-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nh2Py1QGvlaWaiDdcWwWu1yHBebK2ANg/tkjVLvWUI/4s8d6Mc0HuhqSaDsMkP+U KsipWlkmUivUuPFh5AI0sw== 0000049816-97-000025.txt : 19970815 0000049816-97-000025.hdr.sgml : 19970815 ACCESSION NUMBER: 0000049816-97-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: CSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS POWER CO CENTRAL INDEX KEY: 0000049816 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370344645 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03004 FILM NUMBER: 97660916 BUSINESS ADDRESS: STREET 1: 500 S 27TH ST STREET 2: C/O HARRIS TRUST & SAVINGS BANK CITY: DECATUR STATE: IL ZIP: 62525-1805 BUSINESS PHONE: 2174246600 FORMER COMPANY: FORMER CONFORMED NAME: ILLINOIS IOWA POWER CO DATE OF NAME CHANGE: 19660822 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________to __________ Commission Registrants; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-11327 Illinova Corporation 37-1319890 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 62525 (217) 424-6600 1-3004 Illinois Power Company 37-0344645 (an Illinois Corporation) 500 S. 27th Street Decatur, IL 62525 (217) 424-6600 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) have been subject to such filing requirements for the past 90 days. Illinova Yes X No Corporation ---- ---- Illinois Power Yes X No Company ---- ---- Indicate the number of shares outstanding of each of the issuers' classes of common stock, as of the latest practicable date: Illinova Corporation Common stock, no par value, 73,721,037 shares outstanding at July 31, 1997 Illinois Power Company Common stock, no par value, 70,868,324 shares outstanding held by Illinova Corporation at July 31, 1997 ILLINOVA CORPORATION ILLINOIS POWER COMPANY This combined Form 10-Q is separately filed by Illinova Corporation and Illinois Power Company. Information contained herein relating to Illinois Power Company is filed by Illinova Corporation and separately by Illinois Power Company on its own behalf. Illinois Power Company makes no representation as to information relating to Illinova Corporation or its subsidiaries, except as it may relate to Illinois Power Company. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 INDEX PAGE NO. Part I. FINANCIAL INFORMATION Item 1. Financial Statements Illinova Corporation Consolidated Balance Sheets 3 - 4 Consolidated Statements of Income 5 Consolidated Statements of Cash Flows 6 Illinois Power Company Consolidated Balance Sheets 7 - 8 Consolidated Statements of Income 9 Consolidated Statements of Cash Flows 10 Notes to Consolidated Financial Statements of Illinova Corporation and Illinois Power Company 11 - 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for Illinova Corporation and Illinois Power Company 15 - 20 Part II. OTHER INFORMATION Item 1: Legal Proceedings 21 Item 6: Exhibits and Reports on Form 8-K 21 Signatures 22 - 23 Exhibit Index 24 PART I. FINANCIAL INFORMATION ILLINOVA CORPORATION CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) JUNE 30, DECEMBER 31, 1997 1996 ASSETS (Unaudited) (Millions of Dollars) Utility Plant, at original cost Electric (includes construction work in progress of $197.0 million and $212.5 million, respectively) $ 6,406.5 $ 6,335.4 Gas (includes construction work in progress of $15.1 million and $21.2 million, respectively) 652.8 646.1 ---------- ---------- 7,059.3 6,981.5 Less-Accumulated depreciation 2,497.0 2,419.7 ---------- ---------- 4,562.3 4,561.8 Nuclear fuel in process 5.8 5.3 Nuclear fuel under capital lease 111.9 96.4 ---------- ---------- Total utility plant 4,680.0 4,663.5 ---------- ---------- Investments and Other Assets 161.9 146.2 ---------- ---------- Current Assets Cash and cash equivalents 23.8 24.6 Accounts receivable (less allowance for doubtful accounts of $3.0 million) Service 144.5 138.8 Other 90.5 62.0 Accrued unbilled revenue 100.0 106.0 Materials and supplies, at average cost 126.6 113.2 Prepayments and other 44.8 24.1 ---------- ---------- Total current assets 530.2 468.7 ---------- ---------- Deferred Charges Deferred Clinton costs 102.1 103.9 Recoverable income taxes 106.5 101.3 Other 241.9 229.2 ---------- ---------- Total deferred charges 450.5 434.4 ---------- ---------- $ 5,822.6 $ 5,712.8 ========== ==========
ILLINOVA CORPORATION CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) JUNE 30, DECEMBER 31, 1997 1996 CAPITAL AND LIABILITIES (Unaudited) (Millions of Dollars) Capitalization Common stock - No par value, 200,000,000 shares authorized; 75,681,937 shares issued, stated at $ 1,425.7 $ 1,425.7 Less - Deferred compensation - ESOP 12.1 14.3 Retained earnings 261.7 233.0 Less - Capital stock expense 8.2 8.2 Less - 518,600, and 0 shares of common stock in treasury, respectively, at cost 11.2 -- Preferred stock of subsidiary 96.2 96.2 Mandatorily redeemable preferred stock of subsidiary 197.0 197.0 Long-term debt 100.0 -- Long-term debt of subsidiary 1,648.0 1,636.4 ---------- ---------- Total capitalization 3,697.1 3,565.8 ---------- ---------- Current Liabilities Accounts payable 232.9 166.7 Notes payable 250.9 387.0 Long-term debt and lease obligations of subsidiary maturing within one year 52.0 47.7 Other 136.7 146.6 ---------- ---------- Total current liabilities 672.5 748.0 ---------- ---------- Deferred Credits Accumulated deferred income taxes 1,083.6 1,034.9 Accumulated deferred investment tax credits 212.1 215.5 Other 157.3 148.6 ---------- ---------- Total deferred credits 1,453.0 1,399.0 ---------- ---------- $ 5,822.6 $ 5,712.8 ========== ==========
ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1997 1996 1997 1996 (Unaudited) (Millions except per share) Operating Revenues: Electric $301.7 $282.6 $583.9 $561.3 Electric interchange 53.5 33.6 80.1 65.5 Gas 60.1 49.5 224.1 185.6 Diversified enterprises 127.6 7.7 225.2 14.1 ---------- ---------- ---------- ---------- Total 542.9 373.4 1,113.3 826.5 ---------- ---------- ---------- ---------- Operating Expenses: Fuel for electric plants 52.2 59.5 97.5 126.1 Power purchased 45.6 13.3 81.4 23.1 Gas purchased for resale 22.8 32.8 122.5 105.8 Diversified enterprises 150.8 20.6 259.2 30.8 Other operating expenses 63.6 53.3 123.0 119.0 Maintenance 30.5 24.3 50.2 44.8 Depreciation & amortization 49.3 48.3 98.3 96.4 General taxes 33.0 31.6 71.7 69.4 ---------- ---------- ---------- ---------- Total 447.8 283.7 903.8 615.4 ---------- ---------- ---------- ---------- Operating Income 95.1 89.7 209.5 211.1 ---------- ---------- ---------- ---------- Other Income and Deductions: Miscellaneous-net (0.5) 6.7 (1.5) (7.2) Equity earnings in 2.4 2.4 6.4 5.1 subsidiaries ---------- ---------- ---------- ---------- Total 1.9 9.1 4.9 (2.1) ---------- ---------- ---------- ---------- Income Before Interest Charges and Income Taxes 97.0 98.8 214.4 209.0 ---------- ---------- ---------- ---------- Interest Charges: Interest expense 34.1 33.7 70.5 67.7 Allowance for borrowed funds used during construction (1.3) (1.9) (2.7) (3.6) Preferred dividend requirements of subsidiary 5.4 5.7 10.9 11.3 ---------- ---------- ---------- ---------- Total 38.2 37.5 78.7 75.4 ---------- ---------- ---------- ---------- Income Before Income Taxes 58.8 61.3 135.7 133.6 Income Taxes 27.4 24.6 60.3 53.6 ---------- ---------- ---------- ---------- Net Income 31.4 36.7 75.4 80.0 Carrying amount under consideration paid for redeemed preferred stock of subsidiary - (0.5) - (0.5) ---------- ---------- ---------- ---------- Net Income Applicable to Common Stock $31.4 $36.2 $75.4 $79.5 ========== ========== ========== ========== Earnings per common share $0.42 $0.48 $1.00 $1.05 Cash dividends declared per common share $0.31 $0.28 $0.62 $0.56 Cash dividends paid per common share $0.31 $0.28 $0.62 $0.56 Weighted average number of common shares outstanding during period 75,648,456 75,681,937 75,665,104 75,678,225
ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (See accompanying Notes to Consolidated Financial Statements) SIX MONTHS ENDED JUNE 30, 1997 1996 (Unaudited) (Millions of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 75.4 $ 79.5 Items not requiring cash, net 132.2 114.8 Changes in assets and liabilities (18.0) 12.6 -------- -------- Net cash provided by operating activities 189.6 206.9 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (67.6) (86.9) Other investing activities (23.2) (56.5) -------- -------- Net cash used in investing activities (90.8) (143.4) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends on common stock (46.8) (42.4) Exercise of stock options -- 1.1 Repurchase of common stock (11.2) -- Redemptions - Short-term debt (188.5) (303.0) Long-term debt of subsidiary (150.2) (74.1) Preferred stock of subsidiary -- (21.2) Issuances - Short-term debt 52.4 284.9 Long-term debt 250.0 -- Preferred stock of subsidiary -- 100.0 Other financing activities (5.3) 1.9 --------- --------- Net cash used in financing activities (99.6) (52.8) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS (.8) 10.7 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24.6 11.3 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23.8 $ 22.0 ========= =========
ILLINOIS POWER COMPANY CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) JUNE 30, DECEMBER 31, 1997 1996 ASSETS (Unaudited) (Millions of Dollars) Utility Plant, at original cost Electric (includes construction work in progress of $197.0 million and $212.5 million, respectively) $ 6,406.5 $ 6,335.4 Gas (includes construction work in progress of $15.1 million and $21.2 million, respectively) 652.8 646.1 ------------ ------------ 7,059.3 6,981.5 Less-Accumulated depreciation 2,497.0 2,419.7 ------------ ------------ 4,562.3 4,561.8 Nuclear fuel in process 5.8 5.3 Nuclear fuel under capital lease 111.9 96.4 ------------ ------------ Total utility plant 4,680.0 4,663.5 ------------ ------------ Investments and Other Assets 6.9 14.5 ------------ ------------ Current Assets Cash and cash equivalents 20.4 12.5 Accounts receivable (less allowance for doubtful accounts of $3.0 million) Service 144.5 138.8 Other 14.4 51.1 Accrued unbilled revenue 100.0 106.0 Materials and supplies, at average cost 125.8 112.2 Prepayments and other 41.6 23.7 ------------ ------------ Total current assets 446.7 444.3 ------------ ------------ Deferred Charges Deferred Clinton costs 102.1 103.9 Recoverable income taxes 106.5 101.3 Other 250.6 241.0 ------------ ------------ Total deferred charges 459.2 446.2 ------------ ------------ $ 5,592.8 $ 5,568.5 ============ ============
ILLINOIS POWER COMPANY CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) JUNE 30, DECEMBER 31, 1997 1996 CAPITAL AND LIABILITIES (Unaudited) (Millions of Dollars) Capitalization Common stock - No par value, 100,000,000 shares authorized; 75,643,937 shares issued, stated at $ 1,424.6 $ 1,424.6 Retained earnings 294.7 245.9 Less - Capital stock expense 8.2 8.2 Less - 4,775,613 and 3,410,897 shares of common stock in treasury, respectively, at cost 113.7 86.2 Preferred stock 96.2 96.2 Mandatorily redeemable preferred stock 197.0 197.0 Long-term debt 1,648.0 1,636.4 ------------ ------------ Total capitalization 3,538.6 3,505.7 ------------ ------------ Current Liabilities Accounts payable 151.6 149.7 Notes payable 250.9 310.0 Long-term debt and lease obligations maturing within one year 52.0 47.7 Other 132.1 148.1 ------------ ------------ Total current liabilities 586.6 655.5 ------------ ------------ Deferred Credits Accumulated deferred income taxes 1,098.2 1,048.0 Accumulated deferred investment tax credits 212.1 215.5 Other 157.3 143.8 ------------ ------------ Total deferred credits 1,467.6 1,407.3 ------------ ------------ $ 5,592.8 $ 5,568.5 ============ ============
ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1997 1996 1997 1996 (Unaudited) (Millions of Dollars) Operating Revenues: Electric $301.7 $282.6 $583.9 $561.3 Electric interchange 53.5 33.6 80.1 65.5 Gas 60.1 49.5 224.1 185.6 ---------- ---------- ----------- ---------- -- Total 415.3 365.7 888.1 812.4 ---------- ---------- ----------- ---------- -- Operating Expenses and Taxes: Fuel for electric plants 52.2 59.5 97.5 126.1 Power purchased 45.6 13.3 81.4 23.1 Gas purchased for resale 22.8 32.8 122.5 105.8 Other operating expenses 63.6 53.3 123.0 119.0 Maintenance 30.5 24.3 50.2 44.8 Depreciation & amortization 49.3 48.3 98.3 96.4 General taxes 33.0 31.6 71.7 69.4 Income taxes 35.7 27.7 72.0 64.8 ---------- ---------- ----------- ---------- Total 332.7 290.8 716.6 649.4 ---------- ---------- ----------- ---------- -- Operating Income 82.6 74.9 171.5 163.0 ---------- ----------- ---------- ---------- Other Income and (0.2) 5.6 (1.4) (1.3) Deductions, Net ---------- ---------- ---------- ----------- Income Before Interest 82.4 80.5 170.1 161.7 Charges ---------- ---------- ---------- ----------- Interest Charges and Other: Interest expense 32.3 33.7 66.4 67.5 Allowance for borrowed funds used during construction (1.3) (1.9) (2.7) (3.6) ---------- ---------- ---------- ----------- Total 31.0 31.8 63.7 63.9 ---------- ---------- ---------- ----------- Net Income 51.4 48.7 106.4 97.8 Less-Preferred dividend requirements 5.4 5.7 10.9 11.3 Plus-Carrying amount under consideration paid for redeemed preferred stock - (0.5) - (0.5) ---------- ---------- ---------- ----------- Net Income applicable to common stock $ 46.0 $ 42.5 $ 95.5 $ 86.0 ========== ========== ========== ===========
ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (See accompanying Notes to Consolidated Financial Statements) SIX MONTHS ENDED JUNE 30, 1997 1996 (Unaudited) (Millions of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $106.4 $ 97.8 Items not requiring cash, net 133.7 120.7 Changes in assets and liabilities (14.5) (1.2) ------------- ------------ Net cash provided by operating activities 225.6 217.3 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (67.6) (86.9) Other investing activities -- 1.8 ------------- ------------ Net cash used in investing (67.6) (85.1) activities ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends on preferred and common stock (58.0) (51.4) Repurchase of common stock (27.5) (18.9) Redemptions - Short-term debt (111.5) (303.0) Long-term debt (150.2) (74.1) Preferred stock -- (21.2) Issuances Short-term debt 52.4 238.9 Long-term debt 150.0 -- Preferred Stock -- 100.0 Other financing activities (5.3) 1.9 ------------- ------------ Net cash used in financing (150.1) (127.8) activities ------------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 7.9 4.4 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12.5 4.3 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $20.4 $8.7 ============= ============
ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GENERAL Financial Statement note disclosures, normally included in financial statements prepared in conformity with generally accepted accounting principles, have been omitted from this Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission (SEC). However, in the opinion of Illinova Corporation (Illinova) and Illinois Power Company (IP), the disclosures and information contained in this Form 10-Q are adequate and not misleading. See the consolidated financial statements and the accompanying notes in Illinova's 1996 Annual Report to Shareholders (included in the Proxy Statement), the consolidated financial statements and the accompanying notes in IP's 1996 Annual Report to Shareholders (included in the Information Statement), Illinova's and IP's 1996 Form 10-K filings to the SEC, and Illinova's and IP's Report on Form 10-Q for the quarter ended March 31, 1997, for information relevant to the consolidated financial statements contained herein, including information as to certain regulatory and environmental matters and as to the significant accounting policies followed. In the opinion of Illinova, the accompanying unaudited consolidated financial statements for Illinova reflect all adjustments necessary to present fairly the Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996, the Consolidated Statements of Income for the three months and six months ended June 30, 1997 and 1996, and the Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996. In addition, it is Illinova's and IP's opinion that the accompanying unaudited consolidated financial statements for IP reflect all adjustments necessary to present fairly the Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996, the Consolidated Statements of Income for the three months and the six months ended June 30, 1997 and 1996, and the Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996. Due to seasonal and other factors which are characteristic of electric and gas utility operations, interim period results are not necessarily indicative of results to be expected for the year. The consolidated financial statements of Illinova include the accounts of Illinova, IP, Illinova Generating Company (IGC), Illinova Insurance Company (IIC), and Illinova Energy Partners, Inc. (IEPI). All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. All