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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _____________
COMMISSION FILE NUMBER: 1-3004
ILLINOIS POWER COMPANY
(Exact name of registrant as specified in its charter)
Illinois 37-0344645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
500 S. 27th Street 62521-2200
Decatur, Illinois (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (217) 424-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
Each of the following securities are listed on the New York Stock Exchange.
PREFERRED STOCK, CUMULATIVE, ILLINOIS POWER COMPANY
$50 PAR VALUE
4.08% Series 4.26% Series 4.70% Series
4.20% Series 4.42% Series
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
(ILLINOIS POWER CAPITAL, L.P.)
9.45% Series
TRUST ORIGINATED PREFERRED SECURITIES OF SUBSIDIARY
(ILLINOIS POWER FINANCING 1)
8.00% Series
FIRST MORTGAGE BONDS
7.95% Series due 2004 (Defeased in 1999)
NEW MORTGAGE BONDS
6 1/8% Series due 2000 6 1/2% Series due 2003
5.625% Series due 2000 6 3/4% Series due 2005
6.25% Series due 2002 7.5% Series due 2009
6.0% Series due 2003 7 1/2% Series due 2025
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has 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 reports), and (2) has been subject to
the filing requirements for the past 90 days.
Yes /X/ No / /
Illinova Corporation is the sole holder of the common stock of Illinois Power
Company. The aggregate market value of the voting preferred stock held by
non-affiliates of Illinois Power Company at February 29, 2000, was
approximately $28.3 million. The determination of stock ownership by
non-affiliates was made solely for the purpose of responding to this
requirement and the registrant is not bound by this determination for any
other purpose.
The number of shares of Illinois Power Company Common Stock, without par
value, outstanding on February 29, 2000, was 62,892,213, all of which is
owned by Illinova Corporation.
DOCUMENTS INCORPORATED BY REFERENCE. None.
2
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ILLINOIS POWER COMPANY
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business.............................................................................. 5
General............................................................................... 5
Definitions......................................................................... 5
Dividends........................................................................... 6
Open Access and Competition......................................................... 6
Customer Data....................................................................... 8
Electric Business..................................................................... 8
Overview............................................................................ 8
Fossil Generation Asset Transfer.................................................... 9
Clinton Power Station............................................................... 9
General........................................................................... 9
PECO and AmerGen Agreements....................................................... 9
Fuel Supply......................................................................... 9
Power Supply........................................................................ 11
Construction Program................................................................ 11
Accounting Matters.................................................................. 11
Gas Business.......................................................................... 12
Gas Supply.......................................................................... 12
Environmental Matters................................................................. 12
Air Quality......................................................................... 12
Clean Air Act....................................................................... 13
Manufactured-Gas Plant Sites........................................................ 13
Water Quality....................................................................... 13
Other Issues........................................................................ 14
Electric and Magnetic Fields........................................................ 14
Environmental Expenditures.......................................................... 14
Year 2000 Data Processing............................................................. 14
Research and Development.............................................................. 14
Regulation............................................................................ 14
Important Information................................................................. 15
Executive Officers.................................................................... 16
Operating Statistics.................................................................. 17
Item 2. Properties............................................................................ 17
Item 3. Legal Proceedings..................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................... 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 18
Item 6. Selected Financial Data............................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
3
Operations............................................................................ 18
Item 8. Financial Statements and Supplementary Data........................................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................ 32
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 33
Item 11. Executive Compensation................................................................ 37
Summary Compensation Table............................................................ 38
Option Grants in 1999 - Individual Grants............................................. 39
Aggregated Option and Fiscal Year-End Option Value Table.............................. 40
Pension Benefits...................................................................... 40
Supplemental Pension Benefits......................................................... 41
Employment Agreement.................................................................. 42
Consulting Agreement.................................................................. 42
Employee Retention and Settlement Agreements.......................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 43
Item 13. Certain Relationships and Related Transactions........................................ 44
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 44
Signatures...................................................................................... 47
Exhibit Index................................................................................... 48
For definitions of certain terms used herein, see "Item 1. Business-Definitions."
4
PART I
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ITEM 1. BUSINESS
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GENERAL
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Illinois Power Company (IP) was incorporated under the laws of the
State of Illinois on May 25, 1923. IP has publicly traded preferred shares
outstanding and common stock wholly owned by Illinova Corporation (Illinova).
On February 1, 2000, Dynegy Holdings Inc. and Illinova merged. As a result, a
new entity named Dynegy Inc. assumed ownership and control of Illinova and
its subsidiary IP, effective on that date. Dynegy is headquartered in
Houston, Texas.
IP is engaged in the transmission, distribution and sale of electric
energy and the distribution, transportation and sale of natural gas in the
state of Illinois. IP was engaged in the generation of electric energy
through December 14, 1999. Effective October 1, 1999, IP's wholly owned
fossil generating assets were transferred to IPMI, a wholly owned subsidiary
of Illinova. Subsequent to the merger IPMI became Dynegy Midwest Generation,
Inc. IP is affected by changes in the electric utility industry driven by
regulatory and legislative initiatives to introduce competition and end
monopoly franchises. One aspect of this change is "direct access," giving
customers the freedom to purchase electricity from alternate suppliers. In
December 1997, electric regulatory restructuring legislation was enacted by
the Illinois General Assembly. For a more detailed discussion of these
developments, refer to the "Open Access and Competition" section of this item.
Through October 1999, IP advanced funds to Illinova for operations
and investments. Illinova paid interest to IP on any borrowed funds at a rate
equal to the higher of the rate that Illinova would pay if it used a
currently outstanding line of credit, or IP's actual cost of the funds
provided. In mid-November 1999, Illinova failed to meet criteria set by the
ICC by which this practice was limited, and IP ceased making such loans. IP
did provide funds to Illinova in the form of cash dividends payable on the
common stock of IP. In 1999, approximately $41 million in such dividends were
paid. For more information regarding cash dividend restrictions, see the
"Dividends" section later in this item.
The IP consolidated financial statements include the accounts of IP,
Illinois Power Capital, L.P., a limited partnership in which IP serves as the
general partner; Illinois Power Financing I, a statutory business trust in
which IP serves as sponsor; Illinois Power Securitization Limited Liability
Company (LLC), a special purpose Delaware LLC whose sole member is IP; and
Illinois Power Special Purpose Trust, a special purpose Delaware business
trust whose sole owner is Illinois Power Securitization Limited Liability
Company.
DEFINITIONS
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As used in this Form 10-K, the abbreviations listed below are defined as
follows:
AICPA American Institute of Certified Public Accountants
AFUDC Allowance for Funds Used During Construction
AmerGen AmerGen Energy Company
BACT Best available control technology
Baldwin Baldwin Power Station
C & I Commercial and Industrial
CAAA Clean Air Act Amendments
Clinton Clinton Power Station
DOE U.S. Department of Energy
DOJ Department of Justice
Dynegy Dynegy Inc.
EITF Emerging Issues Task Force of the Financial Accounting Standards Board
5
EMF Electric and Magnetic Fields
EPS Earnings Per Share
ESOP Employees' Stock Ownership Plan
FAS Statement of Financial Accounting Standards
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fuel Company Illinois Power Fuel Company
Hennepin Hennepin Power Station
ICC Illinois Commerce Commission
Illinova Illinova Corporation
IP Illinois Power Company
IPFI Illinois Power Financing I
IPMI Illinova Power Marketing Inc.
IPSPT Illinois Power Special Purpose Trust
ISA Integrated Safety Assessment
ISO Independent System Operator
IT Information Technology
ITC Investment Tax Credits
kw Kilowatt
kwh Kilowatt-Hour
MAIN Mid-America Interconnected Network
MGP Manufactured-Gas Plant
MIPS Monthly Income Preferred Securities
MISO Midwest Independent Transmission System Operator, Inc.
MW Megawatt
MWH Megawatt-Hour
NAES North American Energy Services Company
NERC North American Electric Reliability Council
NOPR Notice of Proposed Rulemaking
NOV Notice of Violation
NOx Nitrogen Oxide
NRC U.S. Nuclear Regulatory Commission
NWPA Nuclear Waste Policy Act of 1992
OATT Open Acess Transmission Tariff
P.A. 90-561 Electric Service Customer Choice and Rate Relief Law of 1997
PCA Power Coordination Agreement
PECO PECO Energy Company
PPA Power Purchase Agreement
ROE Return on Equity
S&P Standard & Poor's
SCR Selective Catalytic Reduction
SEC U.S. Securities and Exchange Commission
SFP Secondary Financial Protection
SO(2) Sulfur Dioxide
SOP Statement of Position
Soyland Soyland Power Cooperative, Inc.
TOPrS Trust Originated Preferred Securities
UFAC Uniform Fuel Adjustment Clause
UGAC Uniform Gas Adjustment Clause
U.S. EPA U.S. Environmental Protection Agency
VaR Value-at-Risk
Vermilion Vermilion Power Station
Wood River Wood River Power Station
DIVIDENDS
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Under the Restated Articles of Incorporation, common stock dividends
are subject to the preferential rights of the holders of preferred and
preference stock.
IP is also limited in its payment of dividends by the Illinois
Public Utilities Act, which requires retained earnings equal to or greater
than the amount of any proposed dividend declaration or payment. The Federal
Power Act precludes declaration or payment of dividends by electric utilities
"out of money properly stated in a capital account."
OPEN ACCESS AND COMPETITION
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Competition has become a dominant issue for the electric utility
industry. It is a significant departure from traditional regulation in which
public utilities have a universal obligation to serve the public in return
for protected service territories and regulated pricing designed to allow a
reasonable return on prudent investment and recovery of operating costs. The
federal Public Utility Regulatory Policies Act of 1978 facilitated
development of co-generators and independent power producers. Promotion of
competition continued with enactment of the Energy Policy Act of 1992, which
authorized the FERC to mandate wholesale wheeling of electricity by utilities
at the request of certain authorized generating entities and electric service
providers. Wheeling is the transport of electricity generated by one entity
over transmission and distribution lines belonging to another entity.
Competition arises not only from co-generation or independent power
production, but also from municipalities seeking to extend their service
boundaries to include customers being served by utilities. The right of
municipalities to have power wheeled to them by utilities was established in
1973. IP has been obligated to wheel power for municipalities and
cooperatives in its territory since 1976.
Further competition may be introduced by state action, as has
occurred in Illinois, or by federal regulatory action, although the Energy
Policy Act currently precludes the FERC from mandating retail wheeling.
Retail wheeling involves the transport of electricity to end-use customers.
6
P.A. 90-561, Illinois electric utility restructuring legislation,
was enacted in December 1997. P.A. 90-561 gave IP's residential customers a
15 percent decrease in base electric rates beginning August 1, 1998, and an
additional 5 percent decrease effective on May 1, 2002. The rate decreases
resulted in revenue reductions of $75 million in 1999, and expected revenue
reductions of approximately $75 million in each of the years 2000 and 2001,
approximately $92 million in 2002, and approximately $101 million in 2003 and
2004, based on current consumption.
Under P.A. 90-561, customers with demand greater than 4 MW at a
single site and customers with at least 10 sites that aggregate at least 9.5
MW in total demand were free to choose their electric generation suppliers
("direct access") effective October 1999. Direct access for the remaining
non-residential customers occurs in two phases: customers representing
one-third of the remaining load in the non-residential class in October 1999
and customers representing the entire remaining non-residential load on
December 31, 2000. Direct access will be available to all residential
customers in May 2002. IP remains obligated to serve all customers who
continue to take service from IP at tariff rates and remains obligated to
provide delivery service to all customers at regulated rates. The transition
charges departing customers must pay to IP are not designed to hold IP
completely harmless from resulting revenue loss because of the mitigation
factor described below.
Although the specified residential rate reductions and the
introduction of direct access will lead to lower electric service revenues,
P.A. 90-561 is designed to protect the financial integrity of electric
utilities in three principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
ICC. The transition charges are calculated by subtracting from a customer's
fully bundled rate an amount equal to: a) delivery charges the utility will
continue to receive from the customer, b) the market value of the freed-up
energy, and c) a mitigation factor, which is the higher of a fixed rate per
kwh or a percentage of the customer's bundled base rate. The mitigation
factor increases during the transition period and is designed to provide
incentive for management to continue cost reduction efforts and generate
new sources of revenue;
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) Utilities are permitted to seek rate relief in the event that the change in
law leads to their return on equity falling below a specified minimum based
on a prescribed test. Utilities are also subject to an "over-earnings" test
that requires them, in effect, to share earnings in excess of specified
levels with customers. See "Note 4 - Commitments and Contingencies" in the
audited financial statements included herein.
The extent to which revenues are affected by P.A. 90-561 will depend
on a number of factors including future market prices for wholesale and
retail energy, and load growth and demand levels in the current IP service
territory. The impact on net income will depend on, among other things, the
amount of revenues earned and the cost of doing business.
Competition creates both risks and opportunities. At this time, the
ultimate effect of competition on IP's financial position and results of
operations is uncertain.
In January 1998, IP, in conjunction with eight other
transmission-owning entities, filed with the FERC for all approvals necessary
to create and to implement the Midwest Independent Transmission System
Operator, Inc. (MISO). On September 16, 1998, the FERC issued an order
authorizing the creation of a MISO. The MISO has elected a seven-person
independent board of directors. The goals of this joint undertaking are: 1)
to put in place a tariff allowing easy and nondiscriminatory access to
transmission facilities in a multi-state region, 2) to enhance regional
reliability and 3) to establish an entity that operates independently of any
transmission owner(s) or other market participants, thus furthering
competition in the wholesale generation market consistent with the objectives
of the FERC's Order No. 888. Since January 1998, five other
transmission-owning entities joined the MISO. Participation in an ISO by
utilities serving retail customers in Illinois was one of the requirements
included in P.A. 90-561. The MISO has a stated goal to be fully operational
by June 1, 2001.
As a MISO member, IP is providing guarantees of up to $10 million to
facilitate MISO access to bank lines of credit during the MISO startup phase
for buildings, personnel and startup capital.
7
CUSTOMER DATA
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The territory served by IP comprises substantial areas in northern,
central and southern Illinois, including nine cities with populations greater
than 30,000 and twenty cities with a population of over 10,000 (1996 U.S.
Census Bureau's Estimated Populations). IP supplies electric service at
retail to an estimated aggregate population of 1,278,000 in 311 incorporated
municipalities, adjacent suburban and rural areas, and numerous
unincorporated communities and retail natural gas service to an estimated
population of 962,000 in 266 incorporated municipalities and adjacent areas.
IP holds franchises in all of the 311 incorporated municipalities in which it
furnishes retail electric service and in all of the 266 incorporated
municipalities in which it furnishes retail gas service. At January 11, 2000,
IP served 583,899 active electric customers (billable meters) and 410,281
active gas customers (billable meters). These numbers do not include
non-metered customers, such as street lights. Sales of electricity and gas
sales and transportation are affected by seasonal weather patterns, and,
therefore, operating revenues and associated operating expenses are not
distributed evenly during the year.
For more information, see "Note 12 - Segments of Business" in the
audited financial statements included herein.
ELECTRIC BUSINESS
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OVERVIEW
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IP supplies electric service at retail to residential, commercial
and industrial consumers in substantial portions of northern, central and
southern Illinois. Electric service at wholesale is supplied to numerous
utilities and power marketing entities, as well as to the Illinois Municipal
Electric Agency (IMEA), as agent for 11 municipalities. In 1999, IP provided
interchange power to 77 entities, including 55 power marketers.
IP's highest system peak hourly demand (native load) in 1999 was
3,888,000 kilowatts on July 29, 1999. This establishes a new IP record for
peak load.
Prior to the October 1, 1999 transfer of wholly owned fossil
generating assets to IPMI and the sale of Clinton to AmerGen on December 15,
1999, IP owned and operated generating facilities with a total net summer
capability of 4,747,250 kilowatts. The generating capability came from six
major steam generating plants and three peaking service combustion turbine
plants. See Item 2, "Properties" for further information.
IP is a participant, together with Ameren - Union Electric Company
(AmerenUE) and Ameren - Central Illinois Public Service Company (AmerenCIPS),
in the Illinois-Missouri Power Pool (Pool), which was formed in 1952. The
Pool operates under an interconnection agreement that provides for the
interconnection of transmission lines. This agreement has no expiration date,
but any party may withdraw from the agreement on 36 months' notice.
IP has agreements with all major wholesale marketing and trading
entities operating in the Midwest. These agreements are used for the purchase
and sale of energy in the wholesale market.
IP, AmerenCIPS and AmerenUE have contracted with the Tennessee
Valley Authority (TVA) for the interconnection of the TVA system with those
of the three companies to exchange economy and emergency power and for other
working arrangements. This contract has no expiration date, but any party may
withdraw from the agreement on five years' written notice.
IP also has interconnections with Indiana-Michigan Power Company,
Commonwealth Edison Company, Central Illinois Light Company, Mid-American
Energy Corporation, Louisville Gas & Electric, Southern Illinois Power
Cooperative, Electric Energy Inc. (EEI), Soyland, the City of Springfield,
Illinois and the TVA.
IP is a member of the Mid-America Interconnected Network, one of ten
regional reliability councils established to coordinate plans and operations
of member companies regionally and nationally.
8
FOSSIL GENERATION ASSET TRANSFER
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On August 24, 1999, the FERC, under Part 205 of the Federal Power
Act, approved IP's filing to put into place a PPA between IP and IPMI, a
wholly owned subsidiary of Illinova. Also, on September 10, 1999, the FERC,
under Part 203 of the Federal Power Act, approved IP's filing to transfer all
of IP's wholly owned fossil generating assets to its affiliate, IPMI. These
approvals, along with the previously received approval from the ICC,
satisfied all regulatory requirements related to the formation of IPMI and
the transfer to IPMI of IP's wholly owned fossil generating assets. On
October 1, 1999 IP transferred all of its wholly owned fossil generating
assets to Illinova, at book value, in exchange for a note receivable.
Illinova subsequently contributed these assets and certain liabilities to
IPMI.
CLINTON POWER STATION
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GENERAL
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For background information on Clinton, see "Note 2 - Clinton
Impairment, Quasi-Reorganization and Sale of Clinton" in the audited
financial statements included herein.
PECO AND AMERGEN AGREEMENTS
---------------------------
On April 15, 1999, IP announced that it had reached an interim
agreement with AmerGen, whereby AmerGen would purchase and operate Clinton
and IP would buy at least 80 percent in 1999 and at least 75 percent during
the years 2000 through 2004 of the plant's electricity output. AmerGen is
jointly owned by PECO and British Energy. IP also announced on April 15,
1999, the execution of a revised management agreement (Agreement) with PECO
for the operation of Clinton retroactive to April 1, 1999.
Specifically, PECO was responsible for Clinton's direct operating
and capital expenses and continued to assist with the management of the
station under the existing management services contract, while IP compensated
PECO for management services based on the amount of electricity the station
produced. This eliminated IP's exposure to the uncertainty regarding the
costs associated with Clinton's operations. In return for transferring this
financial risk, IP agreed to pay PECO a management fee and allowed PECO to
retain 20 percent of the power generated for its own use. The financial
impact of this obligation was contingent on two variables: (1) the capacity
levels at which Clinton operated and (2) the prices at which the electricity
was sold. Based on the terms of the revised management agreement, the fees
paid to PECO during the interim period exceeded the 1999 Clinton-related O&M
and capital costs for which PECO assumed full responsibility commencing April
1, 1999. Terms of the Agreement between PECO and IP remained in effect until
the Clinton plant sale closed on December 15, 1999.
On December 15, 1999, IP closed the sale of Clinton to AmerGen.
Basic terms for the sale were unchanged from a definitive agreement announced
on July 1, 1999. AmerGen paid IP $12.4 million for the plant and property and
AmerGen assumed responsibility for operating and ultimately decommissioning
Clinton.
IP agreed to transfer to AmerGen the existing decommissioning trust
funds in the amount of $98.5 million on the sale closing date and to make an
additional payment of $113.4 million to the decommissioning trust funds. In
addition, IP is responsible for five future annual payments of approximately
$5 million to the decommissioning trust funds. AmerGen bears all other
costs and risks of decommissioning.
FUEL SUPPLY
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Coal was used to generate approximately 73% of the electricity
produced by IP during 1999. Nuclear fuel was used to generate approximately
25% of the electricity produced by IP, with other fuels generating the
remaining 2%. The calculation of the above percentages and items within this
heading, Fuel Supply, take into consideration the transfer of wholly owned
fossil generation assets on October 1, 1999, and the sale of Clinton on
December 15, 1999.
