova
Business Enterprises - holding company; insurance and risk products; and
miscellaneous business lines.
Of the above-listed segments, the IP Financial Business Group, the IP Support
Services Business Group, and Corporate did not individually meet the minimum
threshold requirements for separate disclosure and are combined in the Other
category.
In 1998, three measures were used to judge segment performance: contribution
margin, cash flow, and return on net invested capital. In 1999, two measures are
used to judge segment performance: contribution margin and cash flow. Omission
of return on net invested capital provides for increased focus on near-term
financial needs.
19
Illinova Corporation
Three Months Ended June 30, 1999 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1999
Revenues from external customers $320.8 $51.8 $5.5 $ - $ - $ - $378.1
Diversified enterprise revenue - - - 77.4 24.1 (0.3) 101.2
Intersegment revenue (1) - 118.9 37.2 - - - 156.1
--------------------------------------------------------------------------------------------
Total Revenue 320.8 170.7 42.7 77.4 24.1 (0.3) 635.4
Depreciation and amortization
expense 23.7 25.7 1.6 - - 0.1 51.1
Other operating expenses (1) 209.8 135.3 59.6 80.7 23.3 12.6 524.3
--------------------------------------------------------------------------------------------
Operating income (loss) 87.3 9.7 (18.5) (3.3) (2.2) (13.0) 60.0
Interest expense 19.3 21.1 3.3 - - 3.1 46.8
AFUDC (0.4) (1.6) - - - (0.0) (2.0)
--------------------------------------------------------------------------------------------
Income (loss) before taxes 68.4 (9.8) (21.8) (3.3) (2.2) (16.1) 15.2
Income tax expense (benefit) 26.2 (4.3) (7.5) (1.1) (0.5) (2.1) 10.7
Miscellaneous - net 0.2 (1.9) (1.6) - (0.5) (1.0) (4.8)
Equity earnings in affiliates - - - (0.6) (2.2) (0.1) (2.9)
Interest revenue - - (0.8) - - (0.7) (1.5)
--------------------------------------------------------------------------------------------
Net income (loss) after taxes 42.0 (3.6) (11.9) (1.6) 1.0 (12.2) 13.7
Preferred dividend requirement and
carrying amount over (under)
consideration paid for redeemed
preferred stock 2.6 2.8 (0.7) - - (0.3) 5.0
--------------------------------------------------------------------------------------------
Net income (loss) applicable
to common stock $39.4 $(6.4) $(11.2) $(1.6) $1.0 $(12.5) $8.7
- -----------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,640.7 $3,162.4 $199.0 $97.6 $241.0 $114.7 $6,455.4
Subsidiary's investment in
equity method investees - - - 9.8 192.4 - 202.2
Total expenditures for additions
to long-lived assets 27.2 86.0 - - - 2.1 115.3
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $52.5 $7.1 $(10.0) $(1.6) $1.0 $(10.4) $38.6
Cash flow (4) 18.1 (51.2) (26.4) (2.9) 9.0 35.7 (17.7)
Return on net invested capital (5) N/A N/A N/A N/A N/A N/A N/A
(1) Intersegment revenue priced at 2.9 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service. Both
intersegment revenue and expenses were eliminated for purposes of the
Consolidated Statements of Income.
(2) Asset balances recorded by the business groups are significantly different
in 1999 due to the impact of the impairment and write-off of nuclear
generation, fair market valuation of fossil generation and recording of the
regulatory asset to the Customer Service Business Group.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(4) Cash flow before financing activities.
(5) Return on net invested capital is no longer a corporate measure in 1999.
20
Illinova Corporation
Three Months Ended June 30, 1998 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1998
Revenues from external customers $352.9 $112.7 $1.4 $ - $ - $ - $467.0
Diversified enterprise revenue - - - 76.4 2.7 1.2 80.3
Intersegment revenue (1) - 120.2 (0.6) - - - 119.6
--------------------------------------------------------------------------------------------
Total Revenue 352.9 232.9 0.8 76.4 2.7 1.2 666.9
Depreciation and amortization
expense 16.9 7.5 24.7 - - 1.4 50.5
Other operating expenses (1) 209.6 284.9 84.4 78.3 4.9 5.4 667.5
--------------------------------------------------------------------------------------------
Operating income (loss) 126.4 (59.5) (108.3) (1.9) (2.2) (5.6) (51.1)
Interest expense 9.4 2.9 10.8 - - 12.8 35.9
AFUDC (0.3) (0.3) (0.5) - - (0.1) (1.2)
--------------------------------------------------------------------------------------------
Income (loss) before taxes 117.3 (62.1) (118.6) (1.9) (2.2) (18.3) (85.8)
Income tax expense (benefit) 48.0 (26.7) (50.9) (0.6) (0.6) (6.8) (37.6)
Miscellaneous - net 0.3 (1.2) - - (0.2) (0.3) (1.4)
Equity earnings in affiliates - - - (0.4) (3.0) - (3.4)
Interest revenue - - - - - (1.4) (1.4)
--------------------------------------------------------------------------------------------
Net income (loss) after taxes 69.0 (34.2) (67.7) (0.9) 1.6 (9.8) (42.0)
Preferred dividend requirement 1.7 0.6 2.5 - - 0.2 5.0
--------------------------------------------------------------------------------------------
Net income (loss) applicable
to common stock $67.3 $(34.8) $(70.2) $(0.9) $1.6 $(10.0) $(47.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets $1,795.3 $715.6 $2,771.7 $53.1 $199.3 $102.9 $5,637.9
Subsidiary's investment in
equity method investees - - - 9.6 173.8 - 183.4
Total expenditures for additions
to long-lived assets 30.7 17.2 19.0 - - 1.5 68.4
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (2) $73.4 $(33.6) $(61.4) $(0.9) $1.6 $(2.8) $(23.7)
Cash flow (3) 53.7 78.0 (70.4) 1.4 (0.9) (23.0) 38.8
Return on net invested capital (4) 5.6% -7.4% N/A 2.2% 0.8% N/A -0.7%
- -----------------------------------------------------------------------------------------------------------------------------------
(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. Both intersegment revenue and expenses
were eliminated for purposes of the Consolidated Statements of Income.
(2) Contribution margin represented by net income before financing costs
(net-of-tax), preferred dividend requirement.
(3) Cash flow before financing activities.
(4) Return on net invested capital calculated as contribution margin divided by
net invested capital.
21
ILLINOVA GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Second Quarter 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $474.9 $545.2
Foreign countries (Seven) 4.4 2.1
------ ------
$479.3 $547.3
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
June 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,507.5 $4,601.7
Foreign countries (Nine) 161.8 132.2
-------- --------
$4,669.3 $4,733.9
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
22
Illinova Corporation
Six Months Ended June 30, 1999 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1999
Revenues from external customers $697.5 $145.9 $7.0 $ - $ - $ - $850.4
Diversified enterprise revenue - - - 123.8 52.4 1.1 177.3
Intersegment revenue (1) - 254.8 36.5 - - - 291.3
--------------------------------------------------------------------------------------------
Total Revenue 697.5 400.7 43.5 123.8 52.4 1.1 1,319.0
Depreciation and amortization
expense 42.2 51.3 3.6 - - (0.0) 97.1
Other operating expenses (1) 485.1 261.9 149.0 130.0 56.4 15.8 1,098.2
--------------------------------------------------------------------------------------------
Operating income (loss) 170.2 87.5 (109.1) (6.2) (4.0) (14.7) 123.7
Interest expense 38.6 41.0 4.0 - - 6.3 89.9
AFUDC (0.8) (2.4) - - - 0.0 (3.2)
--------------------------------------------------------------------------------------------
Income (loss) before taxes 132.4 48.9 (113.1) (6.2) (4.0) (21.0) 37.0
Income tax expense (benefit) 50.6 18.0 (43.2) (1.8) 1.2 (2.8) 22.0
Miscellaneous - net 0.2 (1.8) (2.1) - (6.7) (2.2) (12.6)
Equity earnings in affiliates - - - (1.6) (1.8) - (3.4)
Interest revenue - - (1.9) - - (2.7) (4.6)
--------------------------------------------------------------------------------------------
Net income (loss) after taxes 81.6 32.7 (65.9) (2.8) 3.3 (13.3) 35.6
Preferred dividend requirement and
carrying amount over (under)
consideratin paid for redeemed
preferred stock 5.5 5.8 (1.6) - - (0.5) 9.2
--------------------------------------------------------------------------------------------
Net income (loss) applicable
to common stock $76.1 $26.9 $(64.3) $(2.8) $3.3 $(12.8) $26.4
- -----------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,640.7 $3,162.4 $199.0 $97.6 $241.0 $114.7 $6,455.4
Subsidiary's investment in
equity method investees - - - 9.8 192.4 - 202.2
Total expenditures for additions
to long-lived assets 50.1 100.5 - - - 3.0 153.6
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $102.5 $53.8 $(63.4) $(2.8) $3.3 $(9.5) $83.9
Cash flow (4) 60.2 (138.8) (132.7) (4.6) 21.5 87.3 (107.1)
Return on net invested capital (5) N/A N/A N/A N/A N/A N/A N/A
(1) Intersegment revenue priced at 2.9 cents per kwh delivered. Intersegment
expense is reflected in other operating expenses for Customer Service. Both
intersegment revenue and expenses were eliminated for purposes of the
Consolidated Statements of Income.
(2) Asset balances recorded by the business groups are significantly different
in 1999 due to the impact of the impairment and write-off of nuclear
generation, fair market valuation of fossil generation and recording of the
regulatory asset to the Customer Service Business Group.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(4) Cash flow before financing activities.
(5) Return on net invested capital is no longer a corporate measure in 1999.
23
Illinova Corporation
Six Months Ended June 30, 1998 (Millions of Dollars)
Illinova
Customer Wholesale Energy Illinova Other Consoli-
Service Energy Nuclear Partners Generating dated
1998
Revenues from external customers $744.5 $209.0 $3.0 $ - $ - $ - $956.5
Diversified enterprise revenue - - - 161.3 3.4 1.5 166.2
Intersegment revenue (1) - 232.0 (1.2) - - - 230.8
--------------------------------------------------------------------------------------------
Total Revenue 744.5 441.0 1.8 161.3 3.4 1.5 1,353.5
Depreciation and amortization
expense 33.8 14.9 49.5 - - 3.0 101.2
Other operating expenses (1) 454.3 435.6 168.4 168.1 8.9 4.4 1,239.7
--------------------------------------------------------------------------------------------
Operating income (loss) 256.4 (9.5) (216.1) (6.8) (5.5) (5.9) 12.6
Interest expense 26.5 8.6 32.3 - - 5.1 72.5
AFUDC (0.6) (0.7) (0.9) - - (0.1) (2.3)
--------------------------------------------------------------------------------------------
Income (loss) before taxes 230.5 (17.4) (247.5) (6.8) (5.5) (10.9) (57.6)
Income tax expense (benefit) 94.4 (10.0) (106.2) (1.7) (1.3) (8.5) (33.3)
Miscellaneous - net 0.3 0.6 - (0.1) (0.2) (0.5) 0.1
Equity earnings in affiliates - - - (2.4) (6.5) - (8.9)
Interest revenue - - - - - (1.4) (1.4)
--------------------------------------------------------------------------------------------
Net income (loss) after taxes 135.8 (8.0) (141.3) (2.6) 2.5 (0.5) (14.1)
Preferred dividend requirement 3.5 1.3 5.0 - - 0.1 9.9
--------------------------------------------------------------------------------------------
Net income (loss) applicable
to common stock $132.3 $(9.3) $(146.3) $(2.6) $2.5 $(0.6) $(24.0)
- -----------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets $1,796.3 $715.6 $2,771.7 $53.1 $199.3 $102.9 $5,637.9
Subsidiary's investment in
equity method investees - - - 9.6 173.8 - 183.4
Total expenditures for additions
to long-lived assets 60.9 27.4 26.2 - - 2.8 117.3
- -----------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (2) $149.0 $(5.5) $(122.6) $(2.6) $2.5 $2.2 $23.0
Cash flow (3) 126.9 121.2 (152.0) 3.5 3.0 19.1 121.7
Return on net invested capital (4) 11.5% -1.4% N/A 7.4% 1.3% N/A 0.6%
(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. Both intersetment revenue and expenses
were eliminated for purposes of the Consolidated Statements of Income.