non-utility operating transactions are included in the sections titled "Diversified enterprises", "Interest expense", "Income taxes" and "Other Income and Deductions, Net" in Illinova's Consolidated Statements of Income. This represents a format change to Illinova's Consolidated Statements of Income and subsequent reclassification of 1996 and previously stated 1997 amounts to conform to the new presentation. The consolidated financial statements of IP include the accounts of Illinois Power Capital, L.P. and Illinois Power Financing I (IPFI). All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. All non-utility operating transactions are included in the section titled "Other Income and Deductions, Net" in IP's Consolidated Statements of Income. IP's consolidated financial position and results of operations are currently the principal factors affecting Illinova's consolidated financial position and results of operations. REGULATORY AND LEGAL MATTERS OPEN ACCESS AND COMPETITION IP continues to work with other interested parties in the state on proposed legislation entitled the "Electric Service Customer Choice and Rate Relief Law of 1997". IP believes this legislation, as currently drafted (Senate Bill 55), will provide an orderly transition to direct access for all customers, and balance financial stability for current utility providers with customer choice. Currently, Senate Bill 55 guarantees IP's residential customers a ten percent decrease in electric rates beginning January 1998 and an additional five percent decrease effective in October 2000. Customers with demand at a single site greater than 4 MW could choose their electric generation supplier ("direct access") starting October 1999. Customers with at least ten sites with at least 9.5 MW in total demand could also have direct access starting October 1999. Direct access for the remaining non-residential customers would occur in two phases: one-third in October 1999 and two-thirds on December 31, 2000. Direct access for residential customers would be phased in in three stages: 10 percent in October 2000, 30 percent in 2001, and 60 percent in 2002. Although the specified residential rate reductions and the introduction of direct access will lead to lower electric service revenues, Senate Bill 55 is designed to protect the financial integrity of electric utilities in at least three ways: 1) departing customers are obligated to pay transition charges, based on the utility's lost revenue from that customer, adjusted to deduct delivery charges the utility will continue to receive from the customer, the market value of the freed-up energy, and a mitigation factor to place some responsibility for stranded cost mitigation on shareholders; 2) utilities are provided the opportunity to lower their financing and capital costs through the issuance of "securitized" bonds; and 3) there is a provision for seeking rate relief in the event that the change in law leads to the Company's interest and preferred dividend coverage ratio falling below a specified minimum based on a prescribed test. The extent to which revenues are lowered will depend on a number of factors including future market prices for wholesale and retail energy, and load growth and demand levels in the current IP service territory. The impact on net income will depend on a number of factors including the ongoing costs of doing business. On May 30, the Illinois House of Representatives voted to approve Senate Bill 55 and forwarded the bill to the Senate for consideration. The bill is expected to go to the Senate in the fall veto sessions scheduled for October 28-30 and November 12-14. Although Senate Bill 55 was approved by a wide margin in the House, action on the bill by the Senate cannot be predicted. IP currently prepares its financial statements in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). Reporting under FAS 71 allows companies whose service obligations and prices are regulated to maintain assets on their balance sheets representing costs they reasonably expect to recover from customers, through inclusion of such costs in their future rates. The SEC has raised the issue of continued qualification to report under FAS 71 for utilities in states that have changed their utility laws to introduce competition, even if the legislation provides for a transition to full competition and for stranded cost recovery. The Emerging Issues Task Force of the Financial Accounting Standards Board (Task Force) concluded its deliberations regarding application of FAS 71 accounting for regulatory transition plans at its July 24 meeting. Their decision will require the discontinuance of FAS 71 accounting at the date of enactment of deregulation legislation for business segments for which a plan of deregulation has been established. However, the Task Force further concluded that regulatory assets associated with a deregulated business segment which will be recovered through tariffs charged to customers of a regulated business segment should be associated with the regulated segment from which the future cash recovery is expected (not the segment from which the costs originated), and can therefore continue to be carried on the regulated entity's balance sheet. In addition, the Task Force concluded that regulatory assets that may arise after the date of enactment of deregulation legislation are also eligible for regulatory asset accounting on the regulated segment's balance sheet. Based on the provisions of Senate Bill 55 and projections of future cash flows, management believes that IP's regulatory assets which are currently associated with its generation segment would be recoverable through