-----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, H3WBcHi9JDb0LX3Y2mL6g1WeSl9H7O4sX/nRdFpkcRvkGwWj426vecE4QmBTFHLE eTbQaDbvMG7RDp0WJ82EbA== 0000049816-97-000029.txt : 19971114 0000049816-97-000029.hdr.sgml : 19971114 ACCESSION NUMBER: 0000049816-97-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: SEC FILE NUMBER: 001-03004 FILM NUMBER: 97712404 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 3RD QUARTER 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 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, 71,681,937 shares outstanding at October 31, 1997 Illinois Power Company Common stock, no par value, 66,292,732 shares outstanding held by Illinova Corporation at October 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 SEPTEMBER 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 - 22 Part II. OTHER INFORMATION Item 1: Legal Proceedings 23 Item 6: Exhibits and Reports on Form 8-K 23 Signatures 24 - 25 Exhibit Index 26 PART I. FINANCIAL INFORMATION ILLINOVA CORPORATION CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) SEPTEMBER 30, DECEMBER 31, 1997 1996 ASSETS (Unaudited) (Millions of Dollars) Utility Plant, at original cost Electric (includes construction work in progress of $223.1 million and $212.5 million, respectively) $ 6,452.7 $ 6,335.4 Gas (includes construction work in progress of $11.4 million and $21.2 million, respectively) 658.2 646.1 ---------- ---------- 7,110.9 6,981.5 Less-Accumulated depreciation 2,546.5 2,419.7 -------- ---------- 4,564.4 4,561.8 Nuclear fuel in process ........ 5.6 5.3 Nuclear fuel under capital lease 116.7 96.4 ------- ------- Total utility plant ..... 4,686.7 4,663.5 ------- ------- Investments and Other Assets ... 188.3 146.2 ------- ------- Current Assets Cash and cash equivalents 24.9 24.6 Accounts receivable (less allowance for doubtful accounts of $3.0 million) Service 150.7 138.8 Other 165.2 62.0 Accrued unbilled revenue 114.1 106.0 Materials and supplies, at average cost 124.7 113.2 Prepayments and other 34.4 24.1 -------- --------- Total current assets 614.0 468.7 -------- --------- Deferred Charges Deferred Clinton costs 101.3 103.9 Recoverable income taxes 97.9 101.3 Other 245.1 229.2 -------- --------- Total deferred charges 444.3 434.4 -------- --------- $ 5,933.3 $ 5,712.8 ======== =========
ILLINOVA CORPORATION CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) SEPTEMBER 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 10.7 14.3 Retained earnings 303.9 233.0 Less - Capital stock expense 8.2 8.2 Less - 4,000,000, and 0 shares of common stock in treasury, respectively, at cost 90.4 -- Preferred stock of subsidiary 92.1 96.2 Mandatorily redeemable preferred stock of subsidiary 197.0 197.0 Long-term debt 100.0 -- Long-term debt of subsidiary 1,597.9 1,636.4 --------- --------- Total capitalization 3,607.3 3,565.8 ---------- --------- Current Liabilities Accounts payable 277.9 166.7 Notes payable 351.5 387.0 Long-term debt and lease obligations of subsidiary maturing within one year 107.2 47.7 Other 130.3 146.6 ---------- ---------- Total current liabilities 866.9 748.0 ---------- ---------- Deferred Credits Accumulated deferred income taxes 1,094.1 1,034.9 Accumulated deferred investment tax credits 210.4 215.5 Other 154.6 148.6 ---------- ---------- Total deferred credits 1,459.1 1,399.0 ---------- ---------- $5,933.3 $ 5,712.8 ========== ==========
CONSOLIDATED STATEMENTS OF INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 (Unaudited) (Millions except per share) Operating Revenues: Electric $ 394.0 $ 377.1 $ 977.9 $ 938.4 Electric interchange 61.3 43.3 141.4 108.8 Gas 41.8 38.0 265.9 223.6 Diversified enterprises 344.7 20.7 569.9 34.8 -------- ---------- ----------- ----------- Total 841.8 479.1 1,955.1 1,305.6 ---------- ---------- ------------ ------------ Operating Expenses: Fuel for electric plants 66.4 59.8 163.9 185.9 Power purchased 74.2 25.0 155.6 48.1 Gas purchased for resale 18.1 12.8 140.6 118.6 Diversified enterprises 353.4 26.8 612.6 57.6 Other operating expenses 73.4 62.9 196.4 181.9 Maintenance 27.9 21.1 78.1 65.9 Depreciation & amortization 50.1 48.5 148.4 144.9 General taxes 34.1 32.6 105.8 102.0 -------- --------- ---------- ---------- Total 697.6 289.5 1,601.4 904.9 --------- --------- ---------- ---------- Operating Income 144.2 189.6 353.7 400.7 ---------- ---------- ----------- ---------- Other Income and Deductions: Miscellaneous-net (0.9) 0.8 (2.4) (6.4) Equity earnings in affiliates 4.7 1.2 11.1 6.3 ---------- ---------- ----------- ---------- Total 3.8 2.0 8.7 (0.1) ----------- ---------- ----------- ----------- Income Before Interest Charges and Income Taxes 148.0 191.6 362.4 400.6 ------------ ----------- ----------- ----------- Interest Charges: Interest expense 32.5 33.8 103.0 101.5 Allowance for borrowed funds used during construction (0.7) (1.6) (3.4) (5.2) Preferred dividend requirements of subsidiary 5.5 5.5 16.4 16.8 ------------ ----------- ---------- ---------- Total 37.3 37.7 116.0 113.1 ------------ ------------ ---------- ---------- Income Before Income Taxes 110.7 153.9 246.4 287.5 Income Taxes 47.4 62.9 107.7 116.5 ------------ ------------ --------- ----------- Net Income 63.3 91.0 138.7 171.0 Carrying amount over (under) consideration paid for redeemed preferred stock of subsidiary 1.1 (0.3) 1.1 (0.8) ----------- --------- -------- ---------- Net Income Applicable to Common Stock $ 64.4 $ 90.7 $ 139.8 $ 170.2 =========== ========== ======== ========== Earnings per common share $0.87 $1.20 $1.87 $2.25 Cash dividends declared per common share $0.31 $0.28 $0.93 $0.84 Cash dividends paid per common share $0.31 $0.28 $0.93 $0.84 Weighted average number of common shares outstanding during period 73,009,027 75,681,937 74,770,016 75,679,472
ILLINOVA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (See accompanying Notes to Consolidated Financial Statements) NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 (Unaudited) (Millions of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 138.7 $ 171.0 Items not requiring cash, net 206.5 192.8 Changes in assets and liabilities (69.4) (24.9) -------- -------- Net cash provided by operating activities 275.8 338.9 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (131.2) (129.2) Other investing activities (41.0) (66.8) -------- -------- Net cash used in investing activities (172.2) (196.0) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends on common stock (70.1) (63.6) Exercise of stock options -- 1.1 Repurchase of common stock (90.4) -- Redemptions - Short-term debt (168.5) (351.4) Long-term debt of subsidiary (150.2) (92.1) Preferred stock of subsidiary (4.1) (29.1) Issuances - Short-term debt 133.0 314.7 Long-term debt 250.0 -- Preferred stock of subsidiary -- 100.0 Other financing activities (3.0) (1.5) --------- --------- Net cash used in financing activities (103.3) (121.9) --------- --------- NET CHANGE IN CASH AND CASH EQUIVALENTS .3 21.0 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24.6 11.3 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24.9 $ 32.3 ========= =========
ILLINOIS POWER COMPANY CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) SEPTEMBER 30, DECEMBER 31, 1997 1996 ASSETS (Unaudited) (Millions of Dollars) Utility Plant, at original cost Electric (includes construction work in progress of $223.1 million and $212.5 million, respectively) $ 6,452.7 $ 6,335.4 Gas (includes construction work in progress of $11.4 million and $21.2 million, respectively) 658.2 646.1 ------------ ------------ 7,110.9 6,981.5 Less-Accumulated depreciation 2,546.5 2,419.7 ------------ ------------ 4,564.4 4,561.8 Nuclear fuel in process 5.6 5.3 Nuclear fuel under capital lease 116.7 96.4 ------------ ------------ Total utility plant 4,686.7 4,663.5 ------------ ------------ Investments and Other Assets 6.4 14.5 ------------ ------------ Current Assets Cash and cash equivalents 12.2 12.5 Accounts receivable (less allowance for doubtful accounts of $3.0 million) Service 150.7 138.8 Other 1.1 51.1 Accrued unbilled revenue 114.1 106.0 Materials and supplies, at average cost 124.1 112.2 Prepayments and other 33.5 23.7 ------------ ------------ Total current assets 435.7 444.3 ------------ ----------- Deferred Charges Deferred Clinton costs 101.3 103.9 Recoverable income taxes 97.9 101.3 Other 252.7 241.0 ------------ ------------ Total deferred charges 451.9 446.2 ------------ ------------ $ 5,580.7 $ 5,568.5 ============ ============
ILLINOIS POWER COMPANY CONSOLIDATED BALANCE SHEETS (See accompanying Notes to Consolidated Financial Statements) SEPTEMBER 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 340.1 245.9 Less - Capital stock expense 8.2 8.2 Less - 9,351,205 and 3,410,897 shares of common stock in treasury, respectively, at cost 205.9 86.2 Preferred stock 92.1 96.2 Mandatorily redeemable preferred stock 197.0 197.0 Long-term debt 1,597.9 1,636.4 ------------ ------------ Total capitalization 3,437.6 3,505.7 ------------ ------------ Current Liabilities Accounts payable 117.9 149.7 Notes payable 328.5 310.0 Long-term debt and lease obligations maturing within one year 107.2 47.7 Other 127.8 148.1 ------------ ------------ Total current liabilities 681.4 655.5 ------------ ------------ Deferred Credits Accumulated deferred income taxes 1,101.7 1,048.0 Accumulated deferred investment tax credits 210.4 215.5 Other 149.6 143.8 ------------ ------------ Total deferred credits 1,461.7 1,407.3 ------------ ------------ $ 5,580.7 $ 5,568.5 ============ ============
ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (See accompanying Notes to Consolidated Financial Statements) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 1997 1996 1997 1996 (Unaudited) (Millions of Dollars) Operating Revenues: Electric $ 394.0 $ 377.1 $ 977.9 $ 938.4 Electric interchange 61.3 43.3 141.4 108.8 Gas 41.8 38.0 265.9 223.6 ----------- ---------- ----------- ----------- Total 497.1 458.4 1,385.2 1,270.8 ------------ ---------- ----------- ----------- Operating Expenses and Taxes: Fuel for electric plants 66.4 59.8 163.9 185.9 Power purchased 74.2 25.0 155.6 48.1 Gas purchased for resale 18.1 12.8 140.6 118.6 Other operating expenses 73.4 62.9 196.4 181.9 Maintenance 27.9 21.1 78.1 65.9 Depreciation & amortization 50.1 48.5 148.4 144.9 General taxes 34.1 32.6 105.8 102.0 Income taxes 51.1 62.4 123.1 127.2 ---------- ---------- ----------- ----------- Total 395.3 325.1 1,111.9 974.5 ------------ ---------- ----------- ----------- Operating Income 101.8 133.3 273.3 296.3 ------------ ---------- ----------- ----------- Other Income and Deductions, Net 0.2 (1.2) (1.2) (2.5) ------------ ---------- ----------- ---------- Income Before Interest Charges 102.0 132.1 272.1 293.8 ------------ ---------- ------------ ----------- Interest Charges and Other: Interest Expense 30.8 33.1 97.2 100.6 Allowance for borrowed funds used during construction (0.7) (1.6) (3.4) (5.2) ----------- ---------- ------------ ----------- Total 30.1 31.5 93.8 95.4 ------------ ----------- ------------ ----------- Net Income 71.9 100.6 178.3 198.4 Less-Preferred dividend requirements 5.5 5.5 16.4 16.8 Plus-Carrying amount over (under)consideration paid for redeemed preferred stock 1.1 (0.3) 1.1 (0.8) ------------ ---------- ---------- ----------- Net Income applicable to common stock $ 67.5 $ 94.8 $ 163.0 $ 180.8 ============ ========== ========== ============
ILLINOIS POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (See accompanying Notes to Consolidated Financial Statements) NINE MONTHS ENDED SEPTEMBER 30, 1997 1996 (Unaudited) (Millions of Dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 178.3 $ 198.4 Items not requiring cash, net 201.1 200.8 Changes in assets and liabilities (62.2) (39.7) ---------------- --------------- Net cash provided by operating 317.2 359.5 activities ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (131.2) (129.2) Other investing activities 9.2 0.6 ---------------- --------------- Net cash used in investing (122.0) (128.6) activities ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends on preferred and common stock (86.9) (81.1) Repurchase of common stock (119.7) (18.9) Redemptions - Short-term debt (114.4) (351.4) Long-term debt (150.2) (92.1) Preferred stock (4.1) (29.1) Issuances Short-term debt 133.0 257.7 Long-term debt 150.0 -- Preferred Stock -- 100.0 Other financing activities (3.2) (0.6) ---------------- --------------- Net cash used in financing activities (195.5) (215.5) ---------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (0.3) 15.4 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12.5 4.3 ---------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12.2 $ 19.7 =============== ==============
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 Reports on Form 10-Q for the quarters ended March 31, 1997, and June 30, 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 September 30, 1997 and December 31, 1996, the Consolidated Statements of Income for the three months and nine months ended September 30, 1997 and 1996, and the Consolidated Statements of Cash Flows for the nine months ended September 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 September 30, 1997 and December 31, 1996, the Consolidated Statements of Income for the three months and the nine months ended September 30, 1997 and 1996, and the Consolidated Statements of Cash Flows for the nine months ended September 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 classified 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. 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" (House Bill 362). On October 30, 1997, the Illinois Senate voted to approve House Bill 362 and forwarded the bill to the House of Representatives for consideration. House Bill 362 represents a modified version of Senate Bill 55 approved by the Illinois House of Representatives on May 30, 1997. The new bill is expected to go to the House in the fall veto session scheduled for November 12-14, 1997. Although House Bill 362 was approved by a wide margin in the Senate, action on the bill by the House cannot be predicted. IP believes this legislation, as currently drafted, will provide an orderly transition to direct access for all customers, and balance financial stability for current utility providers with customer choice. Currently, House Bill 362 guarantees IP's residential customers a fifteen percent decrease in base electric rates beginning August 1998 and an additional five percent decrease effective in May 2002. 