(2) Contribution margin represented by net income before financing costs
(net-of-tax), preferred dividend requirement.
(3) Cash flow before financing activities.
(4) Return on net invested capital calculated as contribution margin divided by
net invested capital.
24
ILLINOVA GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Year-To-Date June 30, 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $1,019.1 $1,120.6
Foreign countries (Seven) 8.6 2.1
-------- --------
$1,027.7 $1,122.7
======== ========
(Millions of dollars)
- --------------------------------------------------------------------------------
June 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,507.5 $4,601.7
Foreign countries (Nine) 161.8 132.2
-------- --------
$4,669.3 $4,733.9
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
IP - SEGMENTS OF BUSINESS
IP comprises five business groups. The business groups and their principal
services are as follows:
o IP Customer Service Business Group - transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural gas
in Illinois.
o IP Wholesale Energy Business Group - fossil-fueled electric generation in
Illinois, wholesale electricity transactions throughout the United States,
and dispatching activities.
o IP Nuclear Generation Business Group - nuclear-fueled electric generation
in Illinois.
o IP Financial Business Group - financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
o IP Support Services Business Group - specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
Of the above-listed segments, the IP Financial Business Group and the IP Support
Services Business Group did not individually meet the minimum threshold
requirements for separate disclosure and are combined in the Other category.
In 1998, three measures were used to judge segment performance: contribution
margin, cash flow, and return on net invested capital. In 1999, two measures are
used to judge segment performance; contribution margin and cash flow. Omission
of return on net invested capital provides for increased focus on near-term
financial needs.
25
Illinois Power
Three Months Ended June 30, 1999 (Millions of Dollars)
Customer Wholesale Total
1999 Service Energy Nuclear Other Company
Revenues from external customers $320.8 $51.8 $5.5 $ - $378.1
Intersegment revenue (1) - 118.9 37.2 - 156.1
------------------------------------------------------------------
Total Revenue 320.8 170.7 42.7 - 534.2
Depreciation and amortization expense 23.7 25.7 1.6 0.1 51.1
Other operating expenses (1) 209.8 135.3 59.6 5.1 409.8
------------------------------------------------------------------
Operating income (loss) 87.3 9.7 (18.5) (5.2) 73.3
Interest expense 19.3 21.1 3.3 0.2 43.9
AFUDC (0.4) (1.6) - (0.0) (2.0)
------------------------------------------------------------------
Income (loss) before taxes 68.4 (9.8) (21.8) (5.4) 31.4
Income tax expense (benefit) 26.2 (4.3) (7.5) 1.8 16.2
Miscellaneous-net 0.2 (1.9) (1.6) 0.1 (3.2)
Interest revenue - - (0.8) (0.8) (1.6)
------------------------------------------------------------------
Net income (loss) after taxes 42.0 (3.6) (11.9) (6.5) 20.0
Preferred dividend requirement and
carrying amount over consideration
paid for redeemed preferred stock 2.6 2.8 (0.7) 0.3 5.0
------------------------------------------------------------------
Net income (loss) applicable to common stock $ 39.4 $ (6.4) $ (11.2) $ (6.8) $ 15.0
- -------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,640.7 $3,162.4 $199.0 $ 36.3 $6,038.4
Total expenditures for additions
to long-lived assets 27.2 86.0 - 2.1 115.3
Corporate Measures -
Contribution margin (3) $ 52.5 $ 7.1 $ (10.0) $ (6.4) $ 43.2
Cash flow (4) 18.1 (51.2) (26.4) 5.2 (54.3)
Return on net invested capital (5) N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.9 cents per kwh delivered for 1999.
Intersegment expense is reflected in other operating expenses for Customer
Service. Both intersegment revenue and eexpenses were eliminated for
purposes of the Consolidated Statements of Income.
(2) Asset balances recorded by the business groups are significantly different
in 1999 due to the impact of the impairment and write-off of nuclear
generation, fair market valuation of fossil generation and recording of the
regulatory asset to the Customer Service Business Group.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(4) Cash flow before financing activities.
(5) Return on net invested capital is no longer a corporate measure in 1999.
26
Illinois Power
Three Months Ended June 30, 1998 (Millions of Dollars)
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
Revenues from external customers $352.9 $ 112.7 $ 1.4 $ - $467.0
Intersegment revenue (1) - 120.2 (0.6) 0.0 119.6
------------------------------------------------------------------
Total Revenue 352.9 232.9 0.8 0.0 586.6
Depreciation and amortization expense 16.9 7.5 24.7 1.4 50.5
Other operating expenses (1) 209.6 284.9 84.4 3.6 582.5
------------------------------------------------------------------
Operating income (loss) 126.4 (59.5) (108.3) (5.0) (46.4)
Interest expense 9.4 2.9 10.8 10.2 33.3
AFUDC (0.3) (0.3) (0.5) (0.1) (1.2)
------------------------------------------------------------------
Income (loss) before taxes 117.3 (62.1) (118.6) (15.1) (78.5)
Income tax expense (benefit) 48.0 (26.7) (50.9) (5.4) (35.0)
Miscellaneous-net 0.3 (1.2) - (0.2) (1.1)
Interest revenue - - - (1.8) (1.8)
------------------------------------------------------------------
Net income (loss) after taxes 69.0 (34.2) (67.7) (7.7) (40.6)
Preferred dividend requirement 1.7 0.6 2.5 0.2 5.0
------------------------------------------------------------------
Net income (loss) applicable to common stock $ 67.3 $ (34.8) $ (70.2) $ (7.9) $(45.6)
- -------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets $1,795.3 $ 715.6 $2,771.7 $ 66.4 $5,349.0
Total expenditures for additions
to long-lived assets 30.7 17.2 19.0 1.5 68.4
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (2) $ 73.4 $ (33.6) $ (61.4) $(2.1) $(23.7)
Cash flow (3) 53.7 78.0 (70.4) (21.3) 40.0
Return on net invested capital (4) 5.6% -7.4% N/A N/A -0.6%
- -------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.5 cents per kwh delivered for 1998.
Intersegment expense is reflected in other operating expenses for Customer
Service. Nuclear reflects a replacement power expense for the increment of
market price over the intersegment price for 1998. Both intersegment
revenue and expenses were eliminated for purposes of the Consolidated
Statements of Income.
(2) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(3) Cash flow before financing activities.
(4) For 1998, return on net invested capital calculated as contribution margin
divided by net invested capital.
27
GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Second Quarter 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $378.1 $467.0
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
June 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,442.2 $4,552.4
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
28
Illinois Power
Six Months Ended June 30, 1999 (Millions of Dollars)
Customer Wholesale Total
1999 Service Energy Nuclear Other Company
Revenues from external customers $697.5 $ 145.9 $7.0 $ - $850.4
Intersegment revenue (1) - 254.8 36.5 - 291.3
------------------------------------------------------------------
Total Revenue 697.5 400.7 43.5 - 1,141.7
Depreciation and amortization expense
42.2 51.3 3.6 - 97.1
Other operating expenses (1) 485.1 261.9 149.0 6.2 902.2
------------------------------------------------------------------
Operating income (loss) 170.2 87.5 (109.1) (6.2) 142.4
Interest expense 38.6 41.0 4.0 0.1 83.7
AFUDC (0.8) (2.4) - - (3.2)
------------------------------------------------------------------
Income (loss) before taxes 132.4 48.9 (113.1) (6.3) 61.9
Income tax expense (benefit) 50.6 18.0 (43.2) 2.4 27.8
Miscellaneous-net 0.2 (1.8) (2.1) (0.3) (4.0)
Interest revenue - - (1.9) (3.0) (4.9)
------------------------------------------------------------------
Net income (loss) after taxes 81.6 32.7 (65.9) (5.4) 43.0
Preferred dividend requirement and
carrying amount over (under)
consideration paid for
redeemed preferred stock 5.5 5.8 (1.6) (0.5) 9.2
------------------------------------------------------------------
Net income (loss) applicable to
common stock $ 76.1 $ 26.9 $ (64.3) $ (4.9) $ 33.8
- -------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets (2) $2,640.7 $3,162.4 $199.0 $ 36.3 $6,038.4
Total expenditures for additions
to long-lived assets 50.1 100.5 - 3.0 153.6
- -------------------------------------------------------------------------------------------------------------------------------
Corporate Measures -
Contribution margin (3) $102.5 $ 53.8 $ (63.4) $ (5.3) $ 87.6
Cash flow (4) 60.2 (138.8) (132.7) 86.6 (124.7)
Return on net invested capital (5) N/A N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.9 cents per kwh delivered for 1999.
Intersegment expense is reflected in other operating expenses for Customer
Service. Both intersegment revenue and expenses were eliminated for
purposes of the Consolidated Statements of Income.
(2) Asset balances recorded by the business groups are significantly different
in 1999 due to the impact of the impairment and write-off of nuclear
generation, fair market valuation of fossil generation and recording of the
regulatory asset to the Customer Service Business Group.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(4) Cash flow before financing activities.
(5) Return on net invested capital is no longer a corporate measure in 1999.