COAL - IP did not experience difficulty in obtaining adequate coal supplies.
9
NUCLEAR - IP leased nuclear fuel from the Fuel Company. During 1999, IP paid
off the remainder of the nuclear fuel lease, approximately $132 million. The
Fuel Company, which was 50% owned by IP, was formed in 1981 for the purpose
of leasing nuclear fuel to IP for Clinton. The Fuel Company was dissolved on
February 23, 2000. Lease payments were equal to the Fuel Company's cost of
fuel consumed (including related financing and administrative costs.) Lease
terms stipulated that, in the event Clinton was out of service for
twenty-four consecutive months, IP was obligated to purchase Clinton's
in-core nuclear fuel from the Fuel Company. At December 31, 1999, there were
no obligations to the Fuel Company.
IP had one long-term contract for the supply of uranium concentrates
with Cameco, a Canadian corporation. The Cameco contract was renegotiated in
1994 to lower the price and provide 55% to 65% of Clinton's estimated fuel
requirements through 2000. The decision to utilize the additional 10% of
Clinton's fuel requirements from Cameco was made the year before each
delivery and depended on the estimated price and availability from the spot
market versus the estimated contract price. The contract with Cameco was
stated in terms of U.S. dollars. This contract was assigned to AmerGen on
December 15, 1999.
Conversion services for the period 1991-2005 were contracted with
Sequoyah Fuels. Sequoyah Fuels closed its Oklahoma conversion plant in 1992
and joined with Allied Chemical Company to form a marketing company named
CoverDyn. All conversion services were performed at Allied's Metropolis,
Illinois facility, but Sequoyah Fuels retained the contract with IP. This
contract was assigned to AmerGen on December 15, 1999.
A contract with General Electric Company provided fuel fabrication
requirements for the initial core and 11 reloads, or approximately through
2011. The contract was renegotiated in 1998 to lower the price and reduce the
duration from approximately 19 reloads. This contract was assigned to AmerGen
on December 15, 1999.
Under the Nuclear Waste Policy Act (NWPA), the DOE is responsible
for the permanent storage and disposal of spent nuclear fuel. The DOE
currently charges one mill ($0.001) per net kwh (one dollar per MWH)
generated and sold for future disposal of spent fuel. In 1996, at the request
of nuclear-owning utilities and state regulatory agencies, the District of
Columbia (D.C.) Circuit Court of Appeals issued an order confirming the DOE's
unconditional obligation to take responsibility for spent nuclear fuel,
commencing in 1998. The DOE argued that it had no such obligation because of
its inability to site and license a permanent repository. Notwithstanding
this decision, which the DOE did not appeal, the DOE has indicated to all
nuclear utilities that it will experience a delay in performance. Nuclear
plant owners and others are pursuing litigation against the DOE at the D.C.
Circuit Court of Appeals, the Federal Court of Claims, federal district
court, and in administrative proceedings. These lawsuits are focused on
establishing DOE liability for damages caused by its failure to perform, the
scope of those damages, and other remedies. To date, the unconditional nature
of the DOE's obligation has been upheld but no court has yet quantified
damages or ordered specific performance. The outcome of these lawsuits is
uncertain. There appears to be no basis under current law to impose liability
on former owners of spent nuclear fuel, for future disposal costs or
environment impairment.
At the closing of the sale of Clinton to AmerGen, IP made an
environmental closing payment of $400,000 to AmerGen in full and complete
satisfaction of all its obligations regarding low-level waste and mixed waste
under the Asset Purchase Agreement with AmerGen, dated June 30, 1999. In
consideration of the environmental closing payment, AmerGen purchased and
acquired all rights, title and interest of IP to the mixed waste drums and
agreed to dispose of such mixed waste drums and assigned low-level waste in
accordance with applicable laws, releasing IP from any further obligations.
Under the Energy Policy Act of 1992, IP is responsible for a portion
of the cost to decontaminate and decommission the DOE's uranium enrichment
facilities. Each utility is assessed an annual fee for a period of fifteen
years based on quantities purchased from the DOE facilities prior to passage
of the Act. At December 31, 1999, IP has a remaining liability of $5.3
million representing future assessments.
OIL AND GAS - IP did not experience difficulty in obtaining adequate supplies
of these resources.
10
Reference is made to the section "Environmental Matters" hereunder
for information regarding pollution control matters relating to IP's fuel
supply.
POWER SUPPLY
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IP's transfer of its wholly owned fossil generating assets to
Illinova and the sale of Clinton to AmerGen changed the method by which IP
obtains its electricity to supply its retail customers. In conjunction with
the aforementioned events, IP entered into PPAs with IPMI and AmerGen, in
order to meet its service obligations under the Illinois Public Utilities
Act. These agreements secure IP's energy requirements at pre-determined
rates. Volatility of the power supply market exposes IP to some risk in
relation to these agreements.
CONSTRUCTION PROGRAM
- --------------------
To meet anticipated needs, IP has used internally generated funds
and external financings. The timing and amount of external financings depend
primarily on economic and financial market conditions, cash needs and
capitalization ratio objectives.
For more information on IP's liquidity, see "Note 5 - Lines of
Credit and Short-Term Loans" in the audited financial statements included
herein; and "Liquidity and Capital Resources" in "Management's Discussion and
Analysis."
ACCOUNTING MATTERS
- ------------------
IP prepares its consolidated financial statements in accordance with
Statement of Financial Accounting Standards (FAS) 71, "Accounting for the
Effects of Certain Types of Regulation." Reporting under FAS 71 allows
companies whose service obligations and prices are regulated to maintain
assets on their balance sheets representing costs they expect to recover from
customers, through inclusion of such costs in their future rates. In July
1997, 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. The
EITF further concluded that regulatory assets and liabilities that originated
in the portion of the business being deregulated should be written off unless
their recovery is specifically provided for through future cash flows from
the regulated portion of the business.
The enactment of P.A. 90-561 provides for market-based pricing of
electric generation services; therefore, IP discontinued application of FAS
71 for its generating segment as of December 1997. IP evaluated its
regulatory assets and liabilities associated with its generation segment and
determined that recovery of these costs was not probable through rates
charged to transmission and distribution customers, the regulated portion of
the business.
In December 1997, IP wrote off generation-related regulatory assets
and liabilities of approximately $195 million (net of income taxes). These
net assets related to previously incurred costs that had been expected to be
collected through future revenues, including deferred Clinton post
construction costs, unamortized gains and losses on reacquired debt,
recoverable income taxes and other generation-related regulatory assets.
In December 1998, IP's Board of Directors decided to exit the
nuclear portion of the business by sale or shutdown of Clinton. FAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," requires that all long-lived assets for which management
has committed to a plan of disposal be reported at the lower of carrying
amount or fair value less cost to sell. Consequently, IP wrote off in 1998
the value of Clinton and accrued Clinton-related exit costs. The Clinton
impairment and accrual of exit-related costs resulted in an impairment loss
of $1,523.7 million, net of income taxes. IP had an accumulated deficit in
retained earnings of $1,565.9 million after recording the impairment loss.
At the same time, IP's Board of Directors also approved the
implementation of a quasi-reorganization. In November 1998, the SEC confirmed
that it would not object to the proposed accounting. A quasi-reorganization
is an accounting procedure that eliminates an accumulated deficit in retained
earnings and permits the company to proceed on much the same basis as if it
11
had been legally reorganized. A quasi-reorganization involves restating a
company's assets and liabilities to their fair values, with the net amount of
these adjustments added to or deducted from the deficit. Any balance in the
retained earnings account is then eliminated by a transfer from common stock
equity, giving the company a "fresh start" with a zero balance in retained
earnings. For additional information see "Note 2 - Clinton Impairment,
Quasi-Reorganization and Sale of Clinton" in the audited financial statements
included herein.
On December 15, 1999, IP sold Clinton to AmerGen. The sale resulted
in revisions to the impairment of Clinton-related assets and the previously
accrued exit-related costs. The decrease in the impairment and accruals was
recognized as an increase in common stock equity, revising the original
effect of the 1998 quasi-reorganization on common stock equity.
GAS BUSINESS
-------------
IP supplies retail natural gas service to an estimated aggregate
population of 962,000 in 266 incorporated municipalities, adjacent suburban
areas and numerous unincorporated communities. IP does not sell gas for
resale.
IP's rate schedules contain provisions for passing through to its
gas customers increases or decreases in the cost of purchased gas. For
information on revenue and energy costs, see the sub-caption "Revenue
Recognition and Energy Cost" of "Note 1 - Summary of Significant Accounting
Policies" in the audited financial statements included herein.
IP has seven underground gas storage fields having a total capacity
of approximately 15.1 Billion Cubic Feet (BCF) and a total deliverability on
a peak day of about 312,000 Thousand Cubic Feet (MCF). In addition to the
capacity of the seven underground storage fields, IP has contracts with
various natural gas suppliers and producers for 9.9 BCF of underground
storage capacity and a total deliverability on a peak day of 160,000 MCF.
Operation of underground storage permits IP to increase deliverability to its
customers during peak load periods by taking gas into storage during the
off-peak months.
IP owns one active liquefied petroleum gas plant having an aggregate
peak-day deliverability of about 20,000 MMBtu for peak-shaving purposes. Gas
properties include approximately 8,000 miles of mains.
IP experienced its 1999 peak-day send out of 705,176 MMBtu of
natural gas on January 4, 1999. This compares with IP's record peak-day send
out of 857,324 MMBtu of natural gas on January 10, 1982.
GAS SUPPLY
- ----------
IP has contracts with six interstate pipeline companies for firm
transportation and storage services. These contracts have varying expiration
dates ranging from 2000 to 2004. IP also enters into contracts for the
acquisition of natural gas supply. Those contracts range in duration from one
to five months.
ENVIRONMENTAL MATTERS
---------------------
IP is subject to regulation by certain federal and Illinois
authorities with respect to environmental matters and may in the future
become subject to additional regulation by such authorities or by other
federal, state and local governmental bodies. Effective October 1, 1999 IP's
wholly owned fossil generating assets were transferred to IPMI. Effective
December 15, 1999, IP's nuclear generating asset, Clinton, was sold to
AmerGen. Consequently, existing regulations affecting IP are principally
related to MGP Sites, hazardous wastes and toxic substances (Other Issues),
and EMF.
AIR QUALITY
- -----------
The United States Environmental Protection Agency (USEPA) has
established ambient air quality standards for air pollutants that, in its
judgment, have an adverse effect on public health or welfare. The Act
requires each state to adopt laws and regulations, subject to USEPA approval,
designed to achieve such standards. Pursuant to the Illinois Environmental
Protection Act, the Illinois Pollution Control Board (Board) adopted and,
along with the Illinois Environmental Protection Agency (IEPA), is enforcing
a comprehensive set of air pollution control regulations that include
emission limitations, permit issuances, monitoring and reporting requirements.
12
The air pollution regulations of the Board impose limitations on
emissions of particulate, sulfur dioxide, carbon monoxide, nitrogen oxides
and various other pollutants. Enforcement of emission limitations is
accomplished in part through the regulatory permitting process. IP's practice
was to obtain an operating permit for each source of regulated emissions.
In addition to the sulfur dioxide emission limitations for existing
facilities, both the USEPA and the State of Illinois adopted New Source
Performance Standards (NSPS) applicable to coal-fired generating units
limiting emissions to 1.2 pounds of sulfur dioxide per million Btu of heat
input. This standard was applicable to IP's Unit 6 at the Havana Power
Station. The federal NSPS also limits nitrogen oxides, opacity and
particulate emissions and imposes certain monitoring requirements. In 1977
and 1990, the Act was amended and, as a result, USEPA has adopted more
stringent emission standards for new sources.
CLEAN AIR ACT
- -------------
For information on the impacts of the Clean Air Act Amendments of
1990 and information on the U.S. EPA complaint, see "Environmental Matters"
in "Note 4 - Commitments and Contingencies" in the audited financial
statements included herein.
MANUFACTURED-GAS PLANT SITES
- ----------------------------
IP's estimated liability for MGP site remediation is $58 million.
This amount represents IP's current best estimate of the costs that it will
incur to remediate the 24 MGP sites for which it is responsible. Because of
the unknown and unique characteristics at each site, IP cannot presently
determine its ultimate liability for remediation of the sites.
In October 1995 IP initiated litigation against a number of
insurance carriers claiming insurance coverage for MGP cleanup costs.
Settlements or settlements in principle have been negotiated with all 30 of
the carriers. Settlement proceeds recovered from the carriers are expected to
offset a significant portion of MGP remediation costs and are credited to
IP's customers through the tariff rider mechanism that the ICC previously
approved. Cleanup costs in excess of insurance proceeds are considered
probable of recovery from IP's transmission and distribution customers.
WATER QUALITY
- -------------
The Federal Water Pollution Control Act Amendments of 1972 require
that National Pollutant Discharge Elimination System (NPDES) permits be
obtained from USEPA (or, when delegated, from individual state pollution
control agencies) for any discharge into navigable waters. Such discharges
are required to conform with the standards, including thermal, established by
USEPA and also with applicable state standards.
Enforcement of discharge limitations is accomplished in part through
the regulatory permitting process similar to that described previously under
"Air Quality." IP had approximately two dozen permits for discharges at its
former power stations and other facilities, which must be periodically
renewed.
In addition to obtaining such permits, each source of regulated
discharges must be operated within the limitations prescribed by applicable
regulations. Verification of such compliance is usually accomplished by
monitoring results reported to regulatory authorities and inspections by such
authorities.
The Havana Power Station permit was reissued in the first quarter of
1996. The Hennepin Power Station permit application for reissuance was
submitted in the fourth quarter of 1996. The permit is not expected until the
third or fourth quarter of 2000. The Vermilion Power Station permit was
reissued in the fourth quarter of 1996. The Wood River Power Station permit
was reissued in the first quarter of 1996. The Baldwin Power Station permit
was reissued in the first quarter of 1998.
13
OTHER ISSUES
- ------------
Hazardous and non-hazardous wastes generated by IP must be managed
in accordance with federal regulations under the Toxic Substances Control Act
(TSCA), the Comprehensive Environmental Response, Compensation and Liability
Act and the Resource Conservation and Recovery Act (RCRA) and additional
state regulations promulgated under both RCRA and state law. Regulations
promulgated in 1988 under RCRA govern IP's use of underground storage tanks.
The use, storage, and disposal of certain toxic substances, such as
polychlorinated biphenyls (PCBs) in electrical equipment, are regulated under
the TSCA. Hazardous substances used by IP are subject to reporting
requirements under the Emergency Planning and Community-Right-To-Know Act.
The State of Illinois has been delegated authority for enforcement of these
regulations under the Illinois Environmental Protection Act and state
statutes. These requirements impose certain monitoring, record keeping,
reporting and operational requirements that IP has implemented or is
implementing to assure compliance. IP does not anticipate that compliance
will have a material adverse impact on its financial position or results of
operations.
ELECTRIC AND MAGNETIC FIELDS
- ----------------------------
The possibility that exposure to EMF emanating from power lines,
household appliances, and other electric sources may result in adverse health
effects continues to be the subject of litigation and governmental, medical,
and media attention. Litigants have also claimed that EMF concerns justify
recovery from utilities for the loss in value of real property adjacent to
power lines, substations, and other such sources of EMF. Two major scientific
studies concluded in 1999 failed to demonstrate significant EMF health risk;
however, a definitive conclusion may never be reached on this topic, and
future impacts are unpredictable.
ENVIRONMENTAL EXPENDITURES
- --------------------------
Operating expenses for environmentally related activities were $33
million in 1999 (including the incremental costs of alternative fuels to meet
environmental requirements). IP's net capital expenditures (including AFUDC
and capitalized interest) for environmental protection programs were
approximately $58.9 million in 1999. Accumulated net capital expenditures
since 1969 have reached approximately $881 million. The calculation of the
above dollar amounts within this heading, Environmental Expenditures, take
into consideration the transfer of wholly owned fossil generation assets on
October 1, 1999.
YEAR 2000 DATA PROCESSING
-------------------------
For information on Year 2000 Data Processing, see "Year 2000" in
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RESEARCH AND DEVELOPMENT
------------------------
Research and development expenditures for 1999 were approximately
$4.4 million, down slightly from the $5.1 million spent in 1998. In 1997,
research and development expenditures were approximately $5.4 million.
REGULATION
----------
The Illinois Public Utilities Act was significantly modified in 1997
by P.A. 90-561, but the ICC continues to have broad powers of supervision and
regulation with respect to the rates and charges of IP, its services and
facilities, extensions or abandonment of service, classification of accounts,
valuation and depreciation of property, issuance of securities and various
other matters. IP must continue to provide bundled retail electric service to
all who choose to continue to take service at tariff rates, and IP must
provide unbundled electric distribution services to all eligible customers as
defined by P.A. 90-561 at rates to be determined by the ICC. During 1998,
pursuant to authority granted in P.A. 90-561, the ICC issued rules associated
with (i) transactions between the utility and its affiliates; (ii) service
reliability; (iii) environmental disclosure; and (iv) alternative retail
electric supplier certification criteria and procedures.
14
During 1999, the ICC ruled on (i) the rates and terms associated with the
provision of delivery services for commercial and industrial customers; (ii)
establishing the neutral fact finder price used in (a) calculating
competitive transition costs and (b) IP's power purchase tariff; and (iii)
the competitive transition cost methodology. During 2000, it is expected that
the ICC will rule on (i) guidelines regarding standards of conduct and
functional separation; and (ii) the rates and terms associated with the
further unbundling of the utility's delivery services.
IP is exempt from all the provisions of the Public Utility Holding
Company Act of 1935 except Section 9(a)(2) thereof. That section requires
approval of the Securities and Exchange Commission prior to certain
acquisitions of any securities of other public utility companies or public
utility holding companies.
IP is subject to regulation under the Federal Power Act by the FERC
as to rates and charges in connection with the transmission of electric
energy in interstate commerce, the issuance of debt securities maturing in
not more than 12 months, accounting and depreciation policies, interaction
with affiliates, and certain other matters. The FERC has declared IP exempt
from the Natural Gas Act and related FERC orders, rules and regulations.
Through December 14, 1999, IP was subject to the jurisdiction of the
NRC with respect to Clinton. NRC regulations control the granting of permits
and licenses for the construction and operation of nuclear power stations and
subject such stations to continuing review and regulation. Additionally, the
NRC review and regulatory process covers decommissioning, radioactive waste,
environmental and radiological aspects of such stations.
IP was subject to the jurisdiction of the Illinois Department of
Nuclear Safety (IDNS) with respect to Clinton. The IDNS and the NRC entered a
memorandum of understanding that allowed IDNS to review and regulate nuclear
safety matters at state nuclear facilities. The IDNS review and regulatory
process covered radiation safety, environmental safety, non-nuclear pressure
vessels, emergency preparedness and emergency response.
IMPORTANT INFORMATION
---------------------
Certain of the statements contained in this report, including those
in Management's Discussion and Analysis are forward-looking. Other
statements, particularly those using words like "expect," "intend,"
"predict," "estimate," and "believe," also are forward-looking. Although IP
believes these statements are accurate, its business is dependent on various
regulatory issues, general economic conditions and future trends, and these
factors can cause actual results to differ materially from the
forward-looking statements that have been made. In particular:
IP is heavily regulated by both the federal government and the State of
Illinois. This regulation has changed substantially over the past
several years. The impacts of these changes include reductions in rates
pursuant to P.A. 90-561 and a phasing in of the opportunity for an
increasing number of customers to choose alternative energy suppliers.
In addition, future regulatory changes are certain to occur and their
nature and impact cannot be predicted.
IP is likely to face increased competition in the future. Alternative
sources of electricity, such as co-generation facilities, are becoming
more economically attractive. When customers elect suppliers other than
IP for their electricity, IP can avoid certain costs and can gain
revenue from transmitting and distributing that electricity; however,
the net effect of these elections generally is a decrease in IP's
revenue and operating income. Illinois transition law is designed to
protect utilities in three principal ways:
1. Departing customers are obligated to pay transition charges based
on the utility's lost revenue from that customer;
2. Utilities are provided the opportunity to lower their financing
and capital costs through the issuance of "securitized" bonds; and
3. Utilities are permitted to seek rate relief in the event the
change in law leads to their ROE falling below a specified minimum
based on a prescribed test.