rates charged to transmission and distribution customers. In addition, management believes that the provisions of Sentate Bill 55 provide IP a means to recover a portion of its generating plant investment during a transition period in preparation for this business segment's entrance into a competitive marketplace. IP's ultimate ability to recover its full investment in generating plant will depend on the interaction of all the provisions of the bill, and future sales, expenses and cash flows. If regulatory reform legislation substantially different from Senate Bill 55 is passed in Illinois, management will assess the provisions of the new law to determine its impact on the recoverability of regulatory assets and plant investment currently associated with its generation segment. MANUFACTURED GAS PLANT SITES IP's liability for Manufactured Gas Plant (MGP) site remediation is $68.6 million. This amount represents IP's best estimate of its remaining costs to remediate the 24 MGP sites for which it is responsible. Because of the unknown and unique characteristics of each site, IP is not able to determine its ultimate liability for remediation. IP is recovering MGP site cleanup costs from its customers through tariff riders approved by the ICC in March 1996. In anticipation of full recovery of MGP site costs, IP has recorded a regulatory asset equivalent to its liability. IP is continuing settlement discussions with its insurance carriers regarding the recovery of estimated MGP site remediation costs. Settlement agreements have been reached with several carriers, and settlement negotiations with other carriers are ongoing. Litigation related to a lawsuit filed by IP in October 1995 seeking a declaratory judgment and damages regarding insurance coverage for four MGP sites is in progress. The trial has been scheduled for January 1998. Any insurance recoveries received will cause the regulatory asset to be reduced by the amount of the recovery. TREASURY STOCK On June 10, 1997, the Illinova Board of Directors approved the repurchase of up to four million shares of its common stock. The shares may be acquired in the open market through private negotiations and other transactions in conformity with the rules of the SEC. Illinova has repurchased 518,600 shares of its common stock in the open market through June 30, 1997, at a cost of $11.2 million. All repurchased shares are held as treasury stock and are deducted from common equity at the cost of the shares purchased. IP repurchased 201,194 shares of its common stock from Illinova on March 30, 1997, at a cost of $4.3 million and 1,163,522 shares on June 30, 1997, at a cost of $23.2 million. Through June 30, 1997, IP has purchased a total of 4,775,613 shares of its common stock, all of which are held as treasury stock and are deducted from common equity at the cost of the shares purchased. ILLINOVA CORPORATION AND ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Illinova's 1996 Annual Report to Shareholders (included in the Proxy Statement), the Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in IP's 1996 Annual Report to Shareholders (included in the Information Statement), and Illinova's and IP's Form 10-K for the year ended December 31, 1996, and Illinova's and IP's Report on Form 10-Q for the quarter ended March 31, 1997. ILLINOVA SUBSIDIARIES IP is the primary business and subsidiary of Illinova and engages in the generation, transmission, distribution and sale of electric energy and the distribution, transportation and sale of natural gas in the State of Illinois. IGC is a wholly-owned independent power subsidiary of Illinova and invests in energy supply projects throughout the world. IGC's strategy is to invest in and develop "greenfield" power plants, acquire existing generation facilities and provide power plant operations and maintenance services. IEPI is a wholly-owned subsidiary of Illinova formed in May 1996. IEPI develops and markets energy-related services to the unregulated energy market throughout the United States and engages in the brokering and marketing of electric power and gas. IIC is a wholly-owned subsidiary of Illinova and was licensed by the State of Vermont as a captive insurance company in August 1996. The primary business of IIC is to insure certain risks of Illinova and its subsidiaries. LIQUIDITY AND CAPITAL RESOURCES CAPITAL RESOURCES AND REQUIREMENTS Cash flows from operations during the first six months of 1997 provided sufficient working capital to meet ongoing operating requirements, to service existing common and IP preferred stock dividends and debt requirements and all of IP's construction requirements. Additionally, Illinova expects 1997 cash flows will enable it to meet operating requirements and continue to service IP's existing debt, IP's preferred and Illinova's common stock dividends, IP's sinking fund requirements and IP's anticipated construction requirements. IP periodically repurchases shares of its common stock from Illinova to provide Illinova cash for operations, in accordance with authority granted by the ICC. For more information, see "Treasury Stock" of the "Notes to Consolidated Financial Statements" on page 13 of this report. On April 10, 1997, IP issued $150 million of Adjustable Rate Pollution Control Revenue Refunding Bonds, due April 1, 2032. The proceeds were used on June 2, 1997, to retire $150 million of IP's 7 5/8% Pollution Control First Mortgage Bonds due 2016. IP issued a call notice on April 28, 1997, to retire the 7 5/8% bonds at a premium of 103. The transaction will allow IP to amend the 1943 Mortgage and Deed of Trust to be generally consistent with the 1992 General Mortgage Indenture