29
Illinois Power
Six Months Ended June 30, 1998 (Millions of Dollars)
Customer Wholesale Total
1998 Service Energy Nuclear Other Company
Revenues from external customers $744.5 $ 209.0 $ 3.0 $ - $956.5
Intersegment revenue (1) - 232.0 (1.2) 0.0 230.8
------------------------------------------------------------------
Total Revenue 744.5 441.0 1.8 0.0 1,187.3
Depreciation and amortization expense
33.8 14.9 49.5 3.0 101.2
Other operating expenses (1) 454.3 435.6 168.4 1.7 1,060.0
-----------------------------------------------------------------
Operating income (loss) 256.4 (9.5) (216.1) (4.7) 26.1
Interest expense 26.5 8.6 32.3 - 67.4
AFUDC (0.6) (0.7) (0.9) (0.1) (2.3)
------------------------------------------------------------------
Income (loss) before taxes 230.5 (17.4) (247.5) (4.6) (39.0)
Income tax expense (benefit) 94.4 (10.0) (106.2) (6.0) (27.8)
Miscellaneous-net 0.3 0.6 - 0.1 1.0
Interest revenue - - - (2.0) (2.0)
------------------------------------------------------------------
Net income (loss) after taxes 135.8 (8.0) (141.3) 3.3 (10.2)
Preferred dividend requirement 3.5 1.3 5.0 0.1 9.9
------------------------------------------------------------------
Net income (loss) applicable to
common stock $132.3 $(9.3) $(146.3) $ 3.2 $(20.1)
- -------------------------------------------------------------------------------------------------------------------------------
Other information -
Total assets $1,795.3 $ 715.6 $2,771.7 $ 66.4 $5,349.0
Total expenditures for additions
to long-lived assets 60.9 27.4 26.2 2.8 117.3
Corporate Measures -
Contribution margin (2) $149.0 $(5.5) $(122.6) $ 3.0 $ 23.9
Cash flow (3) 126.9 121.2 (152.0) 10.0 106.1
Return on net invested capital (4) 11.5% -1.4% N/A N/A 0.7%
- -------------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.5 cents per kwh delivered for 1998.
Intersegment expense is reflected in other operating expenses for Customer
Service. Nuclear reflects a replacement power expense for the increment of
market price over the intersegment price for 1998. Both intersegment
revenue and expenses were eliminated for purposes of the Consolidated
Statements of Income.
(2) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(3) Cash flow before financing activities.
(4) For 1998, return on net invested capital calculated as contribution margin
divided by net invested capital.
30
GEOGRAPHIC INFORMATION
(Millions of dollars)
- --------------------------------------------------------------------------------
Year-To-Date June 30, 1999 1998
- --------------------------------------------------------------------------------
Revenues: (1)
United States $850.4 $956.5
====== ======
(Millions of dollars)
- --------------------------------------------------------------------------------
June 30, 1999 1998
- --------------------------------------------------------------------------------
Long-lived assets: (2)
United States $4,442.2 $4,552.4
======== ========
(1) Revenues are attributed to geographic regions based on location of
customer.
(2) Long-lived assets include plant, equipment, and investments in
subsidiaries.
31
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information contained in this report is forward-looking
information based on current expectations and plans that involve risks and
uncertainties. Forward-looking information includes, among other things,
statements concerning the impact of regulatory changes, plans for the Clinton
facility, and success in addressing Year 2000 issues; as well as those that
include the words "expect," "intend," "predict," "estimate," "believe" or
similar language. Although Illinova and IP believe these forward-looking
statements are accurate, their businesses are dependent on various regulatory
issues, general economic conditions and future trends, and these factors can
cause actual results to differ materially from the forward-looking statements
that have been made.
The following factors, in addition to those discussed elsewhere in this
report and in the Annual Report on Form 10-K for the fiscal year ended December
31, 1998, and subsequent securities filings could cause results to differ
materially from management expectations as suggested by such forward-looking
statements: the outcome of state and Federal regulatory proceedings affecting
the restructuring of the electric and utility industry; the impact on IP of
current regulations providing for rate reductions and the phasing in of the
opportunity for some customers to choose alternative energy suppliers; the
effects of increased competition in the future due to, among other things,
deregulation of certain aspects of IP's business at both the state and Federal
levels, and the increasing popularity of alternative sources of electricity,
such as co-generation facilities; the effects of the implementation of
Illinova's various strategies to best respond to its changing business and
regulatory environment, including potential acquisitions, focused growth of
unregulated businesses and other options; the fluctuating electricity supply
demands of IP customers, which, if increased beyond IP's generation capacity,
might result in unplanned outages forcing IP to acquire additional supplies in
the electricity marketplace at uncertain and often volatile prices and
availability; changes in prices and costs of fuel; various financial risks
attendant to selling or shutting down Clinton; ongoing nuclear operational
exposures until Clinton is sold or shut down; the effect of events that can
occur in Illinova's or IP's business operations or in general economic
conditions, that could negatively impact its financial flexibility and costs of
financing; the impact of the sale or shutdown of Clinton on IP's ability to
issue indebtedness under its existing mortgages; the impact of current
environmental regulations on utilities and the expectation that more stringent
requirements will be introduced over time, which are likely to have a negative
financial effect; various factors affecting non-utility investments, such as
IGC's investments in foreign countries, which are subject to currency
fluctuations, cyclical and sustained economic downturns and political risks; the
inherent risks of active purchases and sales by Illinova, through IEP and IP, of
electricity and natural gas futures and similar contracts; and the ability of
Illinova and IP, their vendors and others to manage Year 2000 issues.
All forward-looking statements in this report are based on information
that currently is available. Illinova and IP disclaim any obligation to update
any forward-looking statement.
32
ILLINOVA SUBSIDIARIES
IP, a subsidiary of Illinova, engages in the generation, transmission,
distribution and sale of electric energy and the distribution, transportation
and sale of natural gas in the State of Illinois. IP has publicly traded
preferred shares outstanding but its common stock is wholly-owned by Illinova.
IGC is Illinova's wholly-owned independent power subsidiary. IGC invests
in energy supply projects throughout the world and competes in the independent
power market. IGC's strategy is to invest in and develop "greenfield" power
plants, acquire existing generation facilities and provide power plant
operations and maintenance.
IEP is a wholly-owned subsidiary of Illinova. IEP develops and markets
energy-related products and services to the unregulated energy market throughout
the United States and Canada and engages in the brokering and marketing of
electric power and gas.
IIC is a wholly-owned subsidiary of Illinova and was licensed by the
State of Vermont as a captive insurance company. The primary business of IIC is
to insure certain risks of Illinova and its subsidiaries.
IBE is a wholly-owned subsidiary of Illinova and was created to account
for miscellaneous business activities not regulated by the ICC or the Federal
Energy Regulatory Commission (FERC) and not falling within the business scope of
other Illinova subsidiaries.
Illinova Power Marketing, Inc. (IPMI) is a wholly-owned subsidiary of
Illinova created in April 1999, to become the wholesale generation and power
marketing company to which IP's fossil generating assets will be transferred.
The ICC approved the transfer of generation assets to IPMI on July 8, 1999.
Other required regulatory approvals for the transfer of these assets and for
IPMI's marketing activities are being sought.
MERGER AGREEMENT
On June 14, 1999, Illinova and Dynegy Inc. (Dynegy) announced the
execution of a definitive agreement for the merger of Illinova and Dynegy,
creating a full service provider of energy products and services. The
combination brings together Illinova's strategically positioned Midwest
generating facilities and developing national energy services and products with
Dynegy, a leading marketer of energy products and services in the country. Both
Illinova and Dynegy are leading independent power developers and producers. The
combined company is expected to own more than 15,000 megawatts of domestic
generating capacity, representing the world's most geographically diverse
generating asset portfolio.
Under terms of the merger agreement, which were approved unanimously by
each company's board of directors and agreed to by Dynegy's industrial
shareholders (who collectively own approximately 76% of Dynegy's outstanding
common stock), a newly established parent company will acquire all of the shares
of Dynegy and Illinova for a combination of stock and cash, subject to the
satisfaction of certain pre-closing conditions. The merger is conditioned, among
other things, upon the completion of the pending sale of the Clinton by
Illinova, the approvals of the FERC, the SEC, the ICC, Illinova's common
stockholders and the expiration or termination of the Hart-Scott-Rodino waiting
period. The merger is expected to close by the end of the first quarter of 2000.
Upon closing, Chuck Watson, Chairman and Chief Executive Officer of
Dynegy, will retain that title in the combined company. Charles Bayless,
Chairman, President and Chief Executive Officer of Illinova, will continue as a
33
non-executive director of the combined company. The Board of Directors of the
combined company, which will be incorporated in Illinois and headquartered in
Houston, Texas, will consist of seven members of the current Illinova Board and
seven members of the current Dynegy Board, including three designees of Chevron
U.S.A., which currently owns an approximate 25% interest in Dynegy. Illinova's
regulated utility, IP, will be a subsidiary and remain headquartered in Decatur,
IL.
Various details regarding the merger are discussed more fully in the
Form S-4 filed by Energy Convergence Holding Company on August 11, 1999, SEC
File No. 333-84965, which is incorporated herein by reference.
DIVERSIFIED BUSINESS ACTIVITIES
In February 1999, IEP, a wholly-owned subsidiary of Illinova, purchased
the Indiana-based natural gas management operations of Equitable Resources
Marketing Company. Equitable Resources Marketing (ERM) was a subsidiary of
Equitable Resources, Inc., (ERI) of Pittsburgh, PA. ERI is an integrated energy
company that produces, markets, and distributes natural gas and oil.
In April 1999, IEP also purchased Quality Energy Services (QES), a
Tempe, Arizona based natural gas marketing company.
In May 1999, IEP purchased the Chicago, IL based holdings of Energy
Dynamics, Inc., (EDI) an independent natural gas marketing firm based in Rolling
Meadows, IL.
The 1998 combined revenues of ERM, QES, and EDI were approximately $67
million.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES AND REQUIREMENTS
Cash flows from operations during the first six months of 1999,
supplemented by external financing and cash on hand, were sufficient to meet
ongoing operating requirements and to service existing common and preferred
stock dividends, debt requirements, IP's construction requirements and
Illinova's investments in its subsidiaries. However, Illinova and IP liquidity
has decreased as compared to June 30, 1998, as a result of higher fossil
maintenance costs, increased marketing expenses, and higher Clinton costs
combined with lower revenues attributable to the rate reduction mandated by P.A.
90-561.
Illinova expects to use future operating cash flows, supplemented by
external financing, to meet operating requirements and to continue to service
existing debt, IP's preferred and Illinova common stock dividends, and
Illinova's and IP's anticipated subsidiary investments and construction
requirements for the remainder of 1999.
Illinova currently has authority to issue an additional $130 million in
debt securities under an existing $300 million shelf registration. Illinova also
has in place a $130 million Revolving Credit Agreement. However, covenants in
the Illinova Revolving Credit Facility limit total Illinova debt to $350
million. At June 30, 1999 $40.5 million of new debt capacity was available.
Prior to 1999, IP paid Illinova dividends on the IP common stock held by
Illinova to provide Illinova cash for operations. IP is limited in its payment
of dividends by the Illinois Public Utilities Act, which requires retained
earnings equal to or greater than the amount of any proposed dividend
declaration or payment, and by the Federal Power Act, which precludes
declaration or payment of dividends by electric utilities "out of money properly
stated in a capital account." In the first quarter of 1999, IP did not declare
or pay dividends on its common stock. In June 1999, IP declared and paid a
34
common stock dividend of $19.5 million. Based on the Board's current dividend
policy, management expects IP's retained earnings to be sufficient to support
Illinova common dividends. IP also is allowed to periodically repurchase its
common stock from Illinova in accordance with authority granted by the ICC,
contingent on IP meeting certain cash flow tests. IP currently does not satisfy
this cash flow test and it is anticipated that it will not satisfy the test
throughout 1999. This test would not interfere with the repurchases, if any, of
Illinova equity shares using securitization proceeds. Illinova's current
capacity under the existing revolving credit agreement and shelf registration
should meet its cash requirements through the third quarter of 1999. Illinova
and IGC are developing additional financing capabilities to meet future needs.