15
IP does not currently foresee any inability to obtain necessary
financing on reasonably favorable terms. However, events can occur in
the IP's business operations or in general economic conditions that
could negatively impact IP's financial flexibility.
The impact of environmental regulations on utilities is significant;
and the expectation is that more stringent requirements will be
introduced over time. Although IP believes it is in substantial
compliance with all current regulations, IP cannot predict the future
impact of environmental compliance. However, if more stringent
requirements are introduced they are likely to have a negative
financial effect.
IP actively purchases and sells natural gas futures and related
contracts. While IP has adopted various risk management practices
intended to minimize the risk of significant loss, trading in assets of
this type is inherently risky and these risk management practices
cannot guarantee against losses.
All forward-looking statements in this report are based on
information that currently is available. IP disclaims any obligation to
update any forward-looking statement.
EXECUTIVE OFFICERS
------------------
- ------------------------------ --------- ---------------------------------------------------------------
NAME OF OFFICER AGE POSITION
- ------------------------------ --------- ---------------------------------------------------------------
Larry F. Altenbaumer 52 President
- ------------------------------ --------- ---------------------------------------------------------------
David W. Butts 45 Executive Vice President and Chief Operating Officer
- ------------------------------ --------- ---------------------------------------------------------------
William B. Conway* 42 Senior Vice President and Chief Legal Officer
- ------------------------------ --------- ---------------------------------------------------------------
Alec G. Dreyer** 42 Senior Vice President
- ------------------------------ --------- ---------------------------------------------------------------
George W. Miraben* 58 Senior Vice President and Chief Administrative Officer
- ------------------------------ --------- ---------------------------------------------------------------
Paul L.Lang* 59 Senior Vice President
- ------------------------------ --------- ---------------------------------------------------------------
Leah Manning Stetzner* 51 Vice President, General Counsel and Corporate Secretary
Kathryn L. Patton 35
- ------------------------------ --------- ---------------------------------------------------------------
Cynthia G. Steward* 42 Controller
Peggy E. Carter 37
- ------------------------------ --------- ---------------------------------------------------------------
Eric B. Weekes* 48 Treasurer
- ------------------------------ --------- ---------------------------------------------------------------
* All of the foregoing Executive Officers have terminated employment subsequent
to the change-in-control resulting from the Illinova-Dynegy merger.
** Mr. Dreyer has terminated employment with IP subsequent to the
change-in-control resulting from the Illinova-Dynegy merger. Mr. Dreyer now
works for IPMI.
Mr. Altenbaumer was elected President in September 1999. He was
previously Senior Vice President and Chief Financial Officer. Prior to being
elected Senior Vice President he was Vice President, Chief Financial Officer,
and Controller.
Mr. Butts was elected Executive Vice President and Chief Operating
Officer in September 1999. He was previously Senior Vice President in
addition to his position as President of Illinova Energy Partners (IEP), a
subsidiary of Illinova.
Mr. Conway joined IP as Senior Vice President and Chief Legal
Officer in April 1999. Prior to joining IP, Mr. Conway was managing partner
of the Washington office of law firm Troutman Sanders LLP.
Mr. Dreyer was elected Senior Vice President in February 1999 in
addition to his position as President of IGC, a subsidiary of Illinova, which
he has held since September 1995.
Mr. Miraben joined IP in January 1999 and was elected Senior Vice
President and Chief Administrative Officer in February 1999. Prior to joining
IP, Mr. Miraben was Senior Vice President of UniSource Energy Corporation and
Executive Vice President of Tucson Electric Power Company, a subsidiary of
UniSource.
Mr. Lang was elected Senior Vice President in June 1992. He joined
IP as Vice President in July 1986.
Ms. Stetzner was elected Vice President, General Counsel and
Corporate Secretary in February 1993. She joined IP as General Counsel and
Corporate Secretary in October 1989.
16
Ms. Patton joined IP in February 2000. She previously was Senior
Director and Regulatory Counsel for Dynegy.
Ms. Steward was elected Controller in September 1995. She previously
held the positions of Manager of Employee Services and Director of Accounting.
Ms. Carter was elected Controller in November 1999. She previously
was Team Leader of Energy Accounting.
Mr. Weekes joined IP as Treasurer in January 1997. He previously
served as Senior Financial Manager with a unit of Kraft Foods.
Unless earlier terminated, the present term of office of each of the
above executive officers extends to the first meeting of IP's Board of
Directors after the Annual Election of Directors. There are no family
relationships among any of the executive officers and directors of IP.
OPERATING STATISTICS
--------------------
Refer to the information under the caption "Selected Illinois Power
Company Statistics" included herein.
ITEM 2. PROPERTIES
- -------
Effective October 1, 1999, IP's wholly owned fossil generating assets
were transferred to IPMI. Effective December 15, 1999, IP's nuclear
generating asset, Clinton, was sold to AmerGen. Prior to the transfer of the
generation assets, IP owned and operated six steam generating stations with
composite net summer capacity of 4,747,250 kilowatts. In addition, IP owned
thirteen quick start combustion turbine peaking units at four locations with
a combined net summer capacity of 323,000 kilowatts. All of IP's generating
stations were in the State of Illinois. IP continues to own 50% of three
combustion turbine units, located in Bloomington, Illinois, with combined net
capacity of 5,250 kilowatts. State Farm Insurance Company owns the other 50%
of these units. The total net summer capability available to IP until October
1, 1999 was 5,075,500 kilowatts.
The major coal-fired units at Baldwin, Havana, Hennepin, Vermilion
and Wood River made up 3,489,000 kilowatts of summer capacity. Three natural
gas-fired units at Wood River were reactivated in 1997. These units had a
combined net summer capacity of 139,000 kilowatts. Five oil-fired units at
Havana were reactivated in 1998. These units had a combined net summer
capacity of 238,500 kilowatts. IP leased four natural gas fired units at
Tilton, which came on-line in the second quarter of 1999. These units had a
combined net summer capacity of 176,000 kilowatts.
IP owns an interconnected electric transmission system of
approximately 2,800 circuit miles, operating from 69,000 to 345,000 volts and
a distribution system that includes about 36,000 circuit miles of overhead
and underground lines.
IP owns 775 miles of gas transmission pipe and 7600 miles of gas
distribution pipe.
All outstanding First Mortgage Bonds issued under the Mortgage and
Deed of Trust dated November 1, 1943 were secured by a first mortgage lien on
substantially all of the fixed property, franchises and rights of IP with
certain exceptions expressly provided in the mortgage securing the bonds. All
outstanding New Mortgage Bonds issued under the General Mortgage and Deed of
Trust dated November 1, 1992, are secured by a lien on IP's properties used
in the generation, purchase, transmission, distribution and sale of
electricity and gas. In December of 1997, the Mortgage and Deed of Trust
dated November 1, 1943, was amended to generally conform with the General
Mortgage and Deed of Trust dated November 1, 1992, following a bondholder
vote and approval of the IP Board of Directors. On July 20, 1999, Illinois
Power's 1943 First Mortgage was retired. All remaining First Mortgage debt
was substituted with debt issued under the 1992 New Mortgage or defeased. All
future IP mortgage bonds will be issued under the New Mortgage. Lien releases
were obtained for all generating assets sold to AmerGen and transferred to
Illinova, in accordance with applicable provisions of the New Mortgage.
17
ITEM 3. LEGAL PROCEEDINGS
- -------
See "Environmental Matters" in "Note 4 - Commitments and
Contingencies" in the audited financial statements included herein for
information pertaining to the U.S. Environmental Protection Agency Complaint
against IP.
See "Fuel Supply" reported under Item 1 of this report for
information regarding legal proceedings concerning nuclear fuel disposal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------
None.
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------
See the information under the caption "Note 15 - Quarterly
Consolidated Financial Information and Common Stock Data (Unaudited)" in the
audited financial statements included herein.
ITEM 6. SELECTED FINANCIAL DATA
- -------
See the information under the caption "Selected Consolidated
Financial Data" in "Item 8."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- RESULTS OF OPERATIONS
DYNEGY INC. AND ILLINOVA CORPORATION MERGER
- -----------------------------------------------------------
On June 14, 1999, Illinova, IP's parent company, and Dynegy announced
execution of a definitive agreement for the merger of Illinova and Dynegy. On
February 1, 2000, Illinova and Dynegy completed the merger creating a full
service provider of energy products and services. The transaction creates a new
combined entity named Dynegy Inc. with a total market capitalization of more
than $10 billion. Dynegy has interests in power plants with more than 14,000
megawatts of domestic generating capacity, average worldwide natural gas sales
of more than 10 billion cubic feet per day and more than 1.4 million retail
customers. The combined company has more than $12 billion in assets and $22
billion in projected annual revenues from energy operations throughout North
America and Europe.
IP operations will continue as a regulated regional utility. Customers
will benefit from increased access to reliable, competitively priced energy
supplies and stable gas resources.
CLINTON POWER STATION
- -----------------------------
In September 1996, a leak in a recirculation pump seal caused IP
operations personnel to shut down Clinton. Clinton returned to service May 27,
1999.
The prolonged outage at Clinton had a significant adverse impact on
IP's financial condition, through higher operating and maintenance and capital
costs, lost opportunities to sell energy, and higher replacement power costs. In
addition, due to the failure of Clinton to restart by January 31, 1999, a
provision in the lease agreement between IP and the Fuel Company required IP to
pay $62.1 million for the acquisition of a portion of in-core fuel in March
1999, to the Fuel Company Trustee for the benefit of investors in secured Notes
of the Fuel Company. See "Capital Expenditures" under "Financial Condition" in
this item for additional information on the Fuel Company.
Due to uncertainties of deregulated generation pricing in Illinois and
to various operation and management factors, IP's Board of Directors decided in
December 1998 to sell or close Clinton. This decision resulted in an impairment
of Clinton-related assets and accrual of exit-related costs. In December 1998,
the impairment and accrual of exit-related charges resulted in a $1,523.7
million, net of income taxes, charge against earnings based on the expectation
of plant closure. On December 15, 1999, IP sold Clinton to AmerGen. In
accordance with the terms of the sale, IP revised its impairment of
Clinton-related assets and accruals for exit-related costs. The decrease in the
impairment and the accruals was recognized as an increase in common stock
equity, revising the original effect of the 1998 quasi-reorganization on the
common stock equity account.
In 1998, PECO was hired to manage Clinton operations for a set fee plus
performance incentives. Beginning April 1, 1999 and continuing until December
15, 1999, IP operated under the terms of a revised management agreement with
PECO under which PECO was responsible for Clinton's direct operating and capital
expenses and assisted with the management of the station under a management
services contract. This eliminated IP's exposure to the uncertainty regarding
18
the costs associated with Clinton's operations. In return for transferring
this financial risk, IP paid PECO a management fee and allowed PECO to retain
20 percent of power generation.
In December 1999, AmerGen paid $12.4 million for the plant and
property and assumed responsibility for operating and ultimately
decommissioning the nuclear station. The asset sale agreement provides that
IP will purchase at least 75 percent of Clinton's electricity output for its
customers through 2004 at fixed prices that exceed current and projected
wholesale prices. IP transferred to AmerGen decommissioning funds of $211.9
million, which included a $113.4 million payment to the decommissioning trust
funds as required by the asset sale agreement. IP agrees to make five future
annual payments of approximately $5 million to the decommissioning trust
funds. AmerGen bears all other costs and risks of decommissioning.
See " Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of
Clinton" in the audited financial statements included herein for additional
information.
OPEN ACCESS AND COMPETITION
- ---------------------------
See "Open Access and Competition" under "General" in "Item 1.
Business" for discussion.
ACCOUNTING MATTERS
- ------------------
1999 Effective October 1, 1999, IP's wholly owned fossil generating assets
and other generation-related assets and liabilities were transferred to
Illinova. For further information, see "Fossil Generation Transfer" under
"Regulatory Matters" in this item and "Note 3 - Related Parties" in the
audited financial statements included herein.
Effective December 15, 1999, with the sale of Clinton, IP revised
its impairment of Clinton-related assets and accruals for exit-related costs
in accordance with the terms of the sale. The net of the revisions was
credited to the common stock equity account. See "Note 2 - Clinton
Impairment, Quasi-Reorganization and Sale of Clinton" in the audited
financial statements included herein for additional information.
1998 Concurrent with the decision to exit Clinton operations, as previously
discussed, IP's Board of Directors also decided to effect a
quasi-reorganization in which IP's consolidated accumulated deficit in
retained earnings of $1,565.9 million was eliminated. A quasi-reorganization
is an accounting procedure whereby a company adjusts its accounts to obtain a
"fresh start." In a quasi-reorganization, a company restates its assets and
liabilities to their fair value, adopts accounting pronouncements issued but
not yet adopted, and eliminates any remaining deficit in retained earnings by
a transfer from common stock equity.
See "Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of
Clinton" in the audited financial statements included herein for additional
information.
1997 IP prepares its consolidated financial statements in accordance
with FAS 71, "Accounting for the Effects of Certain Types of Regulation."
Reporting under FAS 71 allows companies whose service obligations and prices
are regulated to maintain balance sheet assets representing costs they expect
to recover from customers through inclusion of such costs in future rates. In
July 1997, the EITF concluded that, for business segments for which a plan of
deregulation has been established, accounting under FAS 71 should be
discontinued when such deregulation legislation is enacted. The EITF further
19
concluded that regulatory assets and liabilities originating in the business
segment being deregulated should be written off, unless their recovery is
specifically provided for through future cash flows from the regulated
portion of the business.
The enactment of P.A. 90-561 provides for future market-based
pricing of electric generation services. Therefore, IP discontinued
application of FAS 71 for its generating segment. IP evaluated the regulatory
assets and liabilities associated with its generation segment and determined
that recovery of these costs was not probable through rates charged to
transmission and distribution customers, the regulated portion of the
business.
IP wrote off generation-related regulatory assets and liabilities of
approximately $195 million, net of income taxes, in December 1997. These net
assets related to previously incurred costs that had been expected to be
collected through future revenues, including deferred costs for Clinton,
unamortized losses on reacquired debt, previously recoverable income taxes,
and other generation-related regulatory assets.
See the audited financial statements included herein for a
discussion of other accounting issues.
REGULATORY MATTERS
- ------------------
FOSSIL GENERATION TRANSFER In August 1999, the FERC, under Part 205 of the
Federal Power Act, approved IP's filing to put into place a PPA between IP
and IPMI. Also, in September 1999, the FERC, under Part 203 of the Federal
Power Act, approved IP's filing to transfer IP's wholly owned fossil
generating assets to its parent, Illinova, and subsequently its affiliate,
IPMI. These approvals, along with the previously received approval from the
ICC, satisfied all regulatory requirements related to the formation of IPMI
and the transfer to IPMI of IP's non-nuclear generating assets.
Effective October 1, 1999, IP's wholly owned fossil generating
assets and other generation-related assets and liabilities were transferred
at book value, from IP to Illinova in exchange for an unsecured note in the
amount of $2.8 billion. Illinova then transferred the net assets to IPMI as
an equity investment. The note between IP and Illinova matures September 30,
2009 and bears interest at an annual rate of 7.5%, payable semiannually on
the first day of April and October each year. Interest accrued on the note
during 1999 was $51.0 million.
In conjunction with the transfer of IP's wholly owned fossil
generating assets to Illinova, and subsequently to IPMI, a PPA was
negotiated between IP and IPMI to provide IP with continued energy supply
from the fossil generating assets. The PPA became effective on October 1,
1999, and has a primary term that continues through December 31, 2004, with
provisions to extend the agreement thereafter on an annual basis, subject to
concurrence by both parties. The PPA defines the terms and conditions under
which IPMI provides capacity and energy to IP using a tiered pricing
structure.
The PPA specifies that IP is responsible for dispatching IPMI's
generating units recognizing specified design limits on unit operation. IP
will generally follow the principles of economic dispatch, while fulfilling
its obligation to maintain adequate reliability of its transmission system.
If IP dispatches the generating units out of economic order for reliability
purposes, IP compensates IPMI for the associated cost. IP provides load
schedules to IPMI and may be required to compensate IPMI for overscheduling.
IPMI is required to provide planned outage schedules for the generating units
to IP and must consider IP's reliability needs in developing the schedules.
IPMI is responsible for adequately maintaining its generating
capacity, obtaining necessary licenses and permits, maintaining minimum
levels of insurance coverage, procuring fuel, and reporting
20
certain performance data. IP and IPMI are required to provide security
guarantees to each other. The PPA also specifies metering, billing, dispute
resolution procedures and defines force majeure conditions.
See "Note 3 - Related Parties" for further discussion.
See "Note 6 - Facilities Agreements" in the audited financial statements
included herein for a discussion of Soyland and the Soyland PCA.
POWER SUPPLY AND RELIABILITY
- ----------------------------
Electricity was in short supply during the 1998 summer cooling
season because of an unusually high number of plant outages in the Midwest
region. IP bought generation and transmission capacity to prevent firm load
curtailment and took additional steps to avoid power outages, including
upgrading transmission lines and equipment, readying emergency procedures,
and returning to service five units that had been in cold shutdown. Expenses
incurred as a result of the shortage had a material adverse impact on IP
during 1998.
IP took additional steps in 1999 to increase power supply and avoid
future power shortages. IP had in excess of 400 MW of additional generation
on line for the summer, including approximately 235 MW from five oil-fired
units that were brought up from cold shutdown during the summer of 1998, and
176 MW from four natural gas turbines installed during 1999. IP also
refurbished nine gas turbines.
YEAR 2000
- ----------
The Year 2000 project has been successful to date. The rollover
occurred without any interruption of electricity or gas supply and without
any significant computing problems. The total cost for achieving Year 2000
readiness was $17.2 million. IP continues to monitor the Year 2000 issue to
ensure that no lingering effects occur.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------
IP was comprised of five business groups. The business groups and their
principal services were as follows:
- - Customer Service Business Group - transmission, distribution, and sale
of electric energy; distribution, transportation, and sale of natural
gas.
- - Wholesale Energy Business Group - fossil-fueled electric generation and
wholesale electricity transactions. Effective October 1, 1999, the
Wholesale Energy Business Group was transferred to IP's parent,
Illinova, and subsequently to its affiliate IPMI.
- - Nuclear Generation Business Group - nuclear-fueled electric generation.
The nuclear assets were sold to AmerGen on December 15, 1999.
- - Financial Business Group - provides financial support functions such as
accounting, finance, corporate performance, audit and compliance,
investor relations, legal, corporate development, regulatory, risk
management, and tax services.
21
- - Support Services Business Group - provides specialized support
functions, including information technology, human resources,
environmental resources, purchasing and materials management, and
public affairs.
In 1998, the business groups reviewed information monthly that
provided contribution margin, cash flow, and return on net invested capital.
Return on net invested capital was deleted as a corporate measure in 1999.
In 1998, these measures for the Customer Service Business Group were
favorable. Generally, the other business groups reflected unfavorable results
as the Clinton restart activity and summer supply situation negatively
impacted their outcomes.
See "Note 12 - Segments of Business" in the audited financial
statements included herein for additional information regarding IP's
corporate measures.
CUSTOMER SERVICE
TRANSMISSION, DISTRIBUTION AND SALE OF ELECTRIC ENERGY AND GAS The Customer
Service Business Group derives its revenues through regulated tariffs. Its
source of electricity is the Wholesale Energy Business Group and the Nuclear
Business Group. Electricity was provided to the Customer Business Group at a
fixed 2.5 cents and 2.9 cents per kwh in 1998 and the first nine months of
1999, respectively. During the last quarter of 1999 electricity was provided
at the PPA price between IP and IPMI. Gas revenues are derived through
regulated tariffs.
Contribution margin for Customer Service decreased $94 million. This
decrease was primarily due to higher power purchases from the Wholesale
Energy Business Group and the Nuclear Business Group compared to 1998. The
remaining decrease was a result of higher O&M and regulatory asset
amortization.
Cash flow is lower than 1998 primarily due to lower net income.
WHOLESALE ENERGY
The Wholesale Energy Business Group derives its revenue providing
electricity primarily to the Customer Service Business Group. Electricity was
provided at 2.5 and 2.9 cents per kwh for 1998 and the nine months ended
September 30, 1999, respectively. During the last quarter of 1999,
electricity was provided at the PPA price between IP and IPMI.
Contribution margin during the nine months ended September 30, 1999,
was $54 million higher than during the corresponding period in 1998, due to
significantly fewer power purchases in 1999 than in 1998 when IP purchased
extremely high-priced electricity to meet system requirements. Partially
offsetting this major variance in power purchases are lower interchange sales
in 1999, and higher depreciation to reflect the write-up of fossil assets in
December 1998.