and Deed of Trust. IP's capital requirements for construction were approximately $68 million and $87 million during the six months ended June 30, 1997 and 1996, respectively. Illinova and IP currently have total lines of credit represented by bank commitments of $150 million and $354 million, respectively. Both Illinova and IP have adequate short- and intermediate-term bank borrowing capacity. Currently, Illinova is reviewing additional financing alternatives to provide cash for operations and has remaining shelf authority with the SEC to issue $200 million in debt securities. Presently, IP's mortgage bonds are rated Baa1 by Moody's, BBB+ by Duff & Phelps, and BBB by Standard & Poor's. IP's preferred stock is rated Baa2 by Moody's and BBB- by both Duff & Phelps and Standard & Poor's. Illinova's $100 million senior notes issued February 5, 1997, have a rating of Baa3 and BBB- from Moody's and Standard & Poor's, respectively. ACCOUNTING ISSUES IP is considering seeking regulatory approval to increase the rate at which its generation-related assets are expensed. Because, under current rulemaking, this change is viewed as discretionary, and subject to regulatory approval, the rate of such increase, if any, will be based on then current conditions and financial performance. The increase in expense could begin as early as the third quarter of 1997 and could amount to at least $400 million in the aggregate through the year 2001, and potentially more thereafter, depending on changes in regulation, the marketplace and financial performance. This reduction in the net book value of IP's generating assets should help position the Company to operate competitively and profitably in the changing business environment. This acceleration of expense would have a direct impact on earnings but not on cash flow. If Senate Bill 55 is enacted in substantially its current form, an acceleration in the rate at which any utility-owned assets are expensed can be undertaken without regulatory approval provided such changes are consistent with generally accepted accounting principles. Under this legislation, up to an aggregate of $1 billion in expense could be accelerated through the year 2008. For further information on accounting issues, see "Open Access and Competition" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on page 12 of this report. REGULATORY MATTERS ASSUMPTION OF CLINTON POWER STATION FROM SOYLAND On March 13, 1997, the Nuclear Regulatory Commission (NRC) issued an order approving transfer of the Clinton Power Station (Clinton) operating license related to Soyland Power Cooperative's (Soyland) 13.21% ownership, to IP, in connection with the transfer from Soyland to IP of all of Soyland's interest in Clinton pursuant to an agreement reached in 1996. Soyland's title to the plant and directly related assets such as nuclear fuel were transferred to IP on May 1, 1997. Soyland's nuclear decommissioning trust assets were transferred to IP on May 19, 1997, consistent with IP's assumption of all of Soyland's ownership obligations including those related to decommissioning. On February 21, 1997, and as updated on May 28, 1997, IP filed with the Federal Energy Regulatory Commission (FERC) an amended Power Coordination Agreement (PCA) between Soyland and IP entered into in furtherance of the transfer. FERC approved the amended PCA on July 25, 1997. The Agreement obligates Soyland to purchase all of its capacity and energy needs from IP for at least ten years. SOYLAND PCA The amended and restated PCA provides that a contract cancellation fee will be paid by Soyland to IP in the event that a Soyland Cooperative member terminates its membership from Soyland. On May 31, 1997, three distribution cooperative members terminated their membership by buying out of their respective long-term wholesale power contracts with Soyland. This action resulted in Soyland paying a fee of $20.8 million to IP in the second quarter. Fee proceeds of $2.3 million will be used to offset the costs of acquiring Soyland's share of Clinton with the remaining $18.5 million recorded as interchange revenue. OPEN ACCESS AND COMPETITION See "Open Access and Competition" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on page 12 of this report. ENVIRONMENTAL MATTERS GAS MANUFACTURING SITES See "Manufactured Gas Plant Sites" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on page 13 of this report. NITROGEN OXIDE Regulators are continuing to examine potential approaches for compliance with current federal ozone level requirements impacted by nitrogen oxide (NOx) emissions. A regulatory initiative by the Ozone Transport Assessment Group (OTAG) to examine recommendations on reducing the amount of ozone allegedly transported to the eastern United States released its findings in June 1997. In addition to fuel and vehicle emission suggestions, OTAG recommended the United States Environmental Protection Agency (USEPA) consider drastic cuts in midwestern utility NOx emissions. The USEPA is expected to initiate a rulemaking in September 1997. By the year 2007, utilities are expected to install additional NOx controls. Legislative action implementing the initiative's findings could have a material adverse impact on the financial position of Illinova and IP. CLINTON POWER STATION On September 6, 1996, leakage at a recirculation pump seal caused IP operations personnel to shut down Clinton. Clinton has not resumed operation because of, among other things, a refueling, implementation of a new transformer design, equipment performance problems, and the need to maintain strict compliance with thousands of interrelated procedures. While management now expects that Clinton may start up in August, the electrical, mechanical, and nuclear engineering aspects of such a power plant are complex, and this complexity, combined with a regulatory and managerial intolerance of procedural non-compliance, makes accurate predictions on start-up difficult, and the length of the ongoing outage uncertain. On June 10, 1997, the NRC notified IP that violations found during five assessments of Clinton's operations would result in a $450,000 fine. The violations were found during assessments of the reactor recirculation pump seal failure, operations and engineering activities supporting operations, Division III emergency diesel generator inoperability, feedwater containment isolation check valve inoperability, and the radiation protection program. On June 25, 1997, the NRC requested a diagnostic inspection of Clinton to diagnose both strong and weak areas at the plant and document the effect of recent corrective actions on employee performance. This inspection is a result of the NRC's semi-annual update that named Clinton among plants with declining performance. The Institute of Nuclear Power Operations will help IP select a team of independent inspectors from the nuclear industry to do the study. The evaluation likely will begin in late August, and should take about six weeks to complete. The impact of this study on operations, and on start-up, is uncertain. WOOD RIVER POWER STATION On December 18, 1996, the control and computer rooms for Wood River units 4 and 5 were damaged by an in-plant fire. Unit 4 was returned to service on June 14, 1997. The current estimate for Unit 5 returning to service is late September 1997. The cost associated with restoring the units to service is not expected to have a material adverse impact on Illinova and IP. POWER SUPPLY AND RELIABILITY Electricity has been in short supply throughout Illinois and Wisconsin this summer because of an unusually high number of plant outages in this region. IP has purchased replacement power, and has secured generation and transmission capacity in order to minimize disruptions in service. Recovery of the added energy and transmission expense so incurred is subject to ICC approval in the annual reconciliation of the Uniform Fuel Adjustment Clause (UFAC) cost recovery mechanism, and a disallowance of such costs could have a material adverse impact. IP has also incurred additional expense by reactivating older power plants in cold storage and upgrading electric transmission facilities to maintain reliability. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 AND 1996 Electric Operations - Electric revenues for the second quarter of 1997 increased $19.1 million (a 6.7% increase) compared to the second quarter of 1996. An increase in UFAC recoveries accounted for $18.6 million of the increase in revenues. In addition, electric interchange sales increased $19.9 million primarily due to the receipt of an opt-out fee from Soyland per the amended PCA. For more information, see "Soyland PCA" under "Regulatory Matters" of the "Management's Discussion and Analysis" on page 17 of this report. Power purchased increased $32.3 million and fuel for electric plants decreased $7.3 million due to lower equivalent availability at nuclear and fossil facilities. These factors combined to create a net increase in electric margin of $14.0 million for the quarter. Cooling degree days decreased approximately 72% during the second quarter of 1997 compared to the same time frame in 1996, resulting in a 9.5% decrease in kilowatt hour (kwh) sales to the temperature-sensitive residential market. Sales to the industrial and commercial markets remained relatively stable. The equivalent availability of Clinton was 0.0% and 92.4% for the three months ended June 30, 1997 and 1996, respectively. Clinton was unavailable in the second quarter of 1997 due to the continued outage which began September 6, 1996. The equivalent availability for IP's coal-fired plants was 68.3% and 79.6% for the three months ended June 30, 1997 and 1996, respectively. The lower equivalent availability for the fossil plants in 1997 was primarily due to the fire and subsequent shut-down of the Wood River fossil station in December 1996 and the scheduled 44 day maintenance outage of Baldwin Unit 1. Gas Operations - Gas revenues increased $10.6 million (21.5%) although total therm sales (excluding transport) decreased approximately 24 million (23%) during the second quarter of 1997 compared to the same period last year. This increase in gas revenues was primarily due to higher prices ($25.3 million) resulting from increases in the cost of gas and collection of prior period underrecoveries. This increase was partially offset by lower sales volumes ($15.2 million). For the quarter, gas costs decreased $10.0 million largely due to a decrease in therms delivered to the system as a result of milder weather. Operation and Maintenance Expense - The current quarter increase of $16.5 million dollars is primarily due to operating and maintenance expenses associated with the Clinton outage. In addition, the fossil plants have incurred more expenses this quarter than the same period a year ago due to start-up costs and alternative fuel modifications. Diversified enterprises revenues increased $119.9 million for the second quarter of 1997 due to increased activity at IEPI (formerly Illinova Power Marketing, Inc.). However, diversified enterprises expenses increased $130.2 million which offsets the growth in revenues. IEPI buys and sells electricity in the Western region of the United States. In the normal course of doing business, IEPI is required to incur price exposure on the electricity bought or sold. Where the markets allow, IEPI hedges such exposure through the use of electricity futures contracts or through swaps with qualified counterparties. During 1996, IEPI entered into electricity purchase and sale contracts with delivery commencing in 1997. In June 1997, IEPI recognized a loss of $13.8 million related to these contracts. Miscellaneous - Net - The increase in deductions of $7.2 million is largely a result of a second quarter 1996 change in an estimate relating to accruals previously established for the planned disposition of property. Earnings per Common Share - The earnings per common share for Illinova during the second quarter of 1997 and 1996 resulted from the interaction of all of the factors discussed herein. SIX MONTHS ENDED JUNE 30, 1997 AND 1996 Electric Operations - Electric margin increased $7.4 million for the first six months of 1997 compared to the same time frame in 1996. Electric revenues increased $22.6 million as a result of an increase to the UFAC of $26.5 million. In addition, electric interchange sales increased $14.6 million primarily due to the receipt of an opt-out fee from Soyland per the amended PCA. For more information, see "Soyland PCA" under "Regulatory Matters" of the "Management's Discussion and Analysis" on page 17 of this report. Cooling degree days decreased 72% for the six month period which resulted in a 5% decrease in kwh sales to the temperature-sensitive residential market. There was also a 2.8% decrease in industrial kwh sales that partially offset the UFAC increase. Industrial sales decreased due to certain industrial customers purchasing electricity from suppliers other than IP as part of an open-access experiment that began in late April 1996. Sales to the commercial market remained stable. The equivalent availability of Clinton was 0% and 96.1% for the six months ended June 30, 1997 and 1996, respectively. Clinton was unavailable for the first six months of 1997 due to the extended outage which began September 6, 1996. The equivalent availability for IP's coal-fired plants was 69% and 81.8% for the six months ended June 30, 1997 and 1996, respectively. The decreased availability is due to the fire and subsequent shut-down of Wood River fossil station in December 1996 and the scheduled 44 day maintenance outage of Baldwin Unit 1. Gas Operations - Gas revenues increased $38.5 million in the first half of 1997. The increase in gas revenues was primarily due to significantly higher Purchased Gas Adjustment (PGA) revenues ($35.1 million), resulting from increases in the cost of gas and collection of prior period underrecoveries. This increase more than offset the decrease caused by lower sales volumes. Therm sales decreased a total of 15.8% (66.7 million therms). This decrease represents a 12.1% (31.3 million) decrease in therm sales to the residential sector, a 9.2% (9.9 million) decrease in therm sales to the commercial sector, and a 44.8% (25.5 million) decrease to the industrial market. Therms transported increased 41.8% (51.6 million) resulting in a $1.9 million increase for the first six months compared to last year. Gas purchased for resale increased $16.7 million during the first six months of 1997. Gas costs increased due to higher prices charged by suppliers ($8.4 million) and the amortization of prior period underrecoveries ($26.0 million). This increase was partially offset by $17.7 million due to a decrease in the amount of therms purchased and reduced storage costs. Operation and Maintenance Expense - The increase of $9.4 million is primarily due to increased company and contractor labor at the fossil and nuclear plants due to scheduled and unscheduled outages. These expenses were partially offset by a decrease in customer accounts expenses. Miscellaneous - Net - The decrease in deductions of $5.7 million is primarily a result of 1996 accruals recorded for the planned disposition of property. Earnings per Common Share - The earnings per common share for Illinova during the first six months of 1997 and 1996 resulted from the interaction of all other factors discussed herein. PART II. OTHER INFORMATION ITEM 1. Legal Proceedings See "Notes to Consolidated Financial Statements" in Part I for a discussion of certain legal proceedings related to manufactured gas plant sites. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits The Exhibits filed with this 10-Q are listed on the Exhibit Index. (b) Reports on Form 8-K since March 31, 1997: None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ILLINOVA CORPORATION (Registrant) By /s/ Leah Manning Stetzner ---------------------- Leah Manning Stetzner, General Counsel and Corporate Secretary on behalf of Illinova Corporation Date: August 13, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ILLINOIS POWER COMPANY (Registrant) By /s/ Leah Manning Stetzner ---------------------- Leah Manning Stetzner, Vice President, General Counsel, and Corporate Secretary on behalf of Illinois Power Company Date: August 13, 1997 EXHIBIT INDEX PAGE NO. WITHIN SEQUENTIAL NUMBERING EXHIBIT DESCRIPTION SYSTEM 27 Financial Data Schedule UT (filed herewith) EX-27 2
UT This schedule contains summary financial information extracted from the balance sheet, income statement, and cash flow statement of Illinois Power Company and is qualified in its entirety by reference to the balance sheet, income statement, and cash flow statement of Illinois Power Company. 3-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 4680 7 447 459 0 5593 1303 0 295 1598 197 96 1577 50 0 201 11 0 71 41 1751 5593 888 72 645 717 171 1 170 64 106 11 95 47 56 226 0 0
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