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 which aggregate 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: 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 for all residential customers would take place in May 2002. Although the specified residential rate reductions and the introduction of direct access will lead to lower electric service revenues, House Bill 362 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, net of a mitigation factor (i.e., percentage reduction of the transition charge amount) 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; and 3) there is a provision for seeking rate relief in the event that the change in law leads to IP's return on equity 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 the amount of revenues earned as well as a number of factors including the ongoing costs of doing business. 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. At its July 24, 1997, meeting, the Emerging Issues Task Force of the Financial Accounting Standards Board (EITF) concluded that application of FAS 71 accounting should be discontinued at the date of enactment of deregulation legislation for business segments for which a plan of deregulation has been established. However, the EITF 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. IP expects to discontinue application of FAS 71 for its generating segment as a result of the enactment of House Bill 362. Based on the provisions of House Bill 362, as currently drafted, 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 House Bill 362 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 fully competitive marketplace. Management is currently analyzing the full financial and accounting impact of the bill. 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 House Bill 362 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 $67.9 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 Illinois Commerce Commission (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 During the third quarter of 1997, Illinova repurchased 3,481,400 shares of common stock in the open market at a cost of $79.2 million thereby completing its 4 million share repurchase program. The shares were repurchased under authority granted by the Illinova Board of Directors on June 10, 1997. All repurchased shares are held as treasury stock and are deducted from common equity at the cost of the shares repurchased. IP repurchased 2,121,444 shares of its common stock from Illinova on August 12, 1997, at a cost of $44.6 million and 2,454,148 shares on September 30, 1997, at a cost of $47.5 million. Through September 30, 1997, IP has purchased a total of 9,351,205 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 Reports on Form 10-Q for the quarters ended March 31, 1997, and June 30, 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 nine 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 pages 13-14 of this report. On October 24, 1997, at a special bondholders meeting, the 1943 Mortgage and Deed of Trust was amended to be generally consistent with the 1992 General Mortgage Indenture and Deed of Trust. The 1992 Indenture and Deed of Trust provides IP with increased financial flexibility. To date this year, IP has repurchased 82,590 shares of various issues of its preferred stock on the open market for a total cash outlay of $3.1 million. On September 29, 1997, IP issued a redemption notice for all outstanding shares of its Adjustable Rate Series A Cumulative Preferred Stock. The redemption took place on November 1, 1997, at $50 per share for a total of $34.9 million. IP's capital requirements for construction were approximately $131 million and $129 million during the nine months ended September 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 operating and investment purposes and has remaining shelf authority with the SEC to issue $200 million in debt securities. Illinova expects to activate the shelf as a medium-term note program during the fourth quarter of 1997. On October 23, 1997, IP filed a petition with the ICC requesting authorization to issue up to $600 million of long-term debt securities. Proceeds will be used for refinancing existing debt or issuance of new long-term debt. It is uncertain when the ICC will issue an order in the proceeding. 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 amortized. 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 amortization could begin as early as the first quarter of 1998 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 generation-related assets should help position the Company to operate competitively and profitably in the changing business environment. This acceleration of amortization would have a direct impact on earnings but not on cash flow. If House Bill 362 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 additional 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 pages 12-13 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 were used to offset the costs of acquiring Soyland's share of Clinton with the remaining $18.5 million recorded as interchange revenue. FUEL COST ADJUSTMENT On September 22, 1997, IP filed a petition with the ICC that stipulates customers will not be charged for certain additional costs of energy incurred as a result of Clinton being out of service. The petition, which was approved by the ICC on September 29, specifies that IP will forego collecting from its customers an estimated $20 million for higher-cost replacement power in 1997. During the third quarter, IP forewent recovery of $15.3 million of fuel costs. IP will forego recovery of additional fuel costs if the Clinton outage continues into 1998. Under the petition, fuel costs charged to customers will be no higher than average 1995-96 levels until Clinton is back in service operating at least at a 65% capacity factor for two consecutive months. During these proceedings, the ICC was asked to determine whether other Clinton investment and operating costs should be excluded from rates in light of the extended outage. The ICC rejected this request, but such a determination continues to be a risk under existing law as long as Clinton is not operating. OPEN ACCESS AND COMPETITION See "Open Access and Competition" under "Regulatory and Legal Matters" of the "Notes to Consolidated Financial Statements" on pages 12-13 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. On October 10, 1997, the USEPA proposed air pollution rules which would require substantial reductions of Nitrogen Oxide (NOx) emissions in Illinois and 21 other states. The proposal would require the installation of NOx controls by no later than September 2002. This proposal is expected to be finalized by October 1998 with Illinois utility reduction requirements specified in 1999. Preliminary cost estimates to implement the proposed required NOx controls are $130 to $150 million beyond what is already needed to comply with the NOx requirements of Phase II of the Acid Rain Program. The proposal includes a 120-day comment period. The legality of this proposal along with its technical feasibility is expected to be challenged by a number of utility groups including IP. GLOBAL WARMING On October 22, 1997, President Clinton outlined the administration's position for negotiating a global warming agreement in Japan in December. The President targeted not exceeding 1990 greenhouse gas emission levels during the period 2008 to 2012 and reductions below 1990 levels for the following five years. He also proposed that all countries participate in making reductions and that flexible, market-based mechanisms be established to help make reductions. During the last week of October, international negotiators prepared draft language for the December negotiations in Japan. The United States proposal for reduction targets and timetables as well as more restrictive proposals from other countries were included in the text. However, the United States proposal requiring all countries to participate in reductions and for flexible market-based mechanisms was not included in the draft text. United States Senate Resolution 98 (passed 95-0) indicates the Senate would not ratify an agreement that does not involve all countries or would damage the United States economy. IP estimates that reducing to 1990 levels by 2008 and just stabilizing at that level until 2025 could require significant capital outlays and annual operating expenses which could have a material adverse impact on 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. 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 25, 1997, the NRC requested a diagnostic inspection of Clinton to assess both strong and weak areas at the plant and document the effect of recent corrective actions on employee performance. This inspection was called for as a result of the NRC's semi-annual update naming Clinton among plants with declining performance. An Integrated Safety Assessment (ISA) team commissioned by IP, composed of two dozen independent nuclear industry professionals, completed its inspection of Clinton in early October. The ISA team issued a report to IP on October 20 citing significant performance, management, safety, and organizational culture problems. In late October, the NRC performed an evaluation to validate the ISA team's results. IP anticipates the NRC will conduct an exit meeting in mid-November. The results of the NRC and ISA teams' reports as well as IP's responses will be discussed at a public meeting currently scheduled for December 11. The reports from the ISA team and the NRC are scheduled to be published on December 18, 1997. No decision will be made regarding an estimated date of restart for Clinton until after the ISA and NRC exit meeting. IP will restart the plant only when it is confident that cultural issues, as well as safety and reliability issues, have been thoroughly addressed. IP anticipates that the Clinton outage will continue through at least the first quarter of 1998. On September 26, 1997, the NRC informed IP that it will be required to submit a written report to the NRC at least two weeks prior to restarting Clinton in order for the agency to determine if further action is needed to ensure compliance with NRC requirements. IP must provide information about corrective actions taken since Clinton was shut down. After the report is submitted, the NRC staff plans to meet with IP's management before the agency makes a decision on the plant's readiness for restart. Additional costs for 1997 associated with the Clinton outage are now estimated to be at least $35 million greater than originally projected. This is approximately $10 million (pre-tax) more than previously disclosed in a September 1997 8-K filed by IP/Illinova. IP expects incremental annual expenditures at least at this level to continue through 1999. 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. Unit 5 returned to service on October 17, 1997. The costs associated with restoring the units to service were substantially offset by insurance coverage and did not have a material adverse impact on Illinova and IP. POWER SUPPLY AND RELIABILITY Electricity was in short supply throughout Illinois and Wisconsin this summer because of an unusually high number of plant outages in this region. IP purchased replacement power, and 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. For more information, see "Fuel Cost Adjustment" under "Regulatory Matters" on page 17 of this report. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Electric Operations - Electric revenues for the third quarter of 1997 increased $16.9 million compared to the third quarter of 1996. An increase in UFAC recoveries accounted for $13.1 million of the increase in revenues. In addition, electric interchange sales increased $18.0 million primarily due to increased activity on the interchange market. Power purchased increased $49.2 million due to lower equivalent availability at nuclear and fossil facilities and increased interchange activity. Fuel for electric plants increased $6.6 million due to a decrease in UFAC underrecoveries of $9.5 million and a $5.0 million increase in emission allowance expense. These increases in expense were partially offset by lower fuel costs of $6.9 million due to decreased generation. During the quarter, IP forewent recovery of $15.3 million of future revenues related to the fuel adjustment clause. For more information, see "Fuel Cost Adjustment" under "Regulatory Matters" of the "Management's Discussion and Analysis" on page 17 of this report. These factors combined to decrease electric margin $20.9 million for the quarter. Kilowatt hour (kwh) sales increased 3.0% for the quarter led by increases of 4.0% and 3.0% in the industrial and the commercial markets, respectively. Cooling degree days were almost the same during the third quarter of 1997 compared to the same time frame in 1996, resulting in relatively constant sales to the temperature-sensitive residential market. The equivalent availability of Clinton was 0.0% and 71.5% for the three months ended September 30, 1997 and 1996, respectively. Clinton was unavailable in the third quarter of 1997 due to the continued outage which began September 6, 1996. The equivalent availability for IP's coal-fired plants was 80.0% and 88.1% for the three months ended September 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. Gas Operations - For the quarter, gas margin decreased $1.5 million reflecting a 9.5% decrease in therm sales (excluding transport). Operation and Maintenance Expense - The current quarter increase of $17.3 million dollars is primarily due to operating and maintenance expenses associated with the Clinton outage. For more information, see "Clinton Power Station" of the "Management's Discussion and Analysis" on pages 18-19 of this report. Diversified enterprises - Revenues increased $324.0 million for the third quarter of 1997 due to increased activity at IEPI. However, diversified enterprises expenses increased $326.6 million which offsets the growth in revenues. Equity Earnings in Affiliates - The current quarter increase of $3.5 million is largely due to increased earnings from IGC investments. Earnings per Common Share - The earnings per common share for Illinova during the third quarter of 1997 and 1996 resulted from the interaction of all of the factors discussed herein as well as fewer shares of common stock outstanding. NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 Electric Operations - Electric margin decreased $13.4 million for the first nine months of 1997 compared to the same time frame in 1996. Electric revenues increased $39.5 million as a result of an increase to the UFAC of $40.2 million. In addition, electric interchange sales increased $32.6 million due to the receipt of an opt-out fee from Soyland per the amended PCA in the second quarter and increased kwh sales. 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 $107.5 million and fuel for electric plants decreased $22.0 million largely due to lower equivalent availability at nuclear and fossil facilities. During the third quarter, IP forewent recovery of $15.3 million of future revenues related to the fuel adjustment clause. For more information, see "Fuel Cost Adjustment" under "Regulatory Matters" of the "Management's Discussion and Analysis" on page 17 of this report. Cooling degree days decreased 21.2% for the nine month period which resulted in a 2.4% decrease in kwh sales to the temperature-sensitive residential market. Sales to the commercial and industrial markets remained relatively stable. The equivalent availability of Clinton was 0% and 87.9% for the nine months ended September 30, 1997 and 1996, respectively. Clinton was unavailable for the first nine months of 1997 due to the extended outage which began September 6, 1996. The equivalent availability for IP's coal-fired plants was 73.4% and 83.3% for the nine months ended September 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 $42.3 million in the first nine months of 1997. The increase in gas revenues was primarily due to significantly higher Purchased Gas Adjustment (PGA) revenues ($36.9 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 15.1% (70.5 million therms). This decrease represents a 11.8% (32.5 million) decrease in therm sales to the residential sector, a 7.7% (9.7 million) decrease in therm sales to the commercial sector, and a 40.6% (28.3 million) decrease to the industrial market. Therms transported increased 31.8% (57.5 million) resulting in a $1.3 million increase for the first nine months compared to last year. Gas purchased for resale increased $22.0 million during the first nine months of 1997. Gas costs increased due to higher prices charged by suppliers ($11.2 million) and the amortization of prior period underrecoveries ($30.8 million). This increase was partially offset by $19.2 million due to a decrease in the amount of therms purchased and reduced storage costs. Operation and Maintenance Expense - The increase of $26.7 million is primarily due to increased company and contractor labor at the fossil and nuclear plants due to scheduled and unscheduled outages. For more information, see "Clinton Power Station" of the "Management's Discussion and Analysis" on pages 18-19 of this report. Diversified enterprises - Due primarily to increased activity at IEPI, diversified enterprises revenues increased $535.1 million for the first nine months of 1997. However, diversified enterprises expenses increased $555.0 million offsetting the growth in revenues. Miscellaneous - Net - The decrease in deductions of $4.0 million is primarily a result of 1996 accruals recorded for the planned disposition of property. Equity Earnings in Affiliates - The increase of $4.8 million in the nine month period is largely due to increased earnings from IGC investments. Earnings per Common Share - The earnings per common share for Illinova during the first nine months of 1997 and 1996 resulted from the interaction of all other factors discussed herein as well as fewer shares of common stock outstanding. 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 June 30, 1997: Report filed on Form 8-K on September 24, 1997 Other Events: IP filed a petition with the Illinois Commerce Commission to forego collecting a portion of its energy costs related to the Clinton Power Station (Clinton) outage. In addition, Illinova expects lower than anticipated earnings in 1997. Also, IP discusses status of the Clinton outage. 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/ Larry F. Altenbaumer --------------------------- Larry F. Altenbaumer, Chief Financial Officer, Treasurer and Controller on behalf of Illinova Corporation Date: November 10, 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/ Larry F. Altenbaumer ------------------------- Larry F. Altenbaumer, Senior Vice President and Chief Financial Officer on behalf of Illinois Power Company Date: November 10, 1997 EXHIBIT INDEX PAGE NO. WITHIN SEQUENTIAL NUMBERING EXHIBIT DESCRIPTION SYSTEM 27 Financial Data Schedule UT (filed herewith) EX-27 2 FINANCIAL DATA SCHEDULE UT FOR 1997 3RD QTR 10-Q
UT This schedule contains summary financial information extracted from the balance sheet, income sttement, 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. 0000049816 Sedonna S. Jordan 0 0 1,000,000 Default 9-Mos Dec-31-1997 Jan-01-1997 Sep-30-1997 1 PER-BOOK 4687 6 436 452 0 5581 1211 0 340 1551 197 92 1577 50 0 279 11 0 59 39 1726 5581 1385 123 989 1112 273 1 272 94 178 16 163 70 83 311 0 0
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