Cash flow is significantly less than 1998 primarily due to a
negative variance in working capital, which was partially offset by higher
net income and the sale and leaseback of gas turbines at the Tilton Energy
Center.
22
NUCLEAR
During 1999, the Nuclear Generation Business Group revenues
consisted of collections from customers under tariff riders to fund the
decommissioning trust and 2.9 cents per kwh generated and sold to the
Customer Service Business Group. The nuclear assets were sold to AmerGen on
December 15, 1999.
Contribution margin for Nuclear increased $164 million primarily due
to increased sales of energy to the Customer Service Business Group as a
result of Clinton returning to operation in May 1999, as well as reduced
depreciation expenses as a result of the write-off of Clinton in 1998,
partially offset by higher operation and maintenance and nuclear fuel
expenses. Included in operation and maintenance cost for 1999 is a fee paid
to PECO for the management of Clinton offset by reimbursements from PECO for
construction and operating expenses.
Cash flow is slightly higher in 1999 due to lower construction
expenditures.
Clinton did not generate electricity during 1998. Its only revenues
were those paid by customers under tariff riders to fund the decommissioning
trust. The Nuclear Generation Business Group results were unfavorably
affected by higher operating and maintenance expenses and capital
expenditures associated with the Clinton outage. Additionally, Nuclear was
assessed a cost of 1.43 cents per kwh (which represents a higher level of
costs over internal pricing due to market conditions) times its actual
historical average generation to simulate the cost of replacement power.
OTHER
Included in this category are the Financial Business Group, the
Support Services Business Group, and other corporate functions. These
segments did not individually meet the minimum threshold requirements for
separate disclosure. Collectively, cash flow for Other is the total of
changes in assets and liabilities not directly assigned to the business
segments and the non-cash portion of income taxes (deferred).
See "Note 12 - Segments of Business" in the audited financial
statements included herein for additional information regarding IP's segments.
OVERVIEW
- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 96 $(1,572) $ (65)
Net income (loss) applicable to common stock
excluding Clinton plant impairment loss in 1998, extraordinary item in 1997
and carrying amount over consideration paid for
redeemed preferred stock in 1999 and 1997 $ 94 $ (49) $ 129
- -----------------------------------------------------------------------------------------------------------------------------------
1999 The increase in 1999 earnings compared to 1998 was due primarily to the
decrease in power purchased due to the restart of Clinton in May 1999 and
unprecedented summer price spikes in 1998, lower expenses due to the 1998
Clinton impairment and the transfer of the wholly owned fossil
23
generating assets to Illinova on October 1, 1999, and increased interest
income from the note between IP and Illinova related to the transfer of the
fossil generating assets.
1998 The decrease in 1998 earnings compared to 1997 was due primarily to the
Clinton impairment, an increase in power purchased cost due to unprecedented
summer price spikes, additional power purchases to serve increased volumes of
interchange sales, market losses recorded on forward power purchase and sales
contracts as part of the wholesale trading business, and higher operation and
maintenance expenses due to the extended outage at Clinton.
1997 The decrease in 1997 earnings compared to 1996 was due primarily to the
extraordinary item related to discontinued application of FAS 71 for the
generation segment, higher operation and maintenance expenses due to the
extended outage at Clinton, higher power purchased costs due to outages at
Clinton and Wood River, and an increase in uncollectible accounts expense.
Regulators historically have determined IP's rates for electric
service: the ICC at the retail level and the FERC at the wholesale level. The
ICC determines IP's rates for gas service. These rates have been designed to
recover the cost of service and allow shareholders the opportunity to earn a
reasonable rate of return. As described in "Open Access and Competition"
under "General" in "Item 1. Business," P.A. 90-561 phases in a competitive
marketplace for electric generation while maintaining cost-based regulation
for electric delivery services and gas service, protecting the financial
integrity of the company during the transition period. Future electric and
natural gas sales will continue to be affected by an increasingly competitive
marketplace, changes in the regulatory environment, transmission access,
weather conditions, gas cost recoveries, customer conservation efforts, and
the overall economy.
ELECTRIC OPERATIONS For the years 1997 through 1999, electric revenues,
including interchange, increased 12.6% and the gross electric margin
increased 1.7% as follows:
- -------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Electric revenues $ 1,178.6 $ 1,224.2 $ 1,244.4
Interchange revenues 420.2 557.2 175.6
Fuel cost & power purchased (612.3) (985.4) (450.3)
- -------------------------------------------------------------------------------------------------------------------------------
Electric margin $ 986.5 $ 796.0 $ 969.7
- -------------------------------------------------------------------------------------------------------------------------------
The components of annual changes in electric revenues were:
- -------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Price $ (86.6) $ (65.5) $ (11.5)
Volume and other 29.5 35.1 9.7
Fuel cost recoveries 11.5 10.2 43.3
- -------------------------------------------------------------------------------------------------------------------------------
Revenue increase (decrease) $ (45.6) $ (20.2) $ 41.5
- -------------------------------------------------------------------------------------------------------------------------------
1999 Electric revenues excluding interchange sales decreased 3.7%
primarily due to the 15% residential rate decrease effective August 1, 1998
and the reclassification of revenue-related taxes mandated by P.A. 90-561.
This decrease was partially offset by increased wheeling revenues due to
increased capacity. Interchange revenues decreased 24.6%. This decrease is
attributable to a decrease in interchange volume offset by $61 million of
revenue recognition resulting from the restructuring of a Soyland power supply
contract. Electric margin increased primarily due to power purchased costs of
$421.1 million in 1999 as compared to $735.2 million in 1998 and decreased
fuel costs resulting from the transfer of IP's wholly owned fossil generating
assets to Illinova on October 1, 1999.
24
1998 Electric revenues excluding interchange sales decreased 1.6% due to the
15% residential rate decrease mandated by P.A. 90-561 and effective August 1,
1998. Also contributing to the decrease in revenue was the one-time August
billing rate reduction of 7.5% for residential and small commercial customers
and the reclassification of revenue related taxes, in accordance with P.A.
90-561. Interchange revenues increased 217.4% primarily due to increased
activity on the interchange market. Electric margin decreased primarily due
to higher power purchased costs and the elimination of the UFAC.
1997 Electric revenues excluding interchange sales increased 3.4%, primarily
due to an increase in revenues under the UFAC and increased wheeling
revenues. Interchange revenues increased 27.6% due to the receipt of an
opt-out fee from Soyland under the amended PCA and increased interchange
activity. Electric margin decreased primarily due to increased power
purchased costs as a result of outages at Clinton and the fossil stations.
The cost of meeting IP's system requirements was reflected in fuel
costs for electric plants and power purchased. Changes in these costs are
detailed below:
- --------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- --------------------------------------------------------------------------------------
Fuel for electric plants $ (59.0) $ 17.8 $ (15.7)
Power purchased (314.1) 517.3 152.7
- --------------------------------------------------------------------------------------
Total increase (decrease) $ (373.1) $ 535.1 $ 137.0
- --------------------------------------------------------------------------------------
Weighted average system
generating fuel cost ($/MWH) $ 11.83 $ 14.19 $ 14.09
- --------------------------------------------------------------------------------------
System load requirements, generating unit availability, fuel prices,
purchased power prices, resale of energy to other utilities, emission
allowance costs, fuel cost recovery through UFAC and the transfer of IP's
wholly owned fossil generating assets to Illinova on October 1, 1999 caused
changes in these costs.
Changes in factors affecting the cost of fuel for electric generation
are detailed below:
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) in generation 17.5% 10.9% (25.4)%
Generation mix
Coal and other 79% 100% 100%
Nuclear 21% 0% 0%
- -----------------------------------------------------------------------------------------------------------------
1999 The cost of fuel decreased 23.5%. The decrease in fuel cost was
primarily due to the transfer of IP's wholly owned fossil generating assets
to Illinova on October 1, 1999. Fuel costs in the fourth quarter of 1999 were
$2.0 million as compared to $67.1 million in the fourth quarter of 1998.
Power purchased decreased $314.1 million due primarily to decreased
interchange volume and unusually high power purchases during 1998. Power
purchased during the fourth quarter of 1999 was $123.6 million as compared to
$91.0 million in the fourth quarter of 1998 due to the generating asset
transfer.
1998 The cost of fuel increased 7.6%. The increase in fuel cost was
primarily a result of running peaking units and reactivation of oil-fired
plants from cold shutdown. These factors were partially offset by effects of
the 1997 UFAC and decreased emission allowance costs.
Power purchased increased $517.3 million. This amount consisted of
higher prices resulting in an increase of $274 million, a $215 million
increase to serve increased volumes of interchange sales, and
25
market losses of $28 million recorded on forward power purchase and sales
contracts. Income from interchange sales was $382 million higher than in 1997
due to increased sales volumes and higher prices. Although IP's margin on
volumes between 1998 and 1997 resulted in IP being a net seller, higher
prices resulted in a $135 million net purchase margin.
1997 The cost of fuel decreased 6.3%. The decrease in fuel cost was
primarily attributable to decreased generation and a favorable price variance.
These factors were partially offset by effects of the UFAC and increased
emission allowance costs. Power purchased increased $152.7 million primarily
due to Clinton and Wood River being out of service.
GAS OPERATIONS For the years 1997 through 1999, gas revenues, including
transportation, decreased 14%, while the gross margin on gas revenues
decreased 4.7% as follows:
- ------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Gas revenues $ 298.9 $ 281.1 $ 345.2
Transportation revenues 5.5 6.7 8.7
Gas cost (165.1) (149.6) (207.7)
- ------------------------------------------------------------------------------------------------------------
Gas margin $ 139.3 $ 138.2 $ 146.2
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
(Millions of therms)
Therms sold 528 503 537
Therms transported 270 267 309
- ------------------------------------------------------------------------------------------------------------
Total consumption 798 770 846
- ------------------------------------------------------------------------------------------------------------
Changes in the cost of gas purchased for resale were:
- ------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Gas purchased for resale
Cost $ (3.1) $ (5.3) $ 8.0
Volume 10.1 (23.2) (30.0)
Gas cost recoveries 8.5 (29.6) 27.1
- ------------------------------------------------------------------------------------------------------------
Total increase (decrease) $ 15.5 $ (58.1) $ 5.1
- ------------------------------------------------------------------------------------------------------------
Average cost per therm delivered 26.8 cents 27.1 cents 28.0 cents
- ------------------------------------------------------------------------------------------------------------
The 1999 increase in gas costs was due to higher consumption and
effects of the UGAC. The 1998 decrease in gas costs was due to low gas prices
and a decrease in therm sales caused by mild weather. The 1997 increase in
gas costs was due to slightly higher prices from suppliers and effects of the
UGAC, offset by a decrease in volume.
OTHER EXPENSES A comparison of significant increases (decreases) in other
operating expenses, maintenance, and depreciation and amortization for the
last three years is presented in the following table:
- ------------------------------------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
Other operating expenses $ 85.3 $ 91.1 $ 40.6
Maintenance (48.5) 44.6 12.0
Depreciation and amortization (25.4) 4.8 8.8
- ------------------------------------------------------------------------------------------------------------
26
The increase in operating expenses for 1999 is primarily due to the
Clinton outage, expenses that would have been considered capital additions
had Clinton not been impaired, and the Clinton management fees paid to PECO,
partially offset by reduced operating expenses due to the transfer of the
wholly owned fossil generating assets to Illinova on October 1, 1999.
Maintenance expenses decreased primarily due to the Clinton management
arrangement with PECO, a decrease in outside consulting fees and the transfer
of the fossil generating assets.
The increase in operating and maintenance expenses for 1998 is
primarily due to the outage at Clinton. Other increases include outside
consulting fees, customer marketing activities, and employee benefits.
The increase in operating and maintenance expenses for 1997 is
primarily due to increased company and contractor labor at Clinton and the
fossil plants. An increase in uncollectible accounts expense and disposal of
surplus inventory also contributed to the increase.
The decrease in depreciation and amortization for 1999 is due to a
combination of several factors. Due to the Clinton impairment, nuclear
depreciation was eliminated but was partially offset by the additional
depreciation resulting from the adjustment to fair value for the fossil
generation assets. In addition, amortization of the decommissioning regulatory
asset and the transition period cost recovery regulatory asset was recognized.
The increases in depreciation and amortization for 1998 and 1997
were due to increases in utility plant balances.
GENERAL TAXES The decrease in general taxes of $22.4 million in 1999 and
$10.6 million in 1998 is due primarily to the reclassification of
revenue-related taxes mandated by P.A. 90-561. The decrease was partially
offset by costs to fund a program, provided for in P.A. 90-561, that helps
low-income customers avoid shutoffs. The 1997 change in general taxes was
negligible.
OTHER INCOME AND DEDUCTIONS - NET Total other income and deductions - net
increased by $52.4 million and includes $51 million of interest on the $2.8
billion note from Illinova. Miscellaneous - net decreased $15.4 million
primarily due to increased taxes of $16.9 million related to non-utility
income partially offset by increased interest income from the investment of
the proceeds of the transitional funding trust notes issued in December 1998,
the adjustment in the net present value of the decommissioning regulatory
asset, and increased miscellaneous non-operating income. The 1997 and 1998
changes in other income and deductions-net were negligible.
INTEREST CHARGES Total interest charges, including AFUDC, increased $12.5
million in 1999, increased $.8 million in 1998, and decreased $3.4 million in
1997. The increase in 1999 is primarily due to interest on the transitional
funding trust notes issued in December 1999, offset by decreased interest on
long and short-term debt. The increase in 1998 was negligible. The decrease
in 1997 was primarily due to the continued benefits of IP refinancing efforts
and capitalization reductions, partially offset by increased IP short-term
borrowings and lower AFUDC.
INFLATION Inflation, as measured by the Consumer Price Index, was 2.7%, 1.6%,
and 2.3% in 1999, 1998, and 1997, respectively. IP recovers historical rather
than current plant costs in its regulated rates.
FINANCIAL CONDITION
- -------------------
27
LIQUIDITY AND CAPITAL RESOURCES
IP's financial condition is a product of its historical capital
structure, the terms of its past and existing indebtedness, various regulatory
considerations, and the cash flow generated by its businesses. In general, IP
historically has been able to either generate sufficient funds or raise
sufficient funds at investment grade credit quality to meet all of its
financial needs. IP's sources of funds and primary non-operating uses of funds
are described below. See "Note 8 - Long-Term Debt" and "Note 9 - Preferred
Stock" in the audited financial statements included herein for additional
information regarding IP's outstanding indebtedness.
MORTGAGES Historically, a substantial portion of the funds needed by IP have
been provided by indebtedness issued pursuant to its general obligation
mortgages. These included a 1943 mortgage (First Mortgage) and a 1992
mortgage (New Mortgage) that was intended, over time, to replace the First
Mortgage. Both mortgages were secured by liens on substantially all of IP's
properties. In general, IP is able to issue debt secured by the mortgages
provided that (i) its "adjusted net earnings" are at least two times its
"annual interest requirements," and (ii) the aggregate amount of indebtedness
secured by the mortgages does not exceed three-quarters of the original cost
of the property subjected to the lien of the mortgages, reduced to reflect
property that has been retired or sold. It also generally can issue
indebtedness in exchange for repurchased and retired indebtedness independent
of whether these two tests are met.
On July 20, 1999, IP's 1943 First Mortgage was retired. All
remaining First Mortgage debt was substituted with debt issued under the 1992
New Mortgage or defeased. New Mortgage Bonds of $35.6 million with a coupon
rate of 5.70% due 2024 (Series K) and $84.2 million with a coupon rate of
7.4% due 2024 (Series L) were substituted for First Mortgage Bonds with
identical terms and amounts (replacement Series U and V). With proceeds
received from the December 1998 securitization issuance, IP defeased $35.2
million of 6.50% First Mortgage Bonds due 1999, $16.1 million of 7.95% First
Mortgage Bonds due 2004 and $84.7 million of 7 3/8% First Mortgage Bonds due
2021.
At December 31, 1999, IP had outstanding approximately $1.3 billion
in indebtedness pursuant to the mortgages and could have issued approximately
$220 million in additional indebtedness based on its property levels. In
addition, IP could have issued approximately $335 million in exchange for
previously issued indebtedness that had been repurchased by IP. Also, IP had
unsecured non-mortgage borrowing capacity totaling approximately $170 million
at December 31, 1999.
On October 1, 1999, IP transferred its wholly owned fossil
generating assets to Illinova in return for a $2.8 billion unsecured note
carrying an interest rate of 7.5% and maturing September 30, 2009. The
outstanding principal balance at March 30, 2000 was $2.3 billion. None of
IP's fossil generating facilities were properties that had been pledged under
the 1992 mortgage to support issuance of mortgage bonds. In December 1999, IP
sold Clinton to AmerGen. The Clinton facility was also property not pledged
under the 1992 mortgage to support the issuance of mortgage bonds. These
assets were subject to the general lien of the New Mortgage, and lien
releases were obtained in connection with each of these transactions.
CASH REQUIREMENTS AND CASH FLOW IP needs cash for operating expenses,
interest and dividend payments, debt and certain IP preferred stock
retirements, and construction programs. IP has met these needs with
internally generated funds and external financings, including debt and
revolving lines of credit. The timing and amount of external financings have
depended primarily on cash needs, economic conditions, financial market
conditions, and capitalization ratio objectives.
Cash flows from operations during 1999 were supplemented by external
financings to meet ongoing operating requirements and to service common and
28
preferred stock dividends, debt requirements, IP's construction requirements,
and funding the decommissioning trust pursuant to the sale of Clinton.
IP expects that future cash flows will continue to be adequate to
meet operating requirements and to service existing debt, preferred
dividends, and anticipated construction requirements. It is anticipated there
will be no need for external financing to supplement cash flows for at least
the years 2000 through 2004.
DIVIDENDS Under the Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders of preferred
and preference stock. IP's retained earnings balance is expected to be
sufficient during 2000 to support payment of all scheduled preferred
dividends.
DEBT RATINGS The availability and cost of external financing depend to a
significant degree on the financial health of the company seeking those
funds. Security ratings are an indication of a company's financial position
and may affect the cost and the willingness of investors to invest in these
securities. IP's securities are currently rated by four principal rating
agencies as follows:
- --------------------------------------------------------------------------------------------------------------------
Standard & Duff & Phelps Fitch
Moody's Poor's IBCA
- --------------------------------------------------------------------------------------------------------------------
New mortgage bonds Baa1 BBB+ A BBB+
Preferred stock baa2 BBB- BBB+ BBB-
Commercial paper P-2 A-2 D-1 F2
Transitional funding trust notes Aaa AAA AAA AAA
Under current market conditions, these ratings would afford IP the
ability to issue additional securities through external financing. IP has
adequate short-term and intermediate-term bank borrowing capacity.
In April 1994, S&P lowered IP's mortgage bond rating to BBB from
BBB+. In July 1996, Moody's upgraded IP's securities, raising mortgage bond
ratings from Baa2 to Baa1 and preferred stock ratings from baa3 to baa2. In
July 1998, both Moody's and S&P revised their ratings outlook for IP. Moody's
rating went from stable to negative and S&P from positive to stable,
reflecting effects of the extended Clinton outage and unprecedented prices
for purchased power during late June 1998. In November 1998, Fitch IBCA
affirmed the ratings of IP's first and new mortgage bonds at BBB+ and IP's
preferred stock at BBB-. Fitch IBCA also established a new commercial paper
rating of F2 for IP.
In February 1999, S&P announced it had implemented a new single
credit rating scale for both debt and preferred stock. As a result, S&P
rerated all the preferred stock issues and similar debt/equity issues that
carry ratings from S&P to conform to the new scale. As a result of this
change, the rating on IP's preferred stock was changed to BBB+ from BBB-. On
March 4, 1999, Moody's placed all of the securities of IP under review for
possible downgrade, citing erosion of cash flow and an expected increase in
leverage caused by the extended Clinton outage. Moody's also acknowledged the
positive impact of the decision to exit Clinton and the progress made in
bringing Clinton back on-line. This review does not include the $864 million
of Transitional Funding Trust Notes issued by IPSPT, that are expected to
remain rated Aaa.
Following the merger announcement, several rating agencies responded
with favorable outlooks on IP's credit quality. S&P changed its outlook from
stable to positive, Duff & Phelps placed IP on Credit Watch-Up and Moody's
affirmed their present ratings.