From the beginning of 1999, through July 16, 1999, IP redeemed $57.1
million of 8.75% First Mortgage Bonds due 2021, $229 million of 8.00% New
Mortgage Bonds due 2023, $22.9 million of 7.95% First Mortgage Bonds due 2004,
$36.8 million of 6.50% First Mortgage Bonds due 1999, $39.85 million of 7.50%
New Mortgage Bonds due 2025, along with 154,900 shares of Monthly Income
Preferred Securities (MIPS) and 154,295 shares of various serial preferred stock
series. These securities were retired using funds from securitization proceeds
received in December 1998.
On July 20, 1999, Illinois Power's 1943 mortgage (First Mortgage) was
retired. All remaining First Mortgage debt was substituted with debt issued
under the 1992 Mortgage (New Mortgage) or defeased. New Mortgage Bonds of $35.6
million with a coupon rate of 7.5% due 2024 (Series K) and $84.2 million with a
coupon rate of 7.4% due 2024 (Series L) were substituted for First Mortgage
Bonds with identical terms and amounts (replacement Series U and V). With
proceeds received from the December 1998 securitization issuance, IP defeased
$35.2 million of 6.50% First Mortgage Bonds due 1999, $16.1 million of 7.95%
First Mortgage Bonds due 2004 and $84.7 million of 7.375% First Mortgage Bonds
due 2021.
IP's capital requirements for construction were approximately $150
million and $115 million during the six months ended June 30, 1999 and 1998,
respectively. Through 2000, IP plans to complete improvements in its generation
facilities including pollution control equipment. Illinova estimates that it
will spend approximately $380 million for IP construction expenditures in 1999.
IP construction expenditures for 1999 through 2003 are expected to total
approximately $1.4 billion. In light of the December 1998 decision to exit
Clinton and the resulting Clinton impairment, Clinton capital expenditures are
expensed as incurred and are not included in the above estimates. On March 2,
1999, in accordance with a lease agreement between IP and IP Fuel Company, IP
paid $62.1 million for partially depleted nuclear fuel in the Clinton reactor to
IP Fuel Company as a result of Clinton Nuclear Station failing to restart by
January 31, 1999. The liability for the nuclear fuel was accrued as of December
31, 1998. As part of the Clinton impairment entries at year end, nuclear fuel
was written down to the expected consumption through August 31, 1999.
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 construction expenditures, Illinova's capital
expenditures for 1999 through 2003 are expected to include $520 million for
mandatory debt retirement. In addition, IPSPT has long-term debt maturities of
$86.4 million in each of the above years.
On June 29, 1999, IP issued $250 million of Mortgage Bonds due 2009 with
an interest rate of 7.50%. Proceeds were used to reduce outstanding short-term
borrowings. IP currently has the authority to issue $500 million in short-term
debt, which includes $354 million in committed bank lines of credit. Of these
35
authorized amounts, IP had $347 million at June 30, 1999, in remaining capacity
that may be utilized to issue commercial paper and extend floating rate notes.
IP anticipates that this liquidity will be sufficient to address its
requirements into the fourth quarter of 1999. IP is developing additional
financial capabilities to meet future needs.
Following the merger announcement, several rating agencies responded
with favorable outlooks on IP and Illinova credit quality. Standard & Poor's has
changed its outlook from stable to positive, and presently rates ILN at BBB- and
IP at BBB. Duff & Phelps has placed IP on Credit Watch-Up, with a present rating
of BBB+. Moody's, which rates IP bonds at Baal and ILN notes at Baa3, affirmed
its present ratings.
ACCOUNTING MATTERS
For further information on accounting issues, see "Accounting Matters"
under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial
Statements" on page 15 of this report.
CLINTON POWER STATION
In September 1996, a leak in a recirculation pump seal caused IP
operations personnel to shut down Clinton. Clinton returned to service May 27,
1999.
The prolonged outage at Clinton has had an adverse effect on Illinova's
and IP's financial condition, through higher operating and maintenance and
capital costs, lost opportunities to sell energy, and replacement power costs.
In addition, in March 1999, due to the failure of Clinton to restart by January
31, 1999, a provision in the lease agreement between IP and the Fuel Company
required IP to pay $62.1 million cash for the acquisition of core fuel in March
1999, to the Fuel Company Trustee for the benefit of investors in secured Notes
of the Fuel Company.
PECO AND AMERGEN AGREEMENT
On April 15, 1999, IP announced that it had reached an interim agreement
with AmerGen Energy Company (AmerGen), whereby AmerGen would purchase and
operate Clinton and IP would buy at least 75 percent of the plant's electricity
output for the next several years. AmerGen is jointly owned by PECO Energy
Company (PECO), and British Energy. IP also announced on April 15, 1999, the
execution of a revised management agreement (Agreement) with PECO for the
operation of Clinton retroactive to April 1, 1999.
On July 1, 1999, IP announced that it had signed a definitive asset
purchase agreement with AmerGen. Basic terms for the sale remain essentially
unchanged from the framework proposed in the interim agreement. The asset
purchase agreement, signed June 30, 1999, provides that IP will purchase at
fixed prices, at least 75 percent of Clinton's electricity output for its
customers through 2004 at fixed prices which exceed current and projected
wholesale prices.
Terms of the interim agreement between PECO and IP will remain in effect
until the transaction closes. Specifically, PECO is responsible for Clinton's
direct operating and capital expenses and continues to manage the station under
the existing management contract, while IP compensates PECO for management
services based on the amount of electricity the station produces. This
eliminates IP's exposure to the uncertainty regarding the costs associated with
Clinton's operations. In return for transferring this financial risk, IP has
agreed to pay PECO a management fee calculated by multiplying a fixed dollar
amount per MWH times 80 percent of the electricity generated at Clinton during
36
the interim period and to allow PECO to retain 20 percent of power generation
for its own use at no cost. The financial impact of this obligation is
contingent on two variables: (1) the capacity levels at which Clinton operates
and (2) the prices at which the electricity can be sold from time to time. Based
on the terms of the revised management agreement, the fees payable to PECO
during the interim period could equal or exceed the 1999 Clinton-related O&M and
capital costs for which PECO assumed full responsibility commencing April 1,
1999.
Under terms of the definitive asset purchase agreement, AmerGen will pay
up to $20 million for the plant and property and will assume full responsibility
and liability for operating and ultimately decommissioning the nuclear station.
IP will transfer to AmerGen the existing decommissioning trust funds, expected
to total approximately $95 million at the end of 1999. IP will also make
additional payments to the decommissioning trust funds intended to be sufficient
to provide for the actual decommissioning of Clinton by 2026, when the plant's
operating license is scheduled to expire. These payments may be in the form of a
single payment of $145 million at closing, one payment of $124.2 million plus
five annual payments of $5 million, or the provision of an insurance policy
purchased by IP.
Approvals must be obtained from various regulatory agencies including
the NRC, the ICC, and the FERC. Approvals for transfer of permits and licenses
must be granted by numerous agencies, including the Illinois Environmental
Protection Agency, the Illinois Department of Nuclear Safety, the Illinois
Department of Natural Resources, and others. Until all approvals are obtained
and the parties close on the sale, IP will continue to maintain the license for
Clinton's operation and retain the ultimate operating authority over the plant.
REGULATORY MATTERS
FOSSIL GENERATION FILING
On July 8, 1999, the ICC unanimously approved IP's filing to sell its
fossil generating assets to Illinova. Subsequently, Illinova intends to transfer
those assets to its wholly owned subsidiary IPMI. IPMI, which was incorporated
in April 1999, will become a wholesale generation and power marketing company.
On June 11, 1999, IP made a Part 205 filing with the FERC seeking approval of a
proposed Power Purchase Agreement between IP and IPMI. IP also filed a request
with the FERC, on June 29, 1999, seeking approval for asset transfer. A response
to both filings by the FERC is anticipated in the third quarter of 1999.
ATTORNEY GENERAL COMPLAINT
On July 17, 1998, a complaint against IP was filed at the ICC by the
Illinois State Attorney General. The complaint alleges that IP failed to meet
its statutory obligations to provide adequate and reliable service in connection
with last summer's electric supply situation (for further disclosure, see "Power
Supply and Reliability" on page 42). It asks the ICC to conduct a management
audit of IP and seeks an order requiring IP to offer compensation to customers
for voluntary conservation and service interruptions. The company provided the
Attorney General with a reliability report. The Attorney General and the Company
agreed on an independent committee of two outside experts to review the report.
In June, the Attorney General and IP signed a settlement agreement in which IP
agrees to provide three annual updates to the reliability report it submitted in
response to the complaint, and agrees to maintain and in some cases moderately
enhance existing systems and maintenance practices. The parties filed a joint
motion to dismiss the complaint on the basis of this agreement, which the ICC
unanimously approved on July 28, 1999. There are no significant costs resulting
37
from the agreement. Although there were limited calls for voluntary
conservation, and interruptible customers were curtailed, no firm load was
interrupted or curtailed during 1998.
SOYLAND POWER COORDINATION AGREEMENT
In March 1999, Soyland and IP signed a new Power Coordination Agreement
(PCA) and filed this agreement with the FERC. The new agreement no longer
obligates IP to provide capacity and energy to Soyland with the exception of a
small amount of capacity for the purpose of supplying Soyland's load within the
IP Control Area. Therefore, the new PCA triggered the immediate recognition of
deferred revenue from the previous Soyland prepayment of the base capacity
charge. This resulted in an increase in interchange revenues of $61 million in
the first quarter of 1999.
UNIFORM FUEL ADJUSTMENT CLAUSE (UFAC)
Prior to March 1998, the costs of fuel for electric generation and
purchased power costs were deferred and recovered from customers pursuant to the
UFAC. On March 6, 1998, IP initiated an ICC proceeding to eliminate the UFAC in
accordance with P.A. 90-561. A new base fuel cost recoverable under IP's
electric tariffs was established, effective on the date of the filing. UFAC
elimination prevents IP from automatically passing cost increases through to its
customers and exposes IP to the risks and opportunities of cost fluctuations and
operating efficiencies.
Under UFAC, IP was subject to annual ICC audits of its actual allowable
fuel costs. Costs could be disallowed, resulting in negotiations and/or
litigation with the ICC. In 1998, IP agreed to settlements with the ICC which
closed the audits for all previously disputed years. As a result of the
settlements, IP electric customers received refunds totaling $32 million during
the first six months of 1999. These refunds complete the process of eliminating
the UFAC at IP.
DEREGULATION RULEMAKINGS AND TARIFFS
The Illinois Public Utilities Act was significantly modified in 1997 by
P.A. 90-561, but the ICC continues to have broad powers of supervision and
regulation with respect to the rates and charges of IP, its services and
facilities, extensions or abandonment of service, classification of accounts,
valuation and depreciation of property, issuance of securities and various other
matters. Before a significant plant addition may be included in IP's rate base,
the ICC must determine that the addition is reasonable in cost, prudent and used
and useful in providing utility service to customers. IP must continue to
provide bundled retail electric service to all who choose to continue to take
service at tariff rates, and IP must provide unbundled electric distribution
services to all eligible customers as defined by P.A. 90-561 at rates to be
determined by the ICC. During 1998, pursuant to authority granted in P.A.
90-561, the ICC issued rules associated with (i) transactions between the
utility and its affiliates; (ii) service reliability; (iii) environmental
disclosure; and (iv) alternative retail electric supplier certification criteria
and procedures. During 1999, it is expected that the ICC will rule on (i) the
rates and terms associated with the provision of delivery services for
commercial and industrial customers; (ii) establishing the neutral fact finder
price utilized in (a) calculating competitive transition costs and (b) IP's
power purchase tariff; (iii) the competitive transition cost methodology; and
(iv) guidelines regarding standards of conduct and functional separation. A
proceeding will be opened in September 1999 to address the issue of unbundling
billing, metering, and customer handling with a final decision to be rendered
38
prior to the third quarter of the year 2000. The final order on delivery service
tariffs is expected in August of 1999.
Under the new rules, Illinois utilities must keep records identifying
service interruptions experienced by each customer. Illinois utilities must also
file an annual report detailing the reliability of its service and explaining
its plans for reliability improvements. In addition, each utility must also
report the number and causes of service interruptions that were due to causes
within the utility's control. Outage targets were established for service to
individual customers and for system performance.
The extent to which revenues are affected by P.A. 90-561 will depend on
a number of factors including future market prices for wholesale and retail
energy, load growth and demand levels in the current IP service territory, and
success in marketing to customers outside IP's existing service territory. The
impact on net income will depend on, among other things, the amount of revenues
earned and the cost of doing business.
OPEN TRANSMISSION ACCESS AND COMPETITION
In January 1998, IP, in conjunction with eight other transmission-owning
entities, filed with the FERC for all approvals necessary to create and
implement the Midwest Independent Transmission System Operator, Inc. (MISO). On
September 16, 1998, the FERC issued an order authorizing the creation of a MISO.
The MISO has elected a seven-person independent board of directors. The goals of
this joint undertaking are to: 1) put in place a tariff allowing easy and
nondiscriminatory access to transmission facilities in a multi-state region, 2)
enhance regional reliability and 3) establish an entity that operates
independently of any transmission owner(s) or other market participants, thus
furthering competition in the wholesale generation market consistent with the
objectives of the FERC's Order No. 888. Since January 1998, four other
transmission-owning entities joined the MISO. Participation in an ISO by
utilities serving retail customers in Illinois was one of the requirements
included in P.A. 90-561, enacted in 1997. The MISO has a stated goal to be fully
operational by January 1, 2001.
See "Open Access and Competition" under "Regulatory and Legal Matters"
of the "Notes to Consolidated Financial Statements" on page 14 of this report
for additional information.
YEAR 2000 DATA PROCESSING
Passing from 1999 into 2000 creates a risk that computer-dependent
processes will fail because the date will be read as "1900." Illinova began its
Year 2000 (Y2K) project in November 1996. The project scope encompasses all of
Illinova's subsidiaries including IP, IGC, and IEP. A central organization
provides overall project guidance and coordination among the business groups,
meeting monthly to share information, conducting internal project reviews, and
producing monthly status reports to all levels of Illinova management.
Bi-monthly Year 2000 readiness reports are provided to the Illinova Board of
Directors.
The Year 2000 project involves evaluation and testing of software,
hardware, and business processes, including mainframe and personal computer
software and hardware, process computer software and hardware, end user
computing, telecommunications and networks, vendor purchased packages, embedded
systems, facility control systems, vendors/supplies, financial institutions, and
electronic interfaces with outside agencies.
The project is divided into two focus areas. The first focus area deals
with information technology (IT) software, hardware, and infrastructure. This
39
includes such items as the billing system, payroll system, accounts payable
system, personal computers, telecommunications, networks, and mainframes.
The second focus area targets non-IT operational systems and processes
which encompass most of the systems and business processes actually used to
deliver electricity and gas to customers. This is also the area where embedded
systems and microprocessors are found. Included in this focus area are power
plant facilities, transportation systems such as railways and barges, fuel
suppliers, electric and gas transmission and distribution facilities,
substations and transformers, meters, building systems such as HVAC and
security, and financial institutions.
The overall status of Illinova's Y2K project is illustrated in the table
below.
Illinova Status
July 1999
IT Non-IT
% Completion * % Completion *
Complete Date Complete Date
Awareness 100 02/01/97 a 100 05/31/98 a
Inventory 100 01/20/97 a 100 02/28/99 a
Assessment 100 05/09/97 a 100 02/28/99 a
Process Analysis 100 11/30/98 a 100 03/31/99 a
Implementation -
(Mission Critical) 100 06/30/99 a 97 09/30/99 e
Implementation -
(Important to
Operations) 100 05/31/99 a 93 10/31/99 e
Contingency Planning 100 07/31/99 a 93 09/30/99 e
*"a" = Actual Completion Date, "e" = Estimated Completion Date
IP has completed its awareness, inventory, assessment, and process
analysis phases. The table below provides further details differentiating
between IT and non-IT for IP alone.
IP Status
July 1999
IT Non-IT
% Completion * % Completion *
Complete Date Complete Date
Awareness 100 02/01/97 a 100 04/29/98 a
Inventory 100 01/20/97 a 100 07/31/98 a
Assessment 100 05/09/97 a 100 09/30/98 a
Process Analysis 100 11/30/98 a 100 02/28/99 a
Implementation -
(Mission Critical) 100 06/30/99 a 100 07/19/99 a
40
Implementation -
(Important to
Operations) 100 05/31/99 a 98 10/31/99 e**
Contingency Planning 100 07/31/99 a 100 06/30/99 a
*"a" = Actual Completion Date, "e" = Estimated Completion Date
** IP important to operations items were Year 2000 ready on July 30, 1999, with
the exception of one process computer system at Clinton and one process computer
system in our fossil power system.
IT systems (such as billing, payroll, etc.) and infrastructure were
completed June 30, 1999. The customer billing system, materials management
system, accounts payable system, power plant maintenance system, payroll system,
and shareholder system have been remediated and are now year 2000 ready. Year
2000 work has not caused any IT projects to be delayed, and thus no maintenance
costs have been deferred.
The United States Department of Energy (DOE) has charged the North
American Electric Reliability Council (NERC) with taking the lead in
facilitating North American-wide coordination of electric utilities' Year 2000
efforts. The collective efforts of the industry will minimize risks imposed by
Year 2000 to the reliable supply of electricity. NERC has in turn assigned the
regional reliability councils the responsibility of assessing their respective
networks to ensure reliable electric supply. IP is taking an active role within
its regional council (MAIN) in assessment and renovation of the grid and in
developing contingency plans to minimize any unexpected Year 2000 grid problems.
Illinois Power is also participating in NERC drills. IP's power plants and
transmission and distribution mission critical items are believed to be fully
Year 2000 ready.
The total cost for achieving Year 2000 readiness for Illinova is
estimated to be approximately $19.6 million through 1999. Through the end of
July 1999, $14.8 million, or 76% of the total $19.6 million had been spent.
Contingency plans focus on Illinova's "mission critical" business
processes. Contingency plans were developed in accordance with industry
guidelines, such as NERC and the General Accounting Office, and involved senior
management review and approval. These plans address business continuity and the
ability to deliver essential products and services to customers in the event of
unexpected Year 2000 problems. Drills will be conducted to test these
contingency plans.
Illinova has assessed potential worst-case scenarios and determined its
most reasonably likely worst-case scenario to be a severe winter storm coupled
with a loss of major telecommunications carrier causing disruptions in
dispatching generation, dispatching emergency response crews, and communicating
with financial institutions.
Contingency plans address the above scenarios as well as other potential
scenarios that could affect the ability to serve our customers and maintain the
financial viability of Illinova.
ENVIRONMENTAL MATTERS
GAS MANUFACTURING SITES
See "Manufactured Gas Plant Sites" under "Regulatory and Legal Matters"
of the "Notes to Consolidated Financial Statements" on page 16 of this report.
41
NITROGEN OXIDE
On October 27, 1998, the U.S. EPA finalized air pollution rules that
will require substantial reductions of NOx emissions in Illinois and 21 other
states. This rule will require the installation of NOx controls by May 2003,
with each Illinois utility's exact reduction requirement to be specified in
1999. Preliminary estimates of the capital expenditures needed in 2000 through
2003 to comply with these new NOx limitations range from $90 million to $140
million. NOx estimates are included in forecasted capital expenditures. The
legality of this proposal, along with its technical feasibility, is being
successfully challenged by a number of states, utility groups, and utilities,
including IP.
EMISSION ALLOWANCE EXCHANGES
The value of emission allowances expected to be given up in future
periods as the result of exchange agreements was recorded in the third quarter
1998 at the current market price and a liability of $9.8 million was recognized.
This obligation will be adjusted as price fluctuates until the allowances are
surrendered. The market value and recorded liability of the allowances at June
30, 1999, was $19.9 million.
GLOBAL WARMING
On December 11, 1997, international negotiations to reduce greenhouse
gas emissions concluded with the adoption of the Kyoto Protocol. This Protocol
requires the United States to reduce greenhouse gas emissions to 7% below 1999
levels during the years 2008 through 2012 and to make further reductions
thereafter. Before it can take effect, this protocol must be ratified by the
United States Senate. However, United States Senate Resolution 98 which passed
95-0 in July 1997, says the Senate would not ratify an agreement that fails to
include commitments for all countries or would damage the economy of the United
States. Since the Protocol does not contain these key elements, ratification
would be a major political issue. It is anticipated that a ratification vote
will be delayed until the current administration feels the Protocol could pass,
or an attractive alternative to the Kyoto Protocol is found.
IP will face major changes in the way it generates electricity if the
Kyoto Protocol is ratified, or if the Protocol's reduction goals are
incorporated into other environmental regulations. IP would have to repower some
generating units and change from coal to natural gas in other units to reduce
greenhouse gas emissions. IP estimates that compliance with these proposed
regulations may require significant capital outlays and annual operating
expenses which could have a material adverse impact on Illinova and IP.
POWER SUPPLY AND RELIABILITY
Electricity was in short supply during the 1998 summer cooling season
because of an unusually high number of plant outages in the Midwest region. IP
bought generation and transmission capacity to prevent firm load curtailment and
took additional steps to avoid power outages, including upgrading transmission
lines and equipment, readying emergency procedures, and returning to service
five units that had been in cold shutdown. This resulted in a material adverse
financial impact on Illinova and IP.
The electric energy market experienced unprecedented prices for power
purchases during the last week of June 1998. IP's power purchases for 1998 were
$517 million higher than 1997 due to summer price spikes resulting in a $274
million increase in power purchased, additional purchases of $215 million to
serve increased volumes of interchange sales, and market losses of $28 million
recorded on forward power purchase and sales contracts as part of the wholesale
42
trading business. Income from interchange sales was $382 million higher than in
1997 due to increased sales volumes and higher prices.
Excluding Clinton, IP has in excess of 400 MW of additional generation
on line for the summer of 1999 as compared to 1998. This includes approximately
235 MW from five oil-fired units which were brought up from cold shutdown during
the summer of 1998 and 176 MW from four natural gas turbines that IP installed
which became operational in June 1999. Total cost for the two projects is
approximately $87 million. IP also refurbished nine gas turbines already in
service at an approximate cost of $13 million. In addition, the restructuring of
the Soyland PCA agreement freed up an additional 287 MW of capacity. Clinton
returned to full power operation on June 2, 1999, providing additional
generating capacity to serve firm load. IP expects to have sufficient generating
capacity to serve firm load during the periods of peak summer demand using
demand-side and supply-side initiatives taken in response to the 1998 regional
supply crisis. If generation is lost or demand is at unprecedented levels, firm
load could be curtailed.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Electric Operations - Electric revenues for the second quarter of 1999
decreased $27.9 million compared to the second quarter of 1998 primarily due to
the 15% residential rate decrease effective August 1, 1998, and the
reclassification of revenue-related taxes mandated by deregulation legislation.
Revenue-related taxes are now accounted for as a liability, and both revenues
and general taxes are reduced with no resultant impact on net income. The rate
decrease resulted in revenue reductions of $14.9 million in the second quarter
of 1999. The impact of the reclassification of $9.8 million in revenue-related
taxes from revenue and general taxes negatively impacted electric revenues.
Electric interchange revenues decreased $56.5 million. This decrease is
attributable to a decrease in interchange volume offset by $3.3 million of
income to reflect mark-to-market for forward contracts and options. Power
purchased decreased $182.8 million due largely to decreased interchange volume.
During the quarter, fuel for electric plants increased $6.1 million due to
increased generation. These factors combined to increase electric margin $92.3
million for the quarter.
Kilowatt hour (kwh) sales to ultimate consumers decreased 0.2% for the
quarter due to decreases of 5.3% and 0.3% in the residential and the commercial
markets, respectively, offset by an increase of 2.4% in the industrial market.
Cooling degree days decreased approximately 36% from 1998 which contributed to
the decrease in sales to the temperature-sensitive markets.
The equivalent availability of Clinton was 38.9% and 0.0% for the three
months ended June 30, 1999 and 1998, respectively, due to the return of Clinton
to full power on June 2, 1999. Clinton was previously unavailable due to an
outage which began September 6, 1996. The equivalent availability for IP's
coal-fired plants was 85.3% and 74.4% for the three months ended June 30, 1999
and 1998, respectively.
Gas Operations - For the quarter, gas margin increased $0.9 million.
Gas revenues decreased $4.5 million while therm sales (excluding transport) were
constant, caused by lower gas prices. Gas purchased costs decreased $5.4 million
due to the lower gas prices and fewer therms purchased.
43
Operation and Maintenance Expenses - The current quarter decrease of
$15.8 million is primarily due to PECO's assumption of Clinton's direct
operating and capital expenses offset by Clinton management fees paid to PECO.
For more information, see "PECO Agreement" of the "Management's Discussion and
Analysis" on pages 36-37 of this report.
Depreciation and amortization - The increase in depreciation and
amortization for the second quarter of 1999 compared to 1998 was $0.4 million.
Due to the Clinton impairment, nuclear depreciation decreased approximately
$23.7 million but was offset by approximately $18 million for the depreciation
of the adjustment to fair value for the fossil generation assets. In addition,
approximately $5 million in expense related to the amortization of the
transition period cost recovery asset created as part of the 1998 Clinton
impairment was recognized in the second quarter.
Diversified enterprises - Diversified enterprise revenues increased
$21.0 million for the second quarter of 1999, which was offset by an increase in
diversified enterprise expenses of $29.5 million. A majority of the net increase
in diversified enterprise expense over diversified enterprise revenue is due to
merger related transactions.
Miscellaneous - net - Of the current quarter increase of $3.4 million,
$1.6 million of the increase is attributed to the adjustment in the net present
value of the decommissioning regulatory asset. Revenues from non-utility
operations also increased in the second quarter of 1999.
Interest expense - The increase in interest expense of $10.9 million in
the second quarter of 1999 is primarily the result of interest on increased
long-term debt of $3.9 million and the adjustment in the net present value of
the decommissioning liability of $7.3 million.
Earnings (loss) per Common Share - The earnings (loss) per common share
for Illinova during the second quarter of 1999 and 1998 resulted from the
interaction of all the factors discussed herein as well as fewer shares of
common stock outstanding.
44
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Electric Operations - Electric revenues for the first six months of 1999
decreased $49.3 million as compared to the first six months of 1998 primarily
due to the 15% residential rate decrease effective August 1, 1998, and the
reclassification of revenue-related taxes mandated by deregulation legislation.
Revenue-related taxes are now accounted for as a liability, and both revenues
and general taxes are reduced. The rate decrease resulted in revenue reductions
of $32.3 million in the first six months of 1999. The impact of the
reclassification of $21.1 million in revenue-related taxes from revenue and
general taxes negatively impacted revenues. Electric interchange revenues
decreased $58.8 million. This decrease is attributable to a decrease in
interchange volume offset by $60.1 million revenue recognition resulting from
the restructuring of a Soyland Power Cooperative power supply contract. Power
purchased decreased $228.2 million due largely to decreased interchange volume.
During the first six months, fuel for electric plants increased $1.8 million due
to increased generation. These factors combined to increase electric margin
$118.3 million.
Kilowatt hour (kwh) sales to ultimate consumers increased 3.0% for the
first six months primarily due to increases of 3.3% and 4.4% in the residential
and the commercial markets, respectively. Cooling degree days decreased
approximately 36% from 1998 which contributed to the decrease in
temperature-sensitive markets, which was offset by an increase of 11% in heating
degree days.
The equivalent availability of Clinton was 19.5% and 0.0% for the six
months ended June 30, 1999 and 1998, respectively, due to the return of Clinton
to full power on June 2, 1999. Clinton was previously unavailable due to an
outage which began September 6, 1996. The equivalent availability for IP's
coal-fired plants was 83.1% and 76.9% for the six months ended June 30, 1999 and
1998, respectively.
Gas Operations - For the six months ended June 30, 1999, gas margin
increased $0.8 million. Gas revenues increased $2.0 million, while therm sales
(excluding transport) were constant, caused by colder winter weather, offset by
lower gas prices. Gas purchased costs increased $1.1 million due to higher
consumption, offset by lower gas prices and fewer therms purchased.
Operation and Maintenance Expenses - Of the increase for the first six
months of 1999 of $27.1 million, $29 million occurred during the first quarter
of 1999 due to higher operating and maintenance expenses associated with the
Clinton outage. This $29 million includes $12.4 million of costs which would
have been considered capital additions had Clinton not been impaired. During the
second quarter PECO assumed Clinton's direct operating and capital expenses,
which were offset by Clinton management fees paid to PECO. For more information,
see "PECO Agreement" of the "Management's Discussion and Analysis" on pages 36
and 37 of this report.
Depreciation and Amortization - The decrease in depreciation and
amortization for the first six months of 1999 as compared to 1998 was $4.2
million. Due to the Clinton impairment, nuclear depreciation decreased
approximately $47 million, but was offset by approximately $36 million for the
depreciation of the adjustment to fair value for the fossil generation assets.
In addition, approximately $5 million in expense related to the amortization of
the transition period cost recovery asset created as part of the Clinton
impairment was recognized in the second quarter.
Diversified enterprises - Diversified enterprise revenues increased
$11.2 million for the first six months of 1999, which was offset by an increase
in diversified enterprise expense of $16.3 million. The net increase of
45
diversified enterprise expense over diversified enterprise revenues is due
primarily to merger related transaction costs.
Miscellaneous - net - Of the first six months increase of $15.8 million,
$6.5 million is miscellaneous credits of IGC. Interest income increased $3.0
million primarily due to the investment of the proceeds of the transitional
funding trust notes issued in December 1998 and the adjustment in the net
present value of the decommissioning regulatory asset. A $2.1 million increase
in miscellaneous non-operating income is attributable to the recognition of
nontaxable income related to the decommissioning regulatory asset. Revenues from
non-utility operations also increased during the first six months of 1999.
Interest expense - The increase in interest expense of $17.4 million in
the first six months of 1999 is the result of interest on increased long-term
debt of $5.6 million, the adjustment in the net present value of the
decommissioning liability of $14 million, and increased amortization of debt
expense and loss on reacquired debt of $2.6 million, offset by decreased
interest on short term debt of $4.8 million.
Earnings per Common Stock - The earnings per common share for Illinova
during the first six months of 1999 and 1998 resulted from the interaction of
all the factors discussed herein as well as fewer shares of common stock
outstanding.
RESULTS OF OPERATIONS - ILLINOVA SEGMENTS OF BUSINESS
THREE MONTHS ENDED JUNE 30, 1999
Customer Service
For the three months ended June 30, 1999, both the contribution margin and cash
flow measures were lower than for the corresponding period in 1998. Contribution
margin is lower for the quarter by $21 million, primarily due to decreased
electric revenues as discussed below. Other factors contributing to the decrease
are amortization of the regulatory asset, slightly higher O&M expenses; and
higher internal charges paid to the Wholesale Energy Group and Nuclear Group for
the purchase of electricity. Partially offsetting these items were slightly
lower gas purchases than in 1998.
Cash flow also reflected a decrease of about $36 million from 1998, primarily
due to lower net income.
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 and
the Nuclear group; electricity was provided to the Customer Service Business
Group at a fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the three months
ended June 30, 1999 decreased 10.0% over the corresponding period in 1998,
primarily due to the 15% residential decrease mandated by P.A. 90-561, which
became effective July 15, 1998, voluntarily advanced by IP from the statutory
effective date of August 1 and a slight decrease in kwh sales to customers.
Additionally, operating costs were higher during the three months ended June 30,
1999 compared to the same period in 1998.
46
Transmission, Distribution and Sale of Natural Gas
- --------------------------------------------------
Revenues are derived through regulated tariffs. During the three months ended
June 30, 1999, revenues from gas sales and transportation were down 9.1%, while
therms sold and transported were up slightly (0.9%) over the second quarter of
1998. The decrease in revenues was due to lower gas prices in 1999, which
resulted in lower PGA revenues. The margin on gas sales and transportation
increased 3.3% during the period due to a prior-period PGA adjustment and the
slight increase in therm sales.
Wholesale Energy
Contribution margin during the three months ended June 30, 1999 is about $41
million higher than during the corresponding period in 1998, primarily due to
the significantly higher purchased power costs in 1998, when the Company
purchased high-priced electricity to meet system requirements and off-system
sale obligations. Partially offsetting this major variance in power purchases
are lower revenues, higher depreciation due to the write-up to market value of
the fossil assets, higher O&M costs and higher internal charges recorded for
power purchased from the nuclear facility.
Cash flow decreased about $129 million, primarily due to higher purchased power
costs in 1998, allocated to the Nuclear Group. Higher construction expenditures
in 1999 to reflect the installation of gas turbines at the Tilton Energy Center
were also a significant factor in this decrease.
Wholesale Energy provided power to the Customer Service business group at 2.9
cents per kwh during the three months ended June 30, 1999 compared to 2.5 cents
per kwh during the corresponding period in 1998.
Nuclear
Both the contribution margin and cash flow measures are higher in 1999 compared
to 1998. Contribution margin is higher than 1998 due to higher intersegment
revenues in 1999 related to the restart of the plant in 1999, coupled with lower
O&M and depreciation expenses in 1999.
Cash flow was positively impacted by net income.
Illinova Energy Partners, Inc.
For the three months ended June 30, 1999, the contribution margin is comparable
to the same period in 1998. Cash flow decreased $4.3 million, primarily due to a
negative change in working capital.
Illinova Generating Compan
For the three months ended June 30, 1999, the contribution margin variance from
1998 was less than $1 million. Cash flow increased about $10 million, primarily
due to a positive change in working capital.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure.
See "Illinova Segments of Business" in the footnotes to the financial statements
on pages 19-25 for additional information.
47
RESULTS OF OPERATIONS - ILLINOIS POWER SEGMENTS OF BUSINESS
THREE MONTHS ENDED JUNE 30, 1999
Customer Service
For the three months ended June 30, 1999, both the contribution margin and cash
flow measures were lower than for the corresponding period in 1998. Contribution
margin is lower for the quarter by $21 million, primarily due to decreased
electric revenues as discussed below. Other factors contributing to the decrease
are amortization of the regulatory asset, slightly higher O&M expenses; and
higher internal charges paid to the Wholesale Energy Group and the Nuclear Group
for the purchase of electricity. Partially offsetting these items were slightly
lower gas purchases than in 1998.
Cash flow also reflected a decrease of about $36 million from 1998, primarily
due to lower net income.
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 and
the Nuclear group; electricity was provided to the Customer Service Business
Group at a fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the three months
ended June 30, 1999 decreased 10.0% over the corresponding period in 1998,
primarily due to the 15% residential decrease mandated by P.A. 90-561, which
became effective July 15, 1998, voluntarily advanced by IP from the statutory
effective date of August 1 and a slight decrease in kwh sales to customers.
Additionally, operating costs were higher during the three months ended June 30,
1999 compared to the same period in 1998.
Transmission, Distribution and Sale of Natural Gas
- --------------------------------------------------
Revenues are derived through regulated tariffs. During the three months ended
June 30, 1999, revenues from gas sales and transportation were down 9.1%, while
therms sold and transported were up slightly (0.9%) over the second quarter of
1998. The decrease in revenues was due to lower gas prices in 1999, which
resulted in lower PGA revenues. The margin on gas sales and transportation
increased 3.3% during the period due to a prior-period PGA adjustment and the
slight increase in therm sales.
Wholesale Energy
Contribution margin during the three months ended June 30, 1999 is about $41
million higher than during the corresponding period in 1998, primarily due to
the significantly higher purchased power costs in 1998, when the Company
purchased extremely high-priced electricity to meet system requirements.
Partially offsetting this major variance in power purchases are lower revenues,
higher depreciation due to the write-up to market value of the fossil assets,
higher O&M costs and higher internal charges recorded for power purchased from
the nuclear facility.
Cash flow decreased about $129 million, primarily due to higher purchased power
costs in 1998 allocated to the Nuclear Group. Higher construction expenditures
in 1999 to reflect the installation of gas turbines at the Tilton Energy Center
were also a significant factor in this decrease.
Wholesale Energy provided power to the Customer Service business group at 2.9
cents per kwh during the three months ended June 30, 1999 compared to 2.5 cents
per kwh during the corresponding period in 1998.
48
Nuclear
Both the contribution margin and cash flow measures are higher in 1999 compared
to 1998. Contribution margin is higher than 1998 due to higher intersegment
revenues in 1999 related to the restart of the plant in 1999, coupled with lower
O&M and depreciation expenses in 1999.
Cash flow was positively affected by net income.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and other corporate functions. These segments did not
individually meet the minimum threshold requirements for separate disclosure.
See "Illinois Power Segments of Business" in the footnotes to the financial
statements on pages 25-31 for additional information.
RESULTS OF OPERATIONS - ILLINOVA SEGMENTS OF BUSINESS
SIX MONTHS ENDED JUNE 30, 1999
Customer Service
For the six months ended June 30, 1999, both the contribution margin and cash
flow measures were lower than for the corresponding period in 1998. Contribution
margin is lower by $46 million, primarily due to decreased electric revenues as
discussed below; higher O&M expenses; higher internal charges paid to the
Wholesale Energy Group and the Nuclear Group due to higher usage and higher
internal pricing and higher depreciation expenses, including regulatory asset
amortization.
Cash flow is lower by $67 million, due to decreased net income, partially offset
by lower construction expenditures.
Transmission, Distribution and Sale of Electric Energy
- ------------------------------------------------------
The Customer Service business group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy business group and
the Nuclear group; electricity was provided to the Customer Service Business
Group at a fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the six months ended
June 30, 1999 decreased 8.5% over the corresponding period in 1998 due to the
15% residential decrease mandated by P.A. 90-561, which became effective July
15, 1998, voluntarily advanced by IP from the statutory effective date of August
1, partially offset by increased kwh sales to customers. Additionally, operating
costs were higher during the six months ended June 30, 1999 compared to the same
period in 1998.
Transmission, Distribution and Sale of Natural Gas
- --------------------------------------------------
Revenues are derived through regulated tariffs. During the six months ended June
30, 1999, revenues from gas sales and transportation were up 1.1%, while therms
sold and transported were up 5.6%. The increase in therm sales was caused by a
return to normal weather after the milder-than-usual weather experienced in
1998. The margin on gas sales and transportation increased 1.0% during the
period due to increases in both therms sold and therms transported.
Wholesale Energy
Contribution margin during the six months ended June 30, 1999 is $59 million
higher than during the corresponding period in 1998, due to significantly fewer
49
power purchases in 1999 than in 1998 when the Company purchased extremely
high-priced electricity to meet system requirements. Partially offsetting this
major variance in power purchases are higher internal charges in 1999 for
purchase of Clinton-generated electricity, higher depreciation to reflect the
write-up of fossil assets in December 1998, higher O&M expenses and lower
interchange sales in 1999.
Cash flow is significantly less than 1998 ($260 million) primarily due to higher
power purchase costs in 1998, allocated to the Nuclear Group, higher
construction expenditures and the receipt of prepaid base capacity charges from
Soyland in 1998.
Wholesale Energy provided power to the Customer Service business group at 2.9
cents per kwh during the six months ended June 30, 1999 compared to 2.5 cents
per kwh during the corresponding period in 1998.
Nuclear
Contribution margin is higher than 1998 due to increased intersegment revenues
in 1999 related to the restart of the plant in 1999, lower depreciation in 1999
as a result of the write-off of nuclear facilities, and lower cost power
purchases to replace Clinton generation.
Cash flow was positively impacted by net income.
Illinova Energy Partners, Inc.
For the six months ended June 30, 1999, the contribution margin is comparable to
the same period in 1998. Cash flow increased about $8 million, primarily related
to changes in working capital.
Illinova Generating Company
For the six months ended June 30, 1999, the contribution margin variance from
1998 was less than $1 million. Cash flow increased about $18 million, primarily
due to changes in working capital.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure.
See "Illinova Segments of Business" in the footnotes to the financial statements
on pages 19-25 for additional information.
50
RESULTS OF OPERATIONS - ILLINOIS POWER SEGMENTS OF BUSINESS
SIX MONTHS ENDED JUNE 30, 1999
Customer Service
For the six months ended June 30, 1999, both the contribution margin and cash
flow measures were lower than for the corresponding period in 1998. Contribution
margin is lower by $46 million, primarily due to decreased electric revenues as
discussed below; higher O&M expenses; higher internal charges paid to the
Wholesale Energy Group and the Nuclear Group due to higher usage and higher
internal pricing and higher depreciation expenses, including regulatory asset
amortization.
Cash flow is lower by $67 million, due to decreased net income and reduced
changes in working capital, partially offset by lower construction expenditures.
Transmission, Distribution and Sale of Electric Energy
- ------------------------------------------------------
The Customer Service business group derives its revenues through regulated
tariffs. Its source of electricity is the Wholesale Energy business group and
the Nuclear group; electricity was provided to the Customer Service Business
Group at a fixed 2.9 cents per kwh in 1999 and 2.5 cents per kwh in 1998.
Retail electric revenues, excluding interchange sales, for the six months ended
June 30, 1999 decreased 8.5% over the corresponding period in 1998 due to the
15% residential decrease mandated by P.A. 90-561, which became effective July
15, 1998, voluntarily advanced by IP from the statutory effective date of August
1, partially offset by increased kwh sales to customers. Additionally, operating
costs were higher during the six months ended June 30, 1999 compared to the same
period in 1998.
Transmission, Distribution and Sale of Natural Gas
- --------------------------------------------------
Revenues are derived through regulated tariffs. During the six months ended June
30, 1999, revenues from gas sales and transportation were up 1.1%, while therms
sold and transported were up 5.6%. The increase in therm sales was caused by a
return to normal weather after the milder-than-usual weather experienced in
1998. The margin on gas sales and transportation increased 1.0% during the
period due to a prior year adjustment to gas costs and by increases in both
therms sold and therms transported.
Wholesale Energy
Contribution margin during the six months ended June 30, 1999 is $59 million
higher than during the corresponding period in 1998, due to significantly fewer
power purchases in 1999 than in 1998 when the Company purchased high-priced
electricity to meet system requirements and off-system sale obligations.
Partially offsetting this major variance in power purchases are higher internal
charges in 1999 for purchase of Clinton-generated electricity, higher
depreciation to reflect the write-up of fossil assets in December 1998, higher
O&M expenses and lower interchange sales in 1999.
Cash flow is significantly less than 1998 ($260 million) primarily due to higher
purchase power costs in 1998 allocated to the Nuclear Group, higher construction
expenditures and the receipt of prepaid base capacity charges from Soyland in
1998.
Wholesale Energy provided power to the Customer Service business group at 2.9
cents per kwh during the six months ended June 30, 1999 compared to 2.5 cents
per kwh during the corresponding period in 1998.
Nuclear
Contribution margin is higher than 1998 due to increased intersegment revenues
in 1999 related to restart of the plant in 1999, lower depreciation in 1999 as a
51
result of the write-off of nuclear facilities, and lower cost power purchases to
replace Clinton generation.
Cash flow was positively impacted by net income.
Other
Included in this category are the Financial Business Group, the Support Services
Business Group, and Corporate. These segments did not individually meet the
minimum threshold requirements for separate disclosure.
See "Illinois Power Segments of Business" in the footnotes to the financial
statements on pages 25-31 for additional information.
52
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
RISK MANAGEMENT
Illinova is exposed to both trading and non-trading market risks. The
non-trading market risks to which Illinova is exposed include interest rate
risk, equity price risk, foreign currency risks, and commodity price risks. The
market risk due to trading consists primarily of commodity price risk.
Illinova's risk management policy allows the use of financial derivative
products, like futures, swaps, and certain types of options to manage its
positions. Illinova uses various approaches to measure and monitor market risk,
which include Value-at-Risk (VaR) and position sensitivity measures to market
factors. VaR is the maximum potential loss that may be incurred on a portfolio
due to adverse movements in market factors, given a confidence level and
specified holding period. VaR does not represent the expected nor the maximum
loss that may actually occur since gains and losses may differ from those
estimated, based on actual fluctuations in market factors and changes in the
composition of the portfolio during a given evaluation period.
INTEREST RATE RISK
Illinova is exposed to interest rate risk from its financing activities,
through issuance of fixed or variable-rate debt and acquisition of bank notes.
IP is likewise exposed to interest rate risk resulting from its issuance of
fixed or variable-rate debt, commercial paper, and bank notes. Interest rate
exposure is managed in accordance with policy by limiting the variable-rate
exposure to a certain percentage of capitalization. Interest rate derivative
instruments are also used when deemed appropriate to change the composition of
variable to fixed-rate component. In addition, the sensitivity of the portfolio
to changes in market factors like interest rate levels and volatility are also
monitored. At June 30, 1999, there was no interest rate derivative instrument in
use.
Interest rate VaR is calculated based on a variance-covariance approach
using the RiskMetrics FourFifteen(TM) model. A 95 percent confidence level and a
one-day holding period is currently used. The interest rate risk as measured by
VaR at June 30, 1999, March 31, 1999, and December 31, 1998, is given below.
- --------------------------------------------------------------------------------
(Millions of dollars) June 30, 1999 March 31,1999 December 31,1998
- --------------------------------------------------------------------------------
VaR VaR VaR
Illinova, including IP debt $7.9 $9.2 $14.9
IP debt only $7.3 $8.7 $14.2
- --------------------------------------------------------------------------------
Contributing factors to the decrease in VaR were the retirement of high
coupon debt with maturities extending past the year 2020 and an increase in
commercial paper levels from that at year end. At December 31, 1998, VaR was
unusually high due to the issuance of securitized debt with the removal of
called bonds not occurring until after year end. The securitized debt has
shorter maturities than the called bonds, which further contributed to the
decrease in VaR.
53
COMMODITY PRICE RISK
Trading Positions
Illinova is exposed to commodity price risk through IEP's power trading
activities and IP's trading and non-trading operations. IEP uses a
variance-covariance approach to calculate VaR, similar to the RiskMetrics(TM)
model, to monitor and control its market risk positions. IP measures, monitors,
and manages its commodity price risk using a proprietary VaR model employing a
Monte Carlo simulation technique. IP and IEP both use a 95 percent confidence
level and a five-day holding period to monitor their daily trading market risk
positions. During the first quarter of 1999, the Board approved a change in the
risk management policy, to use a five day holding period instead of a four-day
period. IP's and IEP's trading VaR at June 30, 1999, March 31, 1999, and
December 31, 1998, as restated using a five day holding period follow:
- --------------------------------------------------------------------------------
June 30, 1999 March 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
(Millions of Dollars) VaR VaR VaR
IP $0.3 $0.6 $1.4
IEP 0.1 0.1 0.1
- --------------------------------------------------------------------------------
IP and IEP both use stress and scenario testing to control "event risk",
(i.e., the risk that certain stressful market events will occur and result in a
loss). In addition, option positions are monitored using sensitivity limits such
as delta (sensitivity to price change), gamma (sensitivity of delta to price
change), and vega (sensitivity to change in implied volatility).
Non-Trading Positions
IP is also exposed to non-trading commodity price risk through its
energy generation business. IP uses physical contracts and is authorized to use
financial derivative instruments to manage its native load requirements. To
measure, monitor, and control the commodity price risk of its non-trading
portfolio, IP uses the same proprietary Monte Carlo model used in the trading
portfolio.
The Monte-Carlo simulation process used in this VaR model generates the
power price, fuel price and load series that are used to value the generation
assets, fuel assets, and contracts entered into by the firm (e.g., tolling,
forward, call and put options). A sophisticated process is used to generate
daily and hourly prices based on historical price series and volatility, wherein
"price spikes," a recent phenomenon in the electricity markets, are modeled into
the price series. The VaR calculated by this model represents the maximum
reduction in operating margin given a 95 percent confidence level. This means
that there is only a 5 percent probability that the reduction in operating
margin from the expected margin will be greater than what is provided by the VaR
number. In this model, a sufficient number of scenarios are generated, whereby
each scenario simulates a one-year margin (one-year holding period). The
expected margin is obtained by averaging the margins calculated from all the
simulation scenarios. The VaR is obtained by sorting the simulation results from
the lowest to highest value and taking the 95th percentile worst case value.
Since the new VaR methodology was implemented at the beginning of March
1999, there is no comparable VaR number at December 31, 1998. The VaR for the
non-trading portfolio at June 30, 1999 and March 31, 1999, using a five-day
holding period is $4.9 million and $11.6 million, respectively.
The overall IP electricity portfolio is also controlled using quarterly
expected margin reduction limits. In this process, the difference between the
current expected margin and last quarter's expected margin is monitored against
54
the quarterly limits. To control "event risk," IP measures the "Stress-VaR,"
i.e., the VaR calculated using assumptions similar to the events that led to the
electricity price spikes in June 1998. The "Stress-VaR" is monitored against
stress limits that were approved by the Board of Directors.
FOREIGN OPERATIONS RISK
Illinova's foreign operations risk is its inherent risk of loss due to
the potential volatility of emerging countries and fluctuations in foreign
currency exchange rates in relation to the U.S. dollar. At June 30, 1999, IGC
had invested $78 million in several international operations, many of which are
joint ventures. Primarily, these investments are with affiliates owning
energy-related production, generation, and transmission facilities.
IGC is exposed to foreign currency risk, sovereign risk, and other
foreign operations risks, primarily through investments in affiliates of $48
million in Asia and $127 million in South and Central America. To mitigate risks
associated with foreign currency fluctuations, the majority of contracts entered
into by IGC or its affiliates are denominated in or indexed to the U.S. dollar.
OTHER MARKET RISK
Illinova is exposed to equity price risk primarily through IP. IP
maintains trust funds, as required by the NRC, to fund certain costs of nuclear
decommissioning. As of June 30, 1999, these funds were invested in domestic and
international equity securities, fixed income securities, and cash and cash
equivalents. By maintaining a portfolio that includes equity investments, IP is
maximizing the return to be used to fund nuclear decommissioning, which in the
long term will correlate better with inflationary increases in decommissioning
costs. The equity securities included in the Corporation's portfolio are exposed
to price fluctuations in equity markets as a result of fluctuations in interest
rates. IP actively monitors its portfolio by benchmarking the performance of its
investments against equity and fixed-income indexes. It maintains and
periodically reviews established target allocations of the trust assets approved
in the investment policy statement. VaR at June 30, 1999, and March 31, 1999,
calculated based on a 95 percent confidence level and a one day holding period
follows:
- --------------------------------------------------------------------------------
June 30, 1999 March 31, 1999
- --------------------------------------------------------------------------------
(Millions of dollars) VaR VaR
IP $1.4 $1.4
- --------------------------------------------------------------------------------
55
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed with this 10-Q are listed on the Exhibit Index.
(b) Reports on Form 8-K since March 31, 1999:
Report filed on Form 8-K on April 19, 1999
Item 5, Other Events: Press Release: Illinova
Releases 1999 first quarter earnings,
Announces expected sale of Clinton to
AmerGen.
Item 7, Exhibits: Illinova Consolidated
Income Statements.
Report filed on Form 8-K on June 14, 1999
Item 5: Illinova announces merger
agreement with Dynegy, Inc.
Report filed on Form 8-K on June 17, 1999
Item 5, Other Events: Merger agreement
update, Clinton Power Station update,
fossil generating subsidiary update.
Item 7, Exhibits: Illinova statement
regarding computation of ratios.
Report filed on Form 8-K on July 12, 1999
Item 5, Other Events: Press release: IP/
AmerGen sign Definitive Agreement for
Sale of Clinton. ICC approval of fossil
generating subsidiary.
Report filed on Form 8-K on July 16, 1999
Item 5, Other Events: Press release:
Illinova Releases 1999 second quarter
Earnings.
Item 7, Exhibits: Illinova Consolidated
Income Statements.
56
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOVA CORPORATION
(Registrant)
/s/Larry F. Altenbaumer
---------------------------
Larry F. Altenbaumer
Senior Vice President,
Chief Financial Officer,
Treasurer and Controller
on behalf of
Illinova Corporation
Date: August 16, 1999
57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ILLINOIS POWER COMPANY
(Registrant)
/s/Larry F. Altenbaumer
---------------------------
Larry F. Altenbaumer
Senior Vice President and
Chief Financial Officer
on behalf of
Illinois Power Company
Date: August 16, 1999
58
EXHIBIT INDEX
PAGE NO. WITHIN
SEQUENTIAL NUMBERING
EXHIBIT DESCRIPTION SYSTEM
4 Instruments Defining Rights of Security
Holders, Including Indentures - Illinois
Power Company
4.1 Supplemental Indenture dated as of June
15, 1999 to Mortgage and Deed of Trust
dated November 1, 1943 providing for the
issuance of $250,000,000 principal amount
of 7.5% mortgage bonds. 60 - 74
4.2 Supplemental Indenture dated as of June
15, 1999 to General Mortgage Indenture
and Deed of Trust dated as of November 1,
1992 providing for the issuance of 7.50%
New Mortgage Bonds. 75 - 84
4.3 Supplemental Indenture dated as of July
15, 1999 to Mortgage and Deed of Trust
dated November 1, 1943 providing for the
issuance of $35,615,000 principal amount
of 5.70% Series U Pollution Control Bonds. 85 - 98
4.4 Supplemental Indenture dated as of July
15, 1999 to General Mortgage Indenture and
Deed of Trust dated as of November 1, 1992
providing for the issuance of $35,615,000
principal amount of 5.70% Series U
Pollution Control Bonds. 99 - 110
4.5 Supplemental Indenture dated as of July
15, 1999 to Mortgage and Deed of Trust
dated November 1, 1943 providing for the
issuance of $84,150,000 principal amount
of 7.40% Series V Pollution Control Bonds. 111 - 124
4.6 Supplemental Indenture dated as of July
15, 1999 to General Mortgage Indenture and
Deed of Trust dated as of November 1, 1992
providing for the issuance of $84,150,000
principal amount of 7.40% series V
Pollution Control Bonds. 125 - 136
10.1 Clinton Nuclear Power Station Asset
Purchase Agreement by and between Illinois
Power Company, as Seller, and AmerGen
Energy Company, L.L.C, as Buyer, dated as
of June 30, 1999. 137 - 241
12.1 Computation of ratio of earnings to fixed
charges for Illinova Corporation. 242
12.2 Computation of ratio of earnings to fixed
charges for Illinois Power Company. 243
27 Financial Data Schedule UT
(filed herewith)
59