In January 2000, Duff & Phelps upgraded IP's credit ratings and
removed IP from Rating Watch-Up with a stable outlook. Duff & Phelps upgraded
IP's secured debt from BBB+ to A, unsecured debt from BBB to A-, preferred
and preferred hybrids from BBB- to BBB+ and commercial paper from D-2 to D-1.
The Transition Funding Trust Notes remained at AAA.
29
Also, in January 2000, S&P upgraded IP's credit ratings and removed
IP from Credit Watch with positive implications. IP's corporate credit rating
was raised from BBB to BBB+, senior secured rating from BBB to BBB+, senior
unsecured debt from BBB- to BBB, subordinated debt from BBB- to BBB, and
preferred and hybrid preferred from BB+ to BBB-.
RECENT FINANCING Changes in principal amounts of capital sources for 1999,
1998, and 1997, including normal maturities and elective redemptions, were as
follows:
- ----------------------------------------------------------------------------------
(Millions of dollars) 1999 1998 1997
- ----------------------------------------------------------------------------------
Long-term debt $(297) $ 64 $ (11)
Preferred stock (15) - (39)
Transitional funding trust notes (86) 864 -
- ----------------------------------------------------------------------------------
Total increase (decrease) $(398) $ 928 $ (50)
- ----------------------------------------------------------------------------------
The amounts shown in the preceding table for debt retirements do not
include all mortgage sinking fund requirements. IP generally met those
requirements by pledging property additions as permitted under IP's 1943
Mortgage and Deed of Trust and the 1992 New Mortgage. Following the
defeasance of the 1943 Mortgage and Deed of Trust, those requirements were no
longer necessary. For additional information, see "Note 8 - Long-Term Debt"
and "Note 9 - Preferred Stock" in the audited financial statements included
herein.
In June 1999, IP issued $250 million of New Mortgage Bonds due 2009
with an interest rate of 7.50%.
SECURITIZATION In December 1998, IPSPT issued $864 million of Transitional
Funding Trust Notes with IP as servicer. This debt, secured by collections of
future electric energy deliveries, represents 25% of IP's total
capitalization at December 31, 1996, as allowed by the 1997 Electric Utility
Transition Funding Law and approved by the ICC. The law allows IP to use this
lower cost debt to repurchase debt and equity, which lowers IP's overall cost
of capital. IP has to have at least a 40% common equity ratio, exclusive of
securitized debt, when the process is completed.
IP has used funds from this offering to fund open market purchases,
maturities and defeasance of debt totaling $646.5 million in principal and
repurchased $15.2 million in principal of various preferred stock series. IP
also repurchased $49.3 million of its shares from Illinova, who in turn
repurchased 1.8 million shares of its common stock on the open market.
Completion of the use of securitization funds is expected during the second
quarter of 2000.
CAPITAL EXPENDITURES Construction expenditures for 1997 through 1999 were
approximately $733 million, including $12.4 million of AFUDC. IP estimates
that it will spend approximately $178 million for construction expenditures
in 2000. IP construction expenditures for 2000 through 2004 are expected to
total approximately $760 million. Additional expenditures may be required
during this period to accommodate the transition to a competitive
environment, environmental compliance, system upgrades, and other costs that
cannot be determined at this time.
The failure of Clinton to restart by January 31, 1999, triggered a
provision in the lease agreement between IP and the Fuel Company requiring IP
to deposit $62.1 million cash, in March 1999, with the Fuel Company Trustee
for the benefit of investors in secured notes of the Fuel Company. These
notes matured December 1, 1999, and were paid in full. During July 1999, IP
paid off all outstanding commercial paper debt of the Fuel Company. In
February 2000, IP dissolved the Fuel Company.
30
In addition to IP's construction expenditures, IP's capital
expenditures for 2000 through 2004 are expected to include $435.7 million for
mandatory debt retirements. In addition, IPSPT has long-term debt maturities
of $86.4 million in each of the above years.
DECOMMISSIONING See "Note 2 - Clinton Impairment, Quasi-Reorganization and Sale
of Clinton" in the audited financial statements included herein for additional
information.
ENVIRONMENTAL MATTERS See "Note 4 - Commitments and Contingencies" in the
audited financial statements included herein and "Environmental Matters" in
"Item 1. Business" for a discussion of environmental matters that impact or
could potentially impact IP.
TAX MATTERS See "Note 7 - Income Taxes" in the audited financial statements
included herein for a discussion of effective tax rates and other tax issues.
MARKET RISK
- -----------
RISK MANAGEMENT IP was exposed to both trading and non-trading market risks.
Market risk is the risk of loss arising from adverse changes in market rates
and prices, such as interest rates, foreign currency exchange rates,
commodity prices, and other relevant market rate or price changes.
Non-trading market risks included interest rate risk, equity price risk, and
commodity price risk. Trading market risk was comprised of commodity price
risk. For a discussion of credit risk exposure, see "Note 14 - Financial and
Other Derivative Instruments" in the audited financial statements included
herein. IP's risk management policy allows the use of derivative financial
instruments to manage its financial exposures. Market risk is measured
through various means, including VaR models. VaR represents the potential
losses for an instrument or portfolio resulting from hypothetical adverse
changes in market factors for a specified time period and confidence level.
It does not represent the maximum loss that may occur. Future gains and
losses will differ from those estimated, based on actual fluctuations in
market rates, operating expenses, and the timing thereof, and changes in the
portfolio of derivative financial instruments during the year.
INTEREST RATE RISK IP is exposed to interest rate risk as a result of
financing through its issuance of fixed or variable-rate debt, including
commercial paper issuances, or bank notes. Interest rate risk is the exposure
of an entity's financial condition to adverse movements in interest rates.
Interest rate exposure is managed according to policy by limiting
variable-rate exposure to a certain percentage of capitalization, utilizing
derivative instruments when deemed appropriate, and monitoring the effects of
market changes in interest rates. At December 31, 1999 and 1998, there were
no derivative financial instruments in use related to interest rate risk.
IP's debt portfolio VaR was calculated quarterly, based on
variance/covariance methodology using the RiskMetrics-TM- model. VaR was
calculated based on a 95 percent confidence factor and a holding period of
one business day. Interest rate risk as measured by VaR for 1999 and 1998
follows:
- --------------------------------------------------------------------------------------------------------
Low High Average
(Millions of dollars) VaR VaR VaR
- --------------------------------------------------------------------------------------------------------
1999 $ 6.1 $ 8.9 $ 7.7
1998 $ 6.7 $ 14.2 $ 9.9
- --------------------------------------------------------------------------------------------------------
OTHER MARKET RISK IP was exposed to equity price risk. Equity price risk is
the risk of loss on equity investments from unfavorable movements in equity
prices. IP maintained trust funds as required by the NRC, to fund certain
costs of nuclear decommissioning. In mid-December, as part of the Clinton
31
sale, these funds were transferred to AmerGen. As of December 31, 1998, these
funds were invested in domestic and international equity securities, fixed
income securities, and cash and cash equivalents. By maintaining a portfolio
that includes equity investments, IP was maximizing the return to be used to
fund nuclear decommissioning, which in the long term would correlate better
with inflationary increases in decommissioning costs. The equity securities
included in the corporation's portfolio were exposed to price fluctuations in
interest rates. IP actively monitored its portfolio by benchmarking the
performance of its investments against equity and fixed income indexes. It
maintained and periodically reviewed established target allocations of the
trust assets approved in the investment policy statement.
COMMODITY PRICE RISK IP was exposed to commodity price risk for the first three
quarters of 1999 through fluctuations in the price of electricity. Commodity
price risk is the risk of loss arising from adverse movements in commodity
prices. On October 1, 1999, IP transferred all wholly owned fossil generating
assets and related commodity price risk to Illinova, and subsequently to IPMI.
Established policies and procedures were employed during 1998 and the first
three quarters of 1999 to manage risks associated with those market fluctuations
using various commodity derivatives, including futures, forwards, swaps, and
options. To measure, monitor, and manage its commodity price risk of both its
trading and non-trading portfolio, IP utilized a "Monte Carlo" simulation of
trading positions based on a 95 percent confidence level and a five-day holding
period. IP's trading VaR at December 31, 1999 and December 31, 1998 were $0.0
million and $1.4 million, respectively.
IP was also exposed to non-trading commodity price risk through its
energy generation business. IP used derivative financial instruments to manage
its native load requirements. To measure, monitor, and manage the commodity
price risk of its non-trading portfolio, IP utilized a "Monte Carlo" simulation
of non-trading positions based on a 95 percent confidence level and a five-day
holding period. IP's non-trading commodity price VaR at December 31, 1999 was
$0.0 million. New VaR methodology was implemented at the beginning of March
1999, so there is no comparable VaR number at December 31, 1998.
IP has entered into power purchase agreements with AmerGen and IPMI.
Should power acquired under these agreements be insufficient to meet native load
requirements, IP will have to buy power at current market prices, thus exposing
IP to commodity price risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------
The audited financial statements are included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- FINANCIAL DISCLOSURE
IP filed a Form 8-K on February 8, 2000 to announce a change in
certifying accountant from PricewaterhouseCoopers LLP to Arthur Andersen LLP.
This change is being made in conjunction with the merger between Illinova and
Dynegy.
32
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- --------
Unless otherwise specifically noted, the following information applies
to the period January 1, 1999 through January 31, 2000. On the February 1, 2000
completion date of the merger in which IP's parent company, Illinova, became a
wholly-owned subsidiary of Dynegy Inc, the directors named below who had served
on both the IP and Illinova Boards, were replaced by a Board consisting of IP
and Dynegy Inc. officers, also identified below. The IP directors elected on
February 1 receive no special or additional compensation as a result of their
service on the IP Board. Also on February 1, 2000, and as a result of the
merger, all Illinova common stock automatically converted into Dynegy Inc.
common stock on a share-for-share basis. Because this Item is historical,
focusing primarily on compensation arrangements in effect during 1999, the word
"Illinova" rather than "Dynegy" is used throughout when referring to this stock.
The Outside Directors of Illinois Power, all of whom also served on the
Board of Illinova, receive a total retainer fee of $18,000 per year for service
on these boards. Outside Directors who also chair Board Committees receive an
additional $2,500 per year. Outside Directors receive a grant of 650 shares of
Illinova Common Stock on the date of each Annual Shareholders Meeting. Outside
Directors elected to the Board between Annual Shareholders Meetings are paid
$850 for each Board and Committee meeting attended prior to the first Annual
Shareholders Meeting after election to the Board.
Prior to 1996 Illinova had a Retirement Plan for Outside Directors.
Under this plan, each Outside Director who attained age 65 and served on the
Board for a period of 60 or more consecutive months was eligible for annual
retirement benefits at the rate of the annual retainer fee in effect when the
director retired. Each former Outside Director whose right to receive the
retirement benefit had vested, continued to receive such benefits in accordance
with the terms of the Retirement Plan until 1999 year-end, at which time each
such retired director received a lump sum payment equal to the net present value
of all remaining payments.
In 1996, the Board of Directors adopted a Comprehensive Deferred Stock
Plan for Outside Directors, replacing the Retirement Plan. All Outside Directors
serving at the time this new plan was adopted were granted a lump sum amount
based on the net present value of these benefits to them, were they to have
retired under the Retirement Plan, based on the number of years they served on
the Board but not to exceed 10. This dollar amount was converted into stock
units, based on the then market value of Illinova Common Stock, and placed into
an account. The value of these stock units is paid to the director in cash, in a
lump sum or installments, on termination of service, based on the market value
of Illinova Common Stock at time of termination plus dividend equivalents
(dividends that would have been paid had the director actually owned the stock).
In addition, each Outside Director receives an annual award of stock
units having a value of $6,000. This award is paid to the Outside Director in
cash on retirement, at once or in installments as the Director may elect. The
amount of such payment is determined by multiplying the number of stock units in
the account times the then market value of Illinova Common Stock, plus dividend
equivalents.
Illinova has a Deferred Compensation Plan for certain Directors.
Outside Directors of Illinois Power may elect to defer all or any portion of
their fees and stock grants or dividends from previously issued stock until
termination of their services as directors. Deferred fees and grants are
converted into stock units representing shares of Illinova Common Stock with the
value of each stock unit based on the last reported sales price of such stock.
Additional credits are made to the participating director's account in dollar
amounts equal to the dividends paid on the Illinova Common Stock that the
director would have received if the director had been the owner of the shares
represented by the stock units, and these amounts are converted into additional
stock units. On termination, payment of deferred fees and stock grants is made
in cash to participating directors. Payment is made in a lump sum or
installments, as soon as practical following a director's termination.
33
The cash paid on termination equals the number of stock units times the share
price at the close of market on the last business day of the month preceding
termination.
All compensation costs related to Outside Directors have been borne
one-half by Illinois Power and one-half by Illinova.
Outside directors Marilou von Ferstel, Walter D. Scott, and Ronald L.
Thompson elected to terminate service on the Illinois Power and Illinova Boards
effective on consummation of the Illinova-Dynegy merger. Dynegy management and
these directors are evaluating a possible arrangement whereby these directors
would continue to provide advisory services to the Dynegy Board. Absent such an
arrangement with alternate compensation, payments of approximately $250,728,
$175,941, and $338,445 will be made to each of these directors, respectively,
representing the net present value of all compensation owed them under the
foregoing plans.
DIRECTORS, 1999 THROUGH JANUARY 31, 2000 YEAR FIRST ELECTED DIRECTOR
- ---------------------------------------- ---------------------------
J. JOE ADORJAN, 61 1997
Partner of Stonington Partners, Inc.
and Chairman of ADVEN Capital
Partners, LLC since 1999. He was
Chairman and Chief Executive Officer
of Borg-Warner Security Corporation,
Chicago, Ill., from 1995 to 1999 and
President of Emerson Electric Company
from 1993 to 1995. Prior to that, he
was Chairman and Chief Executive
Officer of ESCO Electronics
Corporation. He is a director of The
Earthgrains Company, ESCO Electronics
Corporation, Hussmann Corporation and
Goss Graphics Systems, Inc.
CHARLES E. BAYLESS, 57 1998
Chairman of Illinova and Illinois
Power since August, 1998 and, until
December 27, 1999, Chief Executive
Officer and an employee since July,
1998. President of Illinois Power
from July 1998 until September 1999,
and President of Illinova from July
1998 until December 1999. He was
Chairman, President and Chief
Executive Officer of Tucson Electric
Power from 1992 to 1998. He is a
director of Trigen Energy Corporation.
C. STEVEN McMILLAN, 54 1996
President, Chief Operating Officer
and Director of Sara Lee Corporation,
Chicago, Ill., a global packaged food
and consumer products company, since
1997, and Sara Lee's Executive Vice
President from 1993 to 1997. He is a
director of Pharmacia and Upjohn and
Delta Galil Industries in Israel.
34
ROBERT M. POWERS, 68 1984
From 1980 until retirement in December,
1988, Mr. Powers was President and Chief
Executive Officer of A. E. Staley
Manufacturing Company, Decatur, Ill.,
a processor of grain and oil seeds. He is a
director of A. E. Staley Manufacturing
Company.
SHELI Z. ROSENBERG, 58 1997
Chief Executive Officer since 1999
and President and Chief Executive
Officer since 1994 of Equity Group
Investments, LLC, Chicago, Ill., a
privately held business conglomerate
holding controlling interests in 7
publicly traded corporations involved
in basic manufacturing, radio
stations, retail, insurance, and real
estate. She is a director of Capital
Trust; Anixter International, Inc.;
Equity Office Properties Trust;
Equity Residential Properties Trust;
CVS Corporation; and Manufactured
Home Communities, Inc.
WALTER D. SCOTT, 68 1990
Professor of Management and Senior
Austin Fellow, J. L. Kellogg Graduate
School of Management, Northwestern
University, Evanston, Ill., since
1988. He is a director of Neodesic
Corporation and Intermatic
Incorporated.
JOE J. STEWART, 61 1998
From 1995 until retirement in 1998,
Mr. Stewart was President of BWX
Technologies, Inc., formerly The
Babcock & Wilcox Government Group,
Lynchburg, Va., a diversified energy
and environmental equipment and
services company, and Executive Vice
President of McDermott International,
Inc. (parent of BWX Technologies,
Inc.). He was President and Chief
Operating Officer of The Babcock and
Wilcox Company and Executive Vice
President of McDermott International,
Inc., from 1993 to 1995.
RONALD L. THOMPSON, 50 1991
Chairman and Chief Executive Officer
of Midwest Stamping and Manufacturing
Co., Maumee, Ohio, a manufacturer of
automotive parts, since 1993. He is a
director of Teachers Insurance and
Annuity Association and Ryerson Tull.
35
MARILOU von FERSTEL, 62 1990
Executive Vice President and General
Manager of Ogilvy Adams & Rinehart,
Inc., a public relations firm in
Chicago, Ill., from June 1990 until
retirement in April 1997. She is a
director of Walgreen Company.
JOHN D. ZEGLIS, 52 1993
President and Director of AT&T,
Basking Ridge, New Jersey, a
diversified communications company,
since October, 1997. He was Vice
Chairman from June 1997 to October
1997, Senior Executive Vice President
and General Counsel, from 1995 to
June 1997 and Senior Vice
President-General Counsel and
Government Affairs from 1989 to 1995.
He is a director of Helmerich & Payne
Corporation and Sara Lee Corporation.
DIRECTORS, EFFECTIVE FEBRUARY 1, 2000 YEAR FIRST ELECTED DIRECTOR
- ------------------------------------- ---------------------------
LARRY F. ALTENBAUMER, 52 2000
President of Illinois Power Company
since 1999; Senior Vice President and
Chief Financial Officer of Illinois
Power and Illinova since 1995. He is
a director of Decatur Memorial Health
Systems.
STEPHEN W. BERGSTROM, 42 2000
President and Chief Operating Officer
of Dynegy Inc. since 1999; previously
President and Chief Operating Officer
of Dynegy Marketing and Trade and
Senior Vice President of Dynegy Inc.,
since 1996. He is a director of
Dynegy Inc.
JOHN U. CLARKE, 47 2000
Executive Vice President and Chief
Financial Officer of Dynegy Inc.
since 1999. Prior to joining Dynegy
in 1997, he was managing director
with Simmons & Company International,
for approximately one year.
Previously he served as President of
Concept Capital Group, Inc., a .
financial advisory firm formed by Mr.
Clarke in May, 1995.
36
KENNETH E. RANDOLPH, 43 2000
Senior Vice President, General
Counsel and Secretary of Dynegy Inc.,
Senior Vice President and General
Counsel of Dynegy and its
predecessor, Natural Gas
Clearinghouse, since 1987.
C.L. WATSON, 50 2000
Chairman and Chief Executive Officer
of Dynegy Inc.; became President of
Dynegy in 1985 and Chairman and Chief
Executive Officer of Dynegy's
predecessor, NGC Corporation in 1989.
He is a Director of Dynegy Inc. and
of Baker Hughes Incorporated.
ITEM 11. EXECUTIVE COMPENSATION
- --------
The following table sets forth a summary of the compensation of the
Chairman and retired Chief Executive Officer, and the four other most highly
compensated executive officers of Illinois Power for the years indicated. The
compensation shown includes all compensation paid for service to Illinois Power,
its parent and subsidiaries.
37
SUMMARY COMPENSATION TABLE
--------------------------
Long-Term Compensation
----------------------------------------------------
Annual Compensation Awards
-----------------------------------------------------------------------
Other Restricted Securities All Other
Bonus Annual Stock Awards Underlying Compensation
Name and Principal Position Year Salary (3) Compensation (4) Options (6)
- --------------------------------------------------------------------------------------------------------------------------------
CHARLES E. BAYLESS (1) (7) 1999 $568,071 $431,250 $10,912 $0 49,700 SHS. $4,344,774
Chairman and 1998 272,372 137,500 2,868 309,625 (5) 165,000 shs. 0
Chief Executive
Officer of Illinois
Power
GEORGE W. MIRABEN (7) 1999 $309,677 $195,000 $7,770 $0 42,500 SHS. $1,934,335
Senior Vice President
and Chief Administrative
Officer of Illinois
Power
LARRY F. ALTENBAUMER 1999 $259,125 $156,600 $9,014 $0 35,120 SHS. $ 676,983
President of 1998 244,375 19,855 7,010 19,855 10,000 shs. 2,500
Illinois Power 1997 232,048 8,992 9,521 8,991 6,500 shs. 1,985
ALEC G. DREYER 1999 $250,135 $150,000 $5,662 $0 27,820 SHS. $ 532,741
Senior Vice President 1998 215,251 27,338 4,676 27,338 10,000 shs. 2,691
of Illinois Power and 1997 185,875 31,060 4,793 31,060 6,000 shs. 2,585
President of Illinova
Generating Company
PAUL L. LANG (2) (7) 1999 $252,001 $151,200 $14,567 $0 9,900 SHS. $1,385,905
Senior Vice President 1998 250,875 24,304 7,705 24,304 8,000 shs. 2,697
of Illinois Power 1997 242,325 10,602 8,305 10,601 6,500 shs. 2,615
(1) Mr. Bayless terminated as Chairman and Chief Executive Officer
of Illinova and Illinois Power on December 27, 1999.
(2) Mr. Lang terminated as Senior Vice President of Illinois Power
on December 31, 1999.
(3) The amounts shown in this column are the cash award portion of
grants made to these individuals under the Executive Incentive
Compensation Plan ("Compensation Plan") for 1999, including
amounts deferred under the Executive Deferred Compensation
Plan. See the Compensation Plan description in footnote (4)
below.
(4) This table sets forth stock unit awards for 1999 under the
Compensation Plan. One-half of each year's award under this
plan is converted into stock units representing shares of
Illinova (now Dynegy) Common Stock based on the closing price
of Illinova Common Stock on the last trading day of the award
year. The other one-half of the award is cash and is included
under Bonus in the Summary Compensation Table. Stock units
awarded in a given year, together with cash representing the
accumulated dividend equivalents on those stock units, become
fully vested after a three-year holding period. Stock units
are converted into cash based on the closing price of Common
Stock on the first trading day of the distribution year.
Participants (or beneficiaries of deceased participants) whose
employment is terminated by retirement on or after age 55,
disability, or death receive the present value of all unpaid
awards on the date of such termination. Participants whose
employment is terminated for reasons other than retirement,
38
disability, or death forfeit all unvested awards. In the event
of a termination of employment within two years after a change
in control of Illinova or any its subsidiaries, without good
cause or by any participant with good reason, all awards
become fully vested and payable. See discussion of Retention
and Settlement Agreements below.
(5) In December 1998, the Board granted Mr. Bayless an award of
6,000 share units that vest in three equal annual installments
of 2,000 share units. These units are converted into Illinova
Common Stock when paid. In December, 1999, the Board granted
4,000 shares of Illinova Common Stock to Mr. Bayless to
complete this award.
(6) The amounts shown in this column are Illinois Power's
contributions under the Incentive Savings Plan (including the
market value of shares of Illinova Common Stock at the time of
allocation), and severance payments made to officers
terminating as a result of the Illinova-Dynegy merger.
(7) See discussion of Retention and Settlement Agreements below.
The following tables summarize grants during 1999 of stock
options under Illinova's 1992 Long-Term Incentive Compensation Plan
("LTIC") and awards outstanding at year end for the individuals named
in the Summary Compensation Table.
OPTION GRANTS IN 1999 - INDIVIDUAL GRANTS
- -----------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise or Base Expiration Grant Date
Granted (1) in 1999 Price Per Share (1) Date (1) Present Value (2)
------------------------------------------------------------------------------------------------------
Charles E. Bayless 49,700 16.8 $24.281 2/10/2009 $220,171
George W. Miraben 12,500 4.2 24.281 2/10/2009 55,375
30,000 10.1 24.688 1/18/2009 159,600
Larry F. Altenbaumer 9,900 3.3 24.281 2/10/2009 43,857
25,220 8.5 31.125 12/8/2009 186,628
Alec G. Dreyer 9,600 3.1 24.281 2/10/2009 42,528
25,220 8.5 31.125 12/8/2009 186,628
Paul L. Lang 9,900 3.3 24.281 2/10/2009 43,857
(1) In addition to the specified expiration date, the grant expires on the
first anniversary of the recipient's death and/or 5 years following date of
retirement, and is not exercisable in the event a recipient's employment
terminates. In the event of certain change-in-control circumstances, the
Compensation and Nominating Committee (Committee) may accelerate vesting.
In August, 1999, the Committee declared all options outstanding at that
time, except those granted to Mr. Bayless, exercisable on consummation of
the Illinova-Dynegy merger, and expiring one year after the termination
dates of any recipients whose employment terminates as a result of the
change-in-control. Options granted to Mr. Bayless are exercisable ten years
after the date of his termination, with such termination date being deemed
to occur on the termination date of his Consulting Agreement. The exercise
price of each option is equal to the fair market value of the Illinova
Common Stock (average of high and low trading price) on the date of the
grant. The options granted in February (those listed first) to Messrs.
Miraben, Altenbaumer, Dreyer, and Lang, included an incentive component,
payable in cash or stock at the Board's discretion, tied to future
performance over three years as measured by total shareholder return or, in
Mr. Dreyer's grant, as measured by economic value added.
39
In December, the Board determined to pay all executive officers a bonus
equal to 183 percent of the maximum award payable over the three-year
performance period. See discussion of Retention and Settlement Agreements
below for more information regarding these awards.
(2) The Grant Date Present Values have been calculated using the Black-Scholes
option pricing model. Disclosure of the Grant Date Present Value, or the
potential realizable value of option grants assuming 5% and 10% annualized
growth rates, is mandated by regulation; however, the Black-Scholes pricing
methodology, or any other present methodology, may not be a valid or
accurate means of valuing stock option grants. For options granted in
February 1999 (those listed first) the calculation is based on the
following assumptions: (i) As of grant date, Illinova's calculated
Black-Scholes ratio was .2001. After discounting for risk of forfeiture at
three percent per year over Illinova's three-year vesting schedule, the
ratio is reduced to .1826; (ii) An annual dividend yield on Illinova Common
Stock of 4.63%; (iii) A risk-free interest rate of 5.28%, based on the
yield of a zero-coupon government bond maturing at the end of the option
term; and (iv) Stock volatility of 23.72%. For those options granted in
December 1999 to Messrs. Altenbaumer and Dreyer (those listed second), the
assumptions were: (i) As of grant date, Illinova's calculated Black-Scholes
ratio was .2607. After discounting for risk of forfeiture at three percent
per year over Illinova's three-year vesting schedule, the ratio is reduced
to .2379; (ii) An annual dividend yield on Illinova Common Stock of 4.86%;
(iii) A risk-free interest rate of 6.49%, based on the yield of a
zero-coupon government bond maturing at the end of the option term; and
(iv) Stock volatility of 30.42%. For the option of 30,000 shares granted to
Mr. Miraben in January, the assumptions are: (i) As of grant date,
Illinova's calculated Black-Scholes ratio was .2362. After discounting for
risk of forfeiture at three percent per year over Illinova's three-year
vesting schedule, the ratio is reduced to .2156; (ii) An annual dividend
yield on Illinova Common Stock of 4.86%; (iii) A risk-free interest rate of
5.10%, based on the yield of a zero-coupon government bond maturing at the
end of the option term; and (iv) Stock volatility of 30.65%.
AGGREGATED OPTION AND FISCAL YEAR-END OPTION VALUE TABLE
- --------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Shares Acquired Value Year-End (#) at Fiscal Year-End ($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------------------------------
Charles E. Bayless 0 $0 214,700 shs./0shs. $1,262,809/$0
George W. Miraben 0 $0 0 shs./42,500 shs. $0/$432,723
Larry F. Altenbaumer 800 $7,300 31,800 shs./51,620 shs. $315,913/$307,689
4,200 $38,719
Alec G. Dreyer 0 $0 17,750 shs./50,820 shs. $158,844/$300,236
Paul L. Lang 0 $0 55,200 shs./0 shs. $515,867/$0
PENSION BENEFITS
- ----------------
The following table shows the estimated annual pension benefits on a
straight life annuity basis payable on retirement based on specified annual
average earnings and years of credited service classifications, assuming
continuation of the Retirement Plan and employment until age 65.
40
This table does not show the Social Security offset, but any actual pension
benefit payments would be subject to this offset.
Estimated Annual Benefits (rounded)
- ---------------------------------------------------------------------------------------------------
Annual 15 Yrs. 20 Yrs. 25 Yrs. 30 Yrs. 35 Yrs.
Average Credited Credited Credited Credited Credited
Earnings Service Service Service Service Service
- ---------------------------------------------------------------------------------------------------
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 87,500
- ---------------------------------------------------------------------------------------------------
150,000 45,000 60,000 75,000 90,000 105,000
- ---------------------------------------------------------------------------------------------------
175,000 52,500 70,000 87,500 105,000 122,500
- ---------------------------------------------------------------------------------------------------
200,000 60,000 80,000 100,000 120,000 140,000
- ---------------------------------------------------------------------------------------------------
250,000 75,000 100,000 125,000 150,000 175,000
- ---------------------------------------------------------------------------------------------------
300,000 90,000 120,000 150,000 180,000 210,000
- ---------------------------------------------------------------------------------------------------
350,000 105,000 140,000 175,000 210,000 245,000
- ---------------------------------------------------------------------------------------------------
400,000 120,000 160,000 200,000 240,000 280,000
- ---------------------------------------------------------------------------------------------------
450,000 135,000 180,000 225,000 270,000 315,000
- ---------------------------------------------------------------------------------------------------
500,000 150,000 200,000 250,000 300,000 350,000
- ---------------------------------------------------------------------------------------------------
550,000 165,000 220,000 275,000 330,000 385,000
- ---------------------------------------------------------------------------------------------------
600,000 180,000 240,000 300,000 360,000 420,000
- ---------------------------------------------------------------------------------------------------
650,000 195,000 260,000 325,000 390,000 455,000
- ---------------------------------------------------------------------------------------------------
700,000 210,000 280,000 350,000 420,000 490,000
- ---------------------------------------------------------------------------------------------------
750,000 225,000 300,000 375,000 450,000 525,000
- ---------------------------------------------------------------------------------------------------
800,000 240,000 320,000 400,000 480,000 560,000
- ---------------------------------------------------------------------------------------------------
The earnings used in determining pension benefits under the Retirement
Plan are the participants' regular base compensation, as set forth under Salary
in the Summary Compensation Table.
SUPPLEMENTAL PENSION BENEFITS
- -----------------------------
In December 1999, the Board of Directors approved termination of the
Supplemental Retirement Income Plan, and elimination of all related future
financial obligations through a lump sum payment of their present value to all
participants.
The employment agreements with Messrs. Bayless and Miraben provided
each of them a supplemental pension benefit equal to 40% of average base pay and
bonus. This was paid as a lump sum of $2,665,384 to Mr. Bayless, and $1,476,437
to Mr. Miraben, rather than an annuity, to effect termination of the
Supplemental Retirement Income Plan. Also, Mr. Altenbaumer was paid $565,848;
Mr. Dreyer was paid $67,625; and Mr. Lang was paid $998,000, to effect
termination of the Supplemental Retirement Income Plan.
At December 31, 1999, for purposes of both the Retirement Plan and the
Supplemental Plan, Messrs. Bayless, Miraben, Altenbaumer, Dreyer, and Lang had
completed 1, 0, 29, 7 and 18 years of credited service, respectively.
41
EMPLOYMENT AGREEMENT
- --------------------
Charles Bayless entered into an employment contract with the Company
when hired in July, 1998. The agreement included a guaranteed bonus,
supplemental pension benefits and a $500,000 loan forgiveable in 20 percent
increments over a period of five years. He was also granted options to purchase
165,000 shares of Illinova stock based on the following vesting schedule:
- -----------------------------------------------------------------------------------
If employed through Options available
the following date to exercise
- -----------------------------------------------------------------------------------
One-year anniversary of grant date 16,667 shares
- -----------------------------------------------------------------------------------
Two-year anniversary of grant date 16,667 shares
- -----------------------------------------------------------------------------------
Three-year anniversary of grant date 16,667 shares
- -----------------------------------------------------------------------------------
The first date on which the stock price is $35.00 57,500 shares
- -----------------------------------------------------------------------------------
The first date on which the stock price is $40.00 57,500 shares
- -----------------------------------------------------------------------------------
An additional grant of 6,000 share units of Illinova stock was awarded
Mr. Bayless in December 1998, with the right to receive these shares in
2,000-share blocks in calendar years 1998, 1999, and 2000. This grant has been
fulfilled. See discussion of Consulting Agreement and Retention and Settlement
Agreements below for information on the disposition of the employment agreement
with Mr. Bayless.
CONSULTING AGREEMENT
- --------------------
Mr. Bayless has been retained as a consultant until January 31, 2000.
The payment for this period is $10,000, for which he is obligated to provide up
to 80 hours of consulting service. During the term of the agreement, Mr. Bayless
is deemed to be an employee for purposes of stock-based awards, the Retention
Agreement, and the Settlement Agreement (see below). On expiration of the
Consulting Agreement, he will be treated as having been terminated without cause
as a result of a change-in-control.
EMPLOYEE RETENTION AND SETTLEMENT AGREEMENTS
- --------------------------------------------
Illinova entered into Employee Retention Agreements with each of its
executive officers and with officers of its subsidiaries. These agreements
entitled the beneficiaries to lump sum cash payments, if their employment were
terminated without good cause or voluntarily by the officer for good reason
within two years following a change in control (as defined in the Agreement) or
terminated prior to a change of control at the request of a potential acquiror,
equal to:
1) 36 months' salary at the greater of the officer's salary rate in effect on
the date of the change in control or the salary rate in effect on the date
the officer's employment with Illinova or subsidiary terminated; plus
2) three times the latest bonus earned by the officer during the three
calendar years preceding termination of employment.
Under these agreements, the beneficiaries continue, after any such
termination of employment, to participate in and receive benefits under Illinova
health and welfare benefit plans, for 36 months following termination of
employment, or, if earlier, until age 65 or the individual is reemployed;
provided that, if the officer is 50 years of age or older at the time of such
termination, then coverage under health, life insurance and similar welfare
plans continues until the officer is 55 at which time he or she is eligible to
receive health and welfare benefits extended to employees electing early
retirement.
42
The Employee Retention Agreements created issues of interpretation and
implementation as the Illinova-Dynegy merger activity progressed. The
Compensation and Nominating Committee worked with outside legal counsel and
other external advisors to develop a fair, optimal and cost effective
implementation strategy for these agreements.
Settlement agreements were subsequently entered into with all
executive officers, containing the following key provisions: (i) the "bonus"
for purposes of trebling, is the 1999 annual award under the Executive
Incentive Compensation Plan calculated on the basis of 100 percent goal
attainment; (ii) the incentive compensation available under the 1992
Long-Term Incentive Plan, measured by total shareholder return over a
three-year performance period commencing in 1999, is paid at a 183 percent of
the amount earned for the 1999 performance period except for Mr. Dreyer,
whose payment was based on economic value added by Illinova Generating
Company, an affiliate of IP, in 1998 and 1999; (iii) vesting is accelerated
for all deferred incentive compensation earned in prior years; (iv)
supplemental pension benefits are liquidated through payment of their net
present values; and (v) ongoing health and welfare benefits are clarified by
agreement that such benefits cease at age 55 unless, when the officer is 55,
such benefits are still offered to early retirees and the officer elects to
retire at that time. All payments treated as earned in 1999 or otherwise
payable regardless of change-in-control were paid in 1999 to realize
accounting and administrative benefits, with the balance of severance
payments made after consummation of the merger and on or after each
recipient's actual termination date. Executives whose employment has not
terminated received the specified incentive compensation payments and payment
in lieu of supplemental pension benefits.
The settlement agreements with Messrs. Bayless and Miraben include
substantially the same provisions and the following additional provisions to
address benefits afforded them by their respective prior employment contracts.
Mr. Bayless entered into a consulting agreement, previously described, whereby
he is deemed to be an employee, until expiration of the consulting agreement,
for purposes of his stock-based awards and forgiveness of obligations under his
$500,000 promissory note dated August 13, 1998. Mr. Miraben's settlement
agreement includes forgiveness of the $250,000 loan made pursuant to a
promissory note dated January 18, 1999, and a tax gross-up payment for the
forgiven interest but not the forgiven principal.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------
The table below shows shares of Illinova Common Stock beneficially
owned as of December 31, 1999, by each director nominee and the executive
officers named in the Summary Compensation Table. All of Illinois Power's Common
Stock is owned by Illinova. To the best of Illinois Power's knowledge, no owner
holds more than 5 percent of Illinois Power Preferred Stock.
43
- -----------------------------------------------------------------------------------
Number Number of Stock
of Shares Units in Deferred
Name of Beneficially Compensation Percent
Beneficial Owner Owned (1)(2) Plans of Class
- -----------------------------------------------------------------------------------
J. Joe Adorjan 2,300 440 (3)
- -----------------------------------------------------------------------------------
Charles E. Bayless 237,189 - (3)
- -----------------------------------------------------------------------------------
C. Steven McMillan 2,600 1,034 (3)
- -----------------------------------------------------------------------------------
Robert M. Powers 9,850 5,352 (3)
- -----------------------------------------------------------------------------------
Sheli Z. Rosenberg 1,674 4,592 (3)
- -----------------------------------------------------------------------------------
Walter D. Scott 6,775 4,031 (3)
- -----------------------------------------------------------------------------------
Joe J. Stewart 1,500 1,760 (3)
- -----------------------------------------------------------------------------------
Ronald L. Thompson 3,935 7,755 (3)
- -----------------------------------------------------------------------------------
Marilou von Ferstel 4,666 5,745 (3)
- -----------------------------------------------------------------------------------
John D. Zeglis 2,769 4,710 (3)
- -----------------------------------------------------------------------------------
Larry F. Altenbaumer 64,642 - (3)
- -----------------------------------------------------------------------------------
Alec G. Dreyer 44,459 - (3)
- -----------------------------------------------------------------------------------
Paul L. Lang (4) 59,192 - (3)
- -----------------------------------------------------------------------------------
George W. Miraben 42,500 - (3)
- -----------------------------------------------------------------------------------
(1) With sole voting and/or investment power.
(2) Includes shares issuable to the executive officers pursuant to outstanding
stock options.
(3) No director or executive officer owns any other equity securities of
Illinova or as much as 1 percent of the Illinova Common Stock. As a group,
directors and executive officers of Illinova and Illinois Power own
approximately 698,800 shares of Common Stock (less than 1 percent).
(4) Includes 910 shares owned by spouse.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------
None.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------
The following documents, which have been filed by Illinois Power with
the Securities and Exchange Commission pursuant to the Securities and Exchange
Act of 1934, as amended, are by this reference incorporated in and made a part
of this statement:
(1) Financial Statements - Consolidated financial statements of Illinois
Power are incorporated under Item 8. of this Form 10-K.
(2) Financial Statement Schedules:
All Financial Statement Schedules are omitted because they are not applicable
or the required information is shown in the financial statements or notes
thereto.
44
(3) Exhibits
The exhibits filed with this Form 10-K are listed in the Exhibit Index
located elsewhere herein. All management contracts and compensatory
plans or arrangements set forth in such list are marked with a ~.
(a) Reports on Form 8-K, 8-K/A, 10-Q, 10-Q/A, and 10-K/A since September
30, 1999:
Report filed on Form 8-K on October 15, 1999
Other Events: IP releases results third-quarter earnings
Report filed on Form 8-K on December 17, 1999
Other Events: IP announces sale of Clinton Power Station to
Amergen, a joint venture between PECO Energy Co.
of Philadelphia and British Energy of Edinburgh,
Scotland.
Report filed on Form 8-K on February 8, 2000
Item 4.: IP announces change in certifying accountant from
PricewaterhouseCoopers LLP to Arthur Andersen LLP.
Report filed on Form 8-K/A on February 28, 2000 which amends March 3,
1999 8-K
Other Events: 1998 Earnings restatement.
Report filed on Form 8-K/A on February 28, 2000 which amends April 19,
1999 8-K
Other Events: 1998 Earnings restatement.
Report filed on Form 8-K/A on February 28, 2000 which amends June 18,
1999 8-K
Other Events: Merger agreement - 1998 earnings restatement.
Report filed on Form 8-K/A on February 28, 2000 which amends July 16,
1999 8-K
Other Events: 1998 Earnings restatement.
Report filed on Form 10-Q/A on February 28, 2000 which amends May 17,
1999, 10-Q for 1998 earnings restatement.
Report filed on Form 10-Q/A on February 28, 2000 which amends August
16, 1999, 10-Q for 1998 earnings restatement.
Report filed on Form 10-Q/A on February 28, 2000 which amends November
15, 1999, 10-Q for 1998 earnings restatement.
Report filed on Form 10-Q/A on February 29, 2000 which amends November
15, 1999, 10-Q for 1998 earnings restatement. (Second amended
filing of this 10-Q)
Report filed on Form 10-K/A on February 29, 2000 which amends the 1998
10-K for 1998 earnings restatement.
Report filed on Form 8-K/A on February 29, 2000 which amends October
15, 1999 8-K for 1998 earnings restatement.
Report filed on Form 8-K on March 1, 2000
Other Events: Illinova releases 1999 earnings
Report filed on Form 10-Q/A on March 1, 2000 which amends August 16,
1999 10-Q
45
for 1998 earnings restatement. (Second amended filing of this 10-Q)
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, President
Date: March 30, 2000
--------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Larry F. Altenbaumer President and Director |
- ------------------------------------- |
Larry F. Altenbaumer |
(Principal Executive Officer and |
Principal Financial Officer) |
|
/s/ Peggy E. Carter Controller |
- ------------------------------------- |
Peggy E. Carter |
(Principal Accounting Officer) |
|
/s/ C. L. Watson | |
- ------------------------------------- | |
C. L. Watson | |
| |
/s/ Stephen W. Bergstrom | |
- ------------------------------------- | |
Stephen W. Bergstrom |-- Director |-- March 30, 2000
| |
/s/ John U. Clarke | |
- ------------------------------------- | |
John U. Clarke | |
| |
/s/ Kenneth E. Randolph | |
- ------------------------------------- | |
Kenneth E. Randolph | |
47
Exhibit Index
Exhibit Description
- ------- -----------
(3)(i) ARTICLES OF INCORPORATION
Amended and Restated Articles of Incorporation
of Illinois Power Company, dated September 7, 1994.
Filed as Exhibit 3(a) to the Current Report on
Form 8-K dated September 7, 1994 (File No. 1-3004). *
(3)(ii) BY-LAWS
By-laws of Illinois Power Company, as amended
December 14, 1994. Filed as Exhibit 3(b)(1)
to the Annual Report on Form 10-K under
the Securities Exchange Act of 1934 for the
year ended December 31, 1994 (File No. 1-3004). *
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
(a)(1) Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 2(b) Registration No. 2-14066. *
(a)(2) Supplemental Indenture dated July 1, 1991, providing
for $84,710,000 principal amount of 7 3/8% First
Mortgage Bonds due July 1, 2021. Filed as Exhibit
4(mm) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1991 (File No. 1-3004). *
(a)(3) Supplemental Indenture No. 1 dated June 1, 1992.
Filed as Exhibit 4(nn) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(a)(4) Supplemental Indenture No. 2 dated June 1, 1992.
Filed as Exhibit 4(oo) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(a)(5) Supplemental Indenture No. 1 dated July 1, 1992.
Filed as Exhibit 4(pp) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(a)(6) Supplemental Indenture No. 2 dated July 1, 1992.
Filed as Exhibit 4(qq) to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1992
(File No. 1-3004). *
(a)(7) Supplemental Indenture dated September 1, 1992,
48
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
providing for $72,000,000 principal amount of 6 1/2%
First Mortgage Bonds due September 1, 1999. Filed
as Exhibit 4(rr) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1992
(File No. 1-3004). *
(a)(8) General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992. Filed as Exhibit 4(cc) to
the Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December
31, 1992 (File No. 1-3004). *
(a)(9) Supplemental Indenture dated February 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(dd) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1992 (File No. 1-3004). *
(a)(10) Supplemental Indenture dated February 15, 1993, to
General Mortgage Indenture and Deed of Trust dated as
of November 1, 1992. Filed as Exhibit 4(ee) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31,
1992 (File No. 1-3004). *
(a)(11) Supplemental Indenture No. 1 dated March 15, 1993,
to Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(ff) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1992 (File No. 1-3004). *
(a)(12) Supplemental Indenture No. 1 dated March 15, 1993,
to General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(gg) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1992 (File No. 1-3004). *
(a)(13) Supplemental Indenture No. 2 dated March 15, 1993,
to Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(hh) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1992 (File No. 1-3004). *
(a)(14) Supplemental Indenture No. 2 dated March 15, 1993,
to General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(ii) to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1992 (File No. 1-3004). *
(a)(15) Supplemental Indenture dated July 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(jj) to the Quarterly Report
49
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
on Form 10-Q for the quarter ended June 30, 1993
(File No. 1-3004). *
(b)(16) Supplemental Indenture dated July 15, 1993, to
General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(kk)to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 (File No. 1-3004). *
(b)(17) Supplemental Indenture dated August 1, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(ll) to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993
(File No. 1-3004). *
(a)(18) Supplemental Indenture dated August 1, 1993, to
General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992. Filed as Exhibit
4(mm) to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 (File No. 1-3004). *
(a)(19) Supplemental Indenture dated October 15, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(nn) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993
(File No. 1-3004). *
(a)(20) Supplemental Indenture dated October 15, 1993, to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992. Filed as Exhibit 4(oo) to
the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (File No. 1-3004). *
(a)(21) Supplemental Indenture dated November 1, 1993, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(pp) to the Quarterly Report on
Form 10-Q for the quarter ended September 30, 1993
(File No. 1-3004). *
(a)(22) Supplemental Indenture dated November 1, 1993, to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992. Filed as Exhibit 4(qq) to
the Quarterly Report on Form 10-Q for the quarter
ended September 30, 1993 (File No. 1-3004). *
(a)(23) Supplemental Indenture dated February 1, 1994, to
Mortgage and Deed of Trust dated November 1, 1943.
Filed as Exhibit 4(hh) to the Annual Report on
Form 10-K under the Securities Exchange Act of 1934
for the year ended December 31, 1993
(File No. 1-3004). *
(a)(24) Indenture dated October 1, 1994 between Illinois
Power Company and the First National Bank of
50
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
Chicago. Filed as Exhibit 4(a) to the Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1994 (File No. 1-3004). *
(a)(25) Supplemental Indenture dated October 1, 1994, to
Indenture dated as of October 1, 1994. Filed as
Exhibit 4(b) to the Quarterly Report on Form
10-Q for the quarter ended September 30, 1994
(File No. 1-3004). *
(a)(26) Indenture dated January 1, 1996 between Illinois
Power Company and Wilmington Trust Company. Filed
as Exhibit 4(b)(36) to the Annual Report on Form
10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1995 (File No. 1-3004). *
(a)(27) First Supplemental Indenture dated January 1, 1996,
between Illinois Power Company and Wilmington Trust
Company. Filed as Exhibit 4(b)(37) to the Annual
Report on Form 10-K under the Securities Exchange
Act of 1934 for the year ended December 31, 1995
(File No. 1-3004). *
(a)(28) Supplemental Indenture dated April 1, 1997, to
Mortgage and Deed of Trust dated November 1, 1943. Filed
as Exhibit 4(a) to the Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997 (File No. 1-3004). *
(a)(29) Supplemental Indenture dated April 1, 1997 to General
Mortgage Indenture and Deed of Trust dated November 1,
1992. Filed as Exhibit 4(b) to the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 (File
No. 1-3004). *
(a)(30) Supplemental Indenture dated December 1, 1997 to
Mortgage and Deed of Trust dated November 1, 1943. *
(a)(31) Supplemental Indenture dated as of March 1, 1998 to
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the issuance of
$18,700,000 principal amount of 5.40% pollution
control bonds. Filed as Exhibit 4.41 to the
Registration Statement on Form S-3, filed January
22, 1999 (File No. 333-71061). *
(a)(32) Supplemental Indenture dated as of March 1, 1998
to Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $18,700,000 principal
amount of pollution control bonds. Filed as Exhibit
4.39 to the Registration Statement on Form S-3, filed
January 22, 1999 (File No. 333-71061). *
(a)(33) Supplemental Indenture dated as of March 1, 1998 to
51
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the issuance of
$33,755,000 principal amount of pollution control
bonds. Filed as Exhibit 4.42 to the Registration
Statement on Form S-3, filed January 22, 1999
(File No. 333-71061). *
(a)(34) Supplemental Indenture dated as of March 1, 1998 to
Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $33,755,000 principal
amount of pollution control bonds. Filed as Exhibit
4.40 to the Registration Statement on Form S-3,
filed January 22, 1999 (File No. 333-71061). *
(a)(35) Supplemental Indenture dated as of July 15, 1998
to General Mortgage Indenture and Deed of Trust
dated as of November 1, 1992 providing for the
issuance of $100,000,000 principal amount of 6.25%
New Mortgage Bonds. Filed as Exhibit 4.44 to the
Registration Statement on Form S-3, filed January
22, 1999 (File No. 333-71061). *
(a)(36) Supplemental Indenture dated as of July 15, 1998 to
Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $100,000,000 principal
amount of 6.25% First Mortgage Bonds. Filed as Exhibit
4.43 to the Registration Statement on Form S-3, filed
January 22, 1999 (File No. 333-71061). *
(a)(37) Supplemental Indenture dated as of September 15, 1998
to General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the issuance of
$100,000,000 principal amount of 6.00% New Mortgage Bonds.
Filed as Exhibit 4.46 to the Registration Statement
on Form S-3, filed January 22, 1999 (File No. 333-71061). *
(a)(38) Supplemental Indenture dated as of September 15, 1998
to Mortgage and Deed of Trust dated November 1, 1943
providing for the issuance of $100,000,000 principal
amount of 6.00% First Mortgage Bonds. Filed as
Exhibit 4.45 to the Registration Statement on Form S-3,
filed January 22, 1999 (File No. 333-71061). *
(a)(39) Supplemental Indenture dated as of October 1, 1998
to General Mortgage Indenture and Deed of Trust dated
as of November 1, 1992 providing for the transfer of
Letter of Credit providers on three series of pollution
control bonds totaling $111,770,000. Filed as Exhibit
4.47 to the Registration Statement on Form S-3, filed
January 22, 1999 (File No. 333-71061). *
(a)(40) Supplemental Indenture dated as of June 15, 1999, to
52
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
Mortgage and Deed of Trust dated November 1, 1943,
providing for the issuance of $250,000,000 principal
amount of 7.5% mortgage bonds. Filed as Exhibit 4.1 to
the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 1-3004). *
(a)(41) Supplemental Indenture dated as of June 15, 1999, to
General Mortgage Indenture and Deed of Trust dated as of
November 1, 1992, providing for the issuance of 7.50% New
Mortgage Bonds. Filed as Exhibit 4.2 to the Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999
(File No. 1-3004). *
(a)(42) Supplemental Indenture dated as of July 15, 1999,
to Mortgage and Deed of Trust dated November 1, 1943,
providing for the issuance of $35,615,000 principal amount
of 5.70% Series U Pollution Control Bonds. Filed as
Exhibit 4.3 to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 1-3004). *
(a)(43) Supplemental Indenture dated as of July 15, 1999, to
General Mortgage Indenture and Deed of Trust dated
November 1, 1992, providing for the issuance of $35,615,000
principal amount of 5.70% Series U Pollution Control Bonds.
Filed as Exhibit 4.4 to the Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 (File No. 1-3004). *
(a)(44) Supplemental Indenture dated as of July 15, 1999, to Mortgage
and Deed of Trust dated November 1, 1943, providing for the
issuance of $84,150,000 principal amount of 7.40% Series V
Pollution Control Bonds. Filed as Exhibit 4.5 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999
(File No. 1-3004). *
(a)(45) Supplemental Indenture dated as of July 15, 1999, to General
Mortgage Indenture and Deed of Trust dated November 1, 1992,
providing for the issuance of $84,150,000 principal amount
of 7.40% Series V Pollution Control Bonds. Filed as Exhibit 4.6
to the Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 1-3004). *
(10) MATERIAL CONTRACTS
(a)(1) Group Insurance Benefits for Managerial Employees of Illinois
Power Company as amended January 1, 1983. Filed as Exhibit 10(a)
to the Annual Report on Form 10-K under the Securities Exchange
Act of 1934 for the year ended December 31, 1983
(File No. 1-3004).~*
(a)(2) Illinois Power Company Incentive Savings Trust and
Illinois Power Company Incentive Savings Plan and
Amendment I thereto. Filed as Exhibit 10(d) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31,
1984 (File No. 1-3004).~*
53
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
(a)(3) Illinois Power Company's Executive Incentive
Compensation Plan. Filed as Exhibit 10(f) to the
Annual Report on Form 10-K under the Securities
Exchange Act of 1934 for the year ended December 31,
1989 (File No. 1-3004).~*
(a)(4) Illinois Power Company Incentive Savings Plan, as
amended and restated effective January 1, 1991.
Filed as Exhibit 10(h) to the Annual Report
on Form 10-K under the Securities Exchange Act of
1934 for the year ended December 31, 1990
(File No. 1-3004).~*
(a)(5) Illinois Power Company Executive Deferred
Compensation Plan. Filed as Exhibit 10(l) to
the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year
ended December 31, 1993 (File No. 1-3004).~*
(a)(6) Illinois Power Company Retirement Income Plan for
salaried employees as amended and restated effective
January 1, 1989, as further amended through January 1,
1994. Filed as Exhibit 10(m) to the Annual Report on
Form 10-K under the Securities Exchange Act of 1934 for
the year ended December 31, 1994 (File No. 1-3004).~*
(a)(7) Illinois Power Company Retirement Income Plan for
employees covered under a collective bargaining agreement
as amended and restated effective as of January 1, 1994.
Filed as Exhibit 10(n)to the Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the
year ended December 31, 1994 (File No. 1-3004).~*
(a)(8) Illinois Power Company Incentive Savings Plan as amended
and restated effective January 1, 1991 and as further
amended through amendments adopted December 28, 1994.
Filed as Exhibit 10(o)to the Annual Report on Form 10-K
under the Securities Exchange Act of 1934 for the year
ended December 31, 1994 (File No. 1-3004).~*
(a)(9) Illinois Power Company Incentive Savings Plan for
employees covered under a collective bargaining
agreement as amended and restated effective January
1, 1991 and as further amended through amendments
adopted December 28, 1994. Filed as Exhibit 10(p)
to the Annual Report on Form 10-K under the
Securities Exchange Act of 1934 for the year ended
December 31, 1994 (File No. 1-3004).~*
(a)(10) Illinois Power Company Executive Incentive Compensation
54
Exhibit Index (Continued)
Exhibit Description
- ------- -----------
Plan, as amended, effective January 1, 1997.~*
(a)(11) Illinois Power Company Executive Deferred Compensation
Plan as amended by resolutions adopted by the Board of
Directors on June 10-11, 1997.~*
(a)(12) Illinois Power Company Supplemental Retirement Income
Plan for Salaried Employees of Illinois Power Company
as amended by resolutions adopted by the Board of
Directors on June 10-11, 1997.~*
(a)(13) Retirement and Consulting Agreement entered into as of
June 30, 1997 between Illinois Power Company and
Wilfred Connell.~*
(a)(14) Interim agreement with PECO relative to CPS. *
(a)(15) Settlement Agreement entered into as of December 22,
1999 between Illinova Corporation on behalf of it and its
subsidiaries including IP and Charles E. Bayless.~
(a)(16) Settlement Agreement entered into as of December 3,
1999 between Illinova Corporation on behalf of it and its
subsidiaries including IP and George W. Miraben.~
(a)(17) Settlement Agreement entered into as of December 14,
1999 between Illinova Corporation on behalf of it and its
subsidiaries including IP and William B. Conway Jr.~
(a)(18) Settlement Agreement entered into as of November
1999 between Illinova Corporation on behalf of it and its
subsidiaries including IP and the following officers:
Larry F. Altenbaumer, Paul L. Lang, Kim B. Leftwich,
David W. Butts, Robert D. Reynolds, Robert A. Schultz,
Cynthia G. Steward, Leah Manning Stetzner,
and Eric B. Weekes.~
(12) STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(21) SUBSIDIARIES OF REGISTRANTS
(a) Subsidiaries of IP.
(27) FINANCIAL DATA SCHEDULES
- --------------------------------------
* Incorporated herein by reference.
~ Management contract and compensatory plans or arrangements.
55
ILLINOIS POWER COMPANY
RESPONSIBILITY FOR INFORMATION
The consolidated financial statements and all information in this report are the
responsibility of management. The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles and include
amounts that are based on management's best estimates and judgments. Management
also prepared the other information in this report and is responsible for its
accuracy and consistency with the consolidated financial statements. In the
opinion of management, the consolidated financial statements fairly reflect
Illinois Power's financial position, results of operations and cash flows.
Illinois Power believes that its accounting and internal accounting control
systems are maintained so that these systems provide reasonable assurance that
assets are safeguarded against loss from unauthorized use or disposition and
that the financial records are reliable for preparing the consolidated financial
statements.
The consolidated financial statements have been audited by Illinois Power's
independent accountants, PricewaterhouseCoopers LLP, in accordance with
generally accepted auditing standards. Such standards include the evaluation of
internal accounting controls to establish a basis for developing the scope of
the examination of the consolidated financial statements. In addition to the use
of independent accountants, Illinois Power maintained a professional staff of
internal auditors who conducted financial, procedural, and special audits. To
assure their independence, both PricewaterhouseCoopers LLP and the internal
auditors had direct access to the Audit Committee of the Board of Directors.
The Audit Committee was composed of members of the Board of Directors who
were not active or retired employees of Illinois Power.
Larry F. Altenbaumer
PRESIDENT
David W. Butts
EXECUTIVE VICE PRESIDENT
& CHIEF OPERATING OFFICER
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Illinois Power Company:
In our opinion, the accompanying consolidated balance sheets and the related
statements of income, of cash flows and of retained earnings present fairly,
in all material respects, the financial position of Illinois Power Company
and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As explained in Note 16 to the consolidated financial statements, Illinova
Corporation ("Illinova"), the Company's parent, merged with Dynegy on
February 1, 2000.
As explained in Note 3 to the consolidated financial statements, the Company
transferred its wholly owned fossil generating assets and other
generation-related assets and liabilities to Illinova in exchange for a note
receivable on October 1, 1999.
As explained in Note 2 to the consolidated financial statements, the Company's
commitment to exit nuclear operations resulted in an impairment of the Clinton
Power Station in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," in December 1998.
As explained in Note 2 to the consolidated financial statements, the Company
effected a quasi-reorganization in December 1998. In conjunction with the
accounting for a quasi-reorganization, the Company adjusted the recorded value
of specific assets and liabilities to fair value, including its fossil power
generation stations. In addition, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" and Emerging Issues Task Force Statement 98-10, "Accounting for
Energy Trading and Risk Management Activities."
As explained in Note 1 to the consolidated financial statements, the Company
discontinued applying the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
to its generation segment of the business in December 1997.
PricewaterhouseCoopers LLP
St. Louis, Missouri
February 28, 2000
Illinois Power Company
C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E
- ----------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
OPERATING REVENUES
Electric $ 1,178.6 $ 1,224.2 $ 1,244.4
Electric interchange 420.2 557.2 175.6
Gas 304.4 287.8 353.9
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,903.2 2,069.2 1,773.9
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES AND TAXES
Fuel for electric plants 191.2 250.2 232.4
Power purchased 421.1 735.2 217.9
Gas purchased for resale 165.1 149.6 207.7
Other operating expenses 466.9 381.6 290.5
Maintenance 107.8 156.3 111.7
Depreciation and amortization 151.8 203.6 198.8
Amortization of regulatory asset 26.4 - -
General taxes 100.8 123.2 133.8
Income taxes 54.4 (30.9) 102.4
Income tax - impairment loss - (982.8) -
Clinton plant impairment loss (Note 2) - 2,666.9 -
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,685.5 3,652.9 1,495.2
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 217.7 (1,583.7) 278.7
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
ITC - Clinton impairment - 160.4 -
Interest income from affiliates 52.4 - -
Miscellaneous - net (12.8) 2.6 3.0
- ----------------------------------------------------------------------------------------------------------------------------------
Total 39.6 163.0 3.0
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest charges 257.3 (1,420.7) 281.7
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST CHARGES
Interest expense 148.4 134.9 135.9
Allowance for borrowed funds used during construction (4.2) (3.2) (5.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Total 144.2 131.7 130.9
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item 113.1 (1,552.4) 150.8
Extraordinary item net of income tax benefit
of $118.0 million (Note 1) - - (195.0)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 113.1 (1,552.4) (44.2)
Less - Preferred dividend requirements 19.2 19.8 21.5
Plus - Carrying amount over consideration
paid for redeemed preferred stock 1.7 - 0.2
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 95.6 $ (1,572.2) $ (65.5)
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of these statements.
Illinois Power Company
C O N S O L I D A T E D B A L A N C E S H E E T S
- ------------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
ASSETS
Utility Plant
Electric (includes construction work in progress of $84.4 million and $177.7 million, respectively) $ 2,188.9 $ 5,481.8
Gas (includes construction work in progress of $17.1 million and $15.3 million, respectively) 714.2 686.9
- ------------------------------------------------------------------------------------------------------------------------------------
2,903.1 6,168.7
Less -- accumulated depreciation 1,138.6 1,713.7
- ------------------------------------------------------------------------------------------------------------------------------------
1,764.5 4,455.0
Nuclear fuel - 20.3
- ------------------------------------------------------------------------------------------------------------------------------------
1,764.5 4,475.3
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS AND OTHER ASSETS 13.1 2.6
- ------------------------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents 23.5 504.5
Accounts receivable (less allowance for doubtful accounts of $5.5 million)
Service 91.7 105.9
Other 49.0 32.5
Interest receivable from affiliate 51.0 -
Accrued unbilled revenue 83.4 82.6
Materials and supplies, at average cost
Fossil fuel - 25.6
Gas in underground storage 24.2 28.9
Operating materials 16.8 35.9
Assets from commodity price risk management activities - 26.0
Prepaid and refundable income taxes 65.9 -
Prepayments and other 35.8 42.8
- ------------------------------------------------------------------------------------------------------------------------------------
441.3 884.7
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES
Note receivable from affiliate 2,597.6 -
Transition period cost recovery 320.3 457.3
Other 161.0 284.2
- ------------------------------------------------------------------------------------------------------------------------------------
3,078.9 741.5
- ------------------------------------------------------------------------------------------------------------------------------------
$ 5,297.8 $ 6,104.1
- ------------------------------------------------------------------------------------------------------------------------------------
CAPITAL and LIABILITIES
CAPITALIZATION
Common stock -- No par value, 100,000,000 shares authorized; 75,643,937 shares issued, stated at $ 1,274.1 $ 1,185.9
Retained earnings -- accumulated since 1/1/99 54.7 -
Less -- Capital stock expense 7.2 7.3
Less -- 12,751,724 shares of common stock in treasury, at cost 286.4 286.4
- ------------------------------------------------------------------------------------------------------------------------------------
Total common stock equity 1,035.2 892.2
Preferred stock 45.8 57.1
Mandatorily redeemable preferred stock 193.4 199.0
Long-term debt 1,906.4 2,158.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total capitalization 3,180.8 3,306.8
- ------------------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable 91.7 216.2
Notes payable 327.3 147.6
Long-term debt maturing within one year 236.4 506.6
Taxes accrued 26.8 29.4
Interest accrued 17.7 34.9
Liabilities from commodity price risk management activities - 61.6
Other 66.3 86.2
- ------------------------------------------------------------------------------------------------------------------------------------
766.2 1,082.5
- ------------------------------------------------------------------------------------------------------------------------------------
DEFERRED CREDITS
Accumulated deferred income taxes 1,075.2 849.5
Accumulated deferred investment tax credits 24.7 39.6
Decommissioning liability - 567.4
Other 250.9 258.3
- ------------------------------------------------------------------------------------------------------------------------------------
1,350.8 1,714.8
- ------------------------------------------------------------------------------------------------------------------------------------
$ 5,297.8 $ 6,104.1
- ------------------------------------------------------------------------------------------------------------------------------------
(Commitments and Contingencies Note 4)
See notes to consolidated financial statements which are an integral part of
these statements.
Illinois Power Company
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S
- ---------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- ---------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $113.1 ($1,552.4) ($44.2)
Items not requiring (providing) cash --
Depreciation and amortization 181.8 203.4 202.1
Deferred income taxes 165.4 (37.8) 29.4
Extraordinary item - - 195.0
Impairment loss, net of tax - 1,523.7 -
Changes in assets and liabilities --
Accounts and notes receivable 83.6 11.9 57.7
Accrued unbilled revenue (.8) 3.7 19.7
Materials and supplies (7.6) (15.9) (5.1)
Prepayments (55.6) 18.5 (37.6)
Accounts payable (34.4) 38.3 (31.2)
Deferred revenue (69.0) 87.4 -
Other deferred credits (213.1) 11.7 (21.2)
Interest accrued and other, net (13.6) 20.8 59.1
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 149.8 313.3 423.7
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (197.2) (311.5) (223.9)
Other investing activities 13.0 5.1 27.8
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (184.2) (306.4) (196.1)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends on common stock and preferred stock (59.6) (126.1) (114.6)
Repurchase of common stock - (78.6) (121.5)
Redemptions --
Short-term debt (520.4) (560.5) (164.1)
Long-term debt (765.4) (188.3) (160.8)
Preferred stock (16.9) - (39.0)
Issuances --
Short-term debt 700.1 331.3 231.0
Long-term debt 250.0 1,116.5 150.0
Other financing activities (34.4) (14.5) (3.3)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (446.6) 479.8 (222.3)
- ---------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (481.0) 486.7 5.3
Cash and cash equivalents at beginning of year 504.5 17.8 12.5
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $23.5 $504.5 $17.8
- ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of these statements.
Illinois Power Company
C O N S O L I D A T E D S T A T E M E N T S O F
R E T A I N E D E A R N I N G S
- -----------------------------------------------------------------------------------------------------------------------------------
(Millions of dollars)
- -----------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997
Balance at beginning of year $ - $ 89.5 $ 245.9
Net income (loss) before dividends and carrying amount adjustment 113.1 (1,552.4) (44.2)
- -----------------------------------------------------------------------------------------------------------------------------------
113.1 (1,462.9) 201.7
- -----------------------------------------------------------------------------------------------------------------------------------
Less-
Dividends-
Preferred stock 19.3 20.1 21.7
Common stock 40.8 82.9 90.7
Plus-
Carrying amount over (under) consideration
paid for redeemed preferred stock 1.7 - 0.2
Quasi-reorganization adjustment (Note 2) - 1,327.2 -
Transfer from common stock equity to
eliminate retained earnings deficit (Note 2) - 238.7 -
- -----------------------------------------------------------------------------------------------------------------------------------
(58.4) 1,462.9 (112.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 54.7 $ - $ 89.5
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements which are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION Illinois Power Company (IP) is a wholly owned
subsidiary of Illinova, a holding company. IP is engaged in the transmission,
distribution, and sale of electric energy and the distribution,
transportation, and sale of natural gas in the state of Illinois. The
consolidated financial statements include the accounts of IP; Illinois Power
Securitization Limited Liability Company, a special purpose LLC whose sole
member is IP; Illinois Power Special Purpose Trust (IPSPT), a special purpose
trust whose sole owner is Illinois Power Securitization Limited Liability
Company; Illinois Power Capital, L.P.; and Illinois Power Financing I (IPFI).
See "Note 8 - Long-Term Debt" and "Note 9 - Preferred Stock" for additional
information.
All significant intercompany balances and transactions have been
eliminated from the consolidated financial statements. Preparation of
financial statements in conformity with generally accepted accounting
principles requires the use of management's estimates. Actual results could
differ from those estimates.
REGULATION IP is regulated primarily by the ICC and the FERC and prepares its
consolidated financial statements in accordance with FAS 71, "Accounting for
the Effects of Certain Types of Regulation." Reporting under FAS 71 allows
companies whose service obligations and prices are regulated to maintain
balance sheet assets representing costs they expect to recover through
inclusion in future rates. In July 1997, the EITF concluded that application
of FAS 71 accounting should be discontinued at the date of enactment of
deregulation legislation for business segments for which a plan of
deregulation has been established. The EITF further concluded that regulatory
assets and liabilities that originated in the portion of the business being
deregulated should be written off unless their recovery is specifically
provided for through future cash flows from the regulated portion of the
business. In December 1997, the State of Illinois enacted P.A. 90-561,
legislation designed to introduce competition for electric generation service
over a defined transition period.
Because P.A. 90-561 provides for market-based pricing of electric
generation services, IP discontinued application of FAS 71 for its generating
segment in December 1997. IP evaluated the regulatory assets and liabilities
associated with its generation segment and determined that recovery of these
costs was not probable through rates charged to transmission and distribution
customers (the regulated portion of its business). In December 1997, IP wrote
off generation-related regulatory assets and liabilities of approximately
$195 million (net of income taxes). These net assets related to previously
incurred costs then expected to be recoverable through future revenues,
including deferred Clinton post-construction costs, unamortized losses on
reacquired debt, previously recoverable income taxes, and other
generation-related regulatory assets.
REGULATORY ASSETS Regulatory assets represent probable future revenues to IP
associated with certain costs that are expected to be recovered from
customers through the ratemaking process. Significant regulatory assets at
December 31 are as follows:
- ------------------------------------------------------------------------------- -------------- --------------
(Millions of dollars) 1999 1998
- ------------------------------------------------------------------------------- -------------- --------------
Transition period cost recovery $320.3 $457.3
Unamortized losses on reacquired debt $ 66.2 $ 40.1
Manufactured-gas plant site cleanup costs $ 44.4 $ 44.7
Clinton decommissioning cost recovery $ 18.7 $ 72.3
UTILITY PLANT The cost of additions to plant and replacements for retired
property units is capitalized. Cost includes labor, materials, and an
allocation of general and administrative costs, plus AFUDC or capitalized
interest as described below. Maintenance and repairs, including replacement
of minor items of property, are charged to maintenance expense as incurred.
When depreciable property units are retired, the original cost and
dismantling charges, less salvage value, are charged to accumulated
depreciation.
Costs which would have been considered capital additions at Clinton were
expensed in 1999 due to the 1998 impairment of Clinton-related assets. See
"Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of Clinton."
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The FERC Uniform System of
Accounts defines AFUDC as the net costs for the period of construction of
borrowed funds used for construction purposes and a reasonable rate on other
funds when so used. AFUDC is capitalized as a component of construction work
in progress by those business segments applying the provisions of FAS 71. In
1999, 1998, and 1997, the pre-tax rate used for all construction projects was
5.5%, 5.7%, and 5.6%, respectively. Although cash is not currently realized
from AFUDC, it is realized through the ratemaking process over the
service life of the related property through increased revenues resulting
from a higher rate base and higher depreciation expense. Non-regulated
business segments capitalize interest under the guidelines in FAS 34,
"Capitalization of Interest Cost."
DEPRECIATION For financial statement purposes, various classes of depreciable
property are depreciated over their estimated useful lives by applying
composite rates on a straight-line basis. Depreciation of Clinton was
discontinued in 1999. In the years 1998 and 1997, depreciation was 2.8% of
the average depreciable cost for Clinton. Provisions for depreciation for all
other electric plant facilities were 2.6%, 2.3%, and 2.8% in 1999, 1998, and
1997, respectively. Provisions for depreciation of gas utility plant, as a
percentage of the average depreciable cost, were 3.5% in 1999 and 1998, and
3.3% in 1997.
AMORTIZATION OF NUCLEAR FUEL Prior to the sale of Clinton, amortization of
nuclear fuel (including related financing costs) was determined on a unit of
production basis. A provision for spent fuel disposal costs was charged to
fuel expense based on kwh generated.
TRANSITION PERIOD REGULATORY ASSET The transition period cost recovery
regulatory asset is amortized over the stranded cost recovery period mandated
by P.A. 90-561, which extends to 2006. The amount of amortization recorded in
each period is based on the recovery of such costs from rate payers as
measured by ROE. See "Note 2 - Clinton Impairment, Quasi-Reorganization and
Sale of Clinton" for additional information on the transition period cost
recovery regulatory asset.
UNAMORTIZED DEBT DISCOUNT, PREMIUM, AND EXPENSE Discount, premium, and
expense associated with long-term debt are amortized over the lives of the
related issues. Costs related to refunded debt for business segments applying
the provisions of FAS 71 are amortized over the lives of the related new debt
issues or the remaining life of the old debt if no new debt is issued. Costs
related to refunded debt for the unregulated segments are expensed when
incurred.
MANUFACTURED-GAS PLANT SITE CLEANUP COSTS REGULATORY ASSET The regulatory
asset for the probable future collections from rate payers of allowable MGP
site cleanup costs is amortized as the allowable costs are collected from
rate payers. See "Note 4 - Commitments and Contingencies" for additional
information.
CLINTON DECOMMISSIONING REGULATORY ASSET The regulatory asset for the
probable future collections from rate payers of decommissioning costs is
amortized as the decommissioning costs are collected from rate payers. See
"Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of Clinton."
REVENUE RECOGNITION AND ENERGY COST Revenues for utility services are
recognized when services are provided to customers. As such, IP records
revenue for services provided but not yet billed. Unbilled revenues represent
the estimated amount customers will be billed for service delivered from the
time meters were last read to the end of the accounting period.
Taxes included in operating revenues were $23 million in 1999, $54 million
in 1998, and $71 million in 1997. In August 1998, the practice of including
state public utility taxes in operating revenues, which is one of several
taxes included in operating revenues, was discontinued for the electric
portion of the business because IP became a tax collection agent.
The cost of gas purchased for resale is recovered from customers pursuant
to the UGAC. Accordingly, allowable gas costs that are to be passed on to
customers in a subsequent accounting period are deferred. The recovery of
costs deferred under this clause is subject to review and approval by the
ICC. Prior to March 1998, the costs of fuel for electric generation and
purchased power costs were deferred and recovered from customers pursuant to
the UFAC. On March 6, 1998, IP initiated an ICC proceeding to eliminate the
UFAC in accordance with P.A. 90-561. A new base fuel cost recoverable under
IP's electric tariffs was established, effective on the date of the filing.
UFAC elimination prevents IP from automatically passing cost increases
through to its customers and exposes IP to the risks and opportunities of
cost fluctuations and operating efficiencies. Under UFAC, IP was subject to
annual ICC audits of its actual allowable fuel costs. Costs could be
disallowed, resulting in negotiations and/or litigation with the ICC. In
1998, IP agreed to settlements with the ICC that closed the audits for all
previously disputed years. As a result of the settlements, IP electric
customers received refunds totaling $15.1 million in the first quarter of
1999. These refunds completed the process of eliminating the UFAC at IP.
INCOME TAXES Deferred income taxes result from temporary differences between
book income and taxable income and the tax bases of assets and liabilities.
The temporary differences relate principally to plant and depreciation.
Investment tax credits used to reduce federal income taxes have been
deferred and are being amortized to income over the service life of the
property that gave rise to the credits. As a result of the decision to exit
the nuclear energy business, all previously deferred investment tax credits
associated with nuclear property were recorded as a credit to income at
December 31, 1998.
IP is included in the consolidated federal income tax and combined state
tax returns of Illinova. Under Illinova's income tax allocation agreement,
each subsidiary calculates its own tax liability. See "Note 7 - Income Taxes"
for additional discussion.
PREFERRED DIVIDEND REQUIREMENTS Preferred dividend requirements of IP
reflected in the Consolidated Statements of Income are recorded on the
accrual basis.
CONSOLIDATED STATEMENTS OF CASH FLOWS Cash and cash equivalents include cash
on hand and temporary investments purchased with an initial maturity of three
months or less. A portion of the cash on hand at December 31, 1999 and 1998
is restricted; it is unavailable for general purpose cash needs. This cash is
reserved for use in paying off the Transitional Funding Trust Notes issued
under the provisions of P.A. 90-561. See "Note 8 - Long-Term Debt" for
additional discussion of the Transitional Funding Trust Notes.
The amount of restricted cash was $12.5 million at the end of 1999, and $4.3
million at the end of 1998.
Income taxes and interest paid are as follows:
(Millions of dollars)
- -------------------------------------- ----------------------- ----------------------- ----------------------
Years ended December 31, 1999 1998 1997
- -------------------------------------- ----------------------- ----------------------- ----------------------
Income taxes $ - $ 14.6 $ 94.3
Interest $168.1 $151.6 $140.0
Non-cash investing activities during 1999 include the receipt of a $2.8
billion note receivable in conjunction with the transfer of the wholly owned
fossil generating assets to Illinova. See "Note 3 - Related Parties" for more
information. There was no non-cash investing or financing activity in 1998 and
1997.
ACCOUNTING PRONOUNCEMENTS Implementation of the quasi-reorganization in 1998
required the adoption of any accounting standards that had not yet been
adopted because their required implementation date had not occurred. All
applicable accounting standards were adopted as of December 1998. The
standards adopted included FAS 133, "Accounting for Derivative Instruments
and Hedging Activities," SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," and SOP 98-5, "Reporting on
the Costs of Start-Up Activities." EITF Issue 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities," was
adopted according to its December 1998 implementation rule.
IP also adopted FAS 130, "Reporting Comprehensive Income." FAS 130
established standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. During
1999, IP recognized $6.2 million of other comprehensive income related to its
decommissioning trust fund as required by FAS 130. Concurrent with the
December 1999 sale of Clinton, the $6.2 million other comprehensive income
was reversed against common stock equity. See "Note 2 - Clinton Impairment,
Quasi-Reorganization and Sale of Clinton." There were no other comprehensive
income items at December 31, 1999 and no items reported as other
comprehensive income in 1998 or 1997.
NOTE 2 - CLINTON IMPAIRMENT, QUASI-REORGANIZATION AND SALE OF CLINTON
In December 1998, IP's Board of Directors decided to exit Clinton operations,
resulting in an impairment of Clinton-related assets and the accrual of
exit-related costs. The impairment and accrual of costs resulted in a
$1,523.7 million, net of income taxes, charge against earnings. Concurrent
with the decision to exit Clinton, IP's Board of Directors also decided to
effect a quasi-reorganization, whereby IP's consolidated accumulated deficit
in retained earnings of $1,565.9 million at December 31, 1998 was eliminated.
On December 15, 1999, IP sold Clinton to AmerGen. The sale resulted in
revisions to the impairment of Clinton-related assets and the previously
accrued exit-related costs. All such revisions were made directly to the
common stock equity account in the balance sheet.
BACKGROUND Clinton was placed in service in 1987 and represented
approximately 20% of IP's installed generation capacity at December 31, 1998.
Clinton did not operate from September 1996 through the end of May 1999, at
which time the plant was successfully restarted. Clinton's equivalent
availability was 59% for 1999, and 0% for 1998 and 1997.
In December 1997, the State of Illinois enacted P.A. 90-561, legislation
designed to introduce competition for electric generation service over a
defined transition period. P.A. 90-561 created uncertainty regarding IP's
ability to recover electric generating costs and earn a reasonable rate of
return on generating assets. Uncertainties about deregulated generation
pricing in Illinois, coupled with IP's experience with nuclear operations and
analyses of expected shareholder value from various options related to
Clinton, led management to the conclusion that either the sale or closure of
Clinton would create more shareholder value than its continued operation.
Management determined that this strategic decision would provide a
fundamental change necessary for IP to achieve success in the new environment
of deregulation and competition.
In anticipation of a possible decision to exit Clinton, management
submitted a letter to the SEC describing proposed accounting for an
impairment loss under the "assets to be disposed of" provisions of FAS 121.
The letter also requested concurrence with the proposed accounting for a
quasi-reorganization, whereby the fossil generation assets would be written
up to their fair value coincident with recording the impairment loss for
Clinton. In November 1998, the SEC confirmed that it would not object to the
proposed accounting.
At the time of its decision to exit Clinton operations, IP was pursuing
potential opportunities to sell Clinton. However, substantial uncertainty
existed with regard to the ability to convert any tentative agreement into an
executable transaction. As a result, in December 1998 IP accounted for the
Clinton exit based on the expectation of plant closure as of August 31, 1999.
CLINTON IMPAIRMENT AND ACCRUAL OF EXIT COSTS Prior to impairment, the book
value of Clinton, including construction work in progress, nuclear fuel, and
material and supplies, net of accumulated depreciation, was $2,617.6 million.
FAS 121 requires that assets to be disposed of be stated at the lower of
their carrying amount or their fair value. The fair value of Clinton was
estimated to be zero. This estimate was consistent with a management decision
to close Clinton. The adjustment of Clinton plant, nuclear fuel, and
materials and supplies to fair value resulted in an impairment loss of
$2,594.4 million, net of accumulated depreciation. Nuclear fuel and materials
and supplies of $23.2 million remained on IP's books after the impairment,
given management's expectations that such amounts would be consumed in 1999
prior to Clinton's ultimate disposal. The impairment of Clinton plant,
nuclear fuel, and materials and supplies was recognized as a charge to
earnings. Consistent with Clinton's estimated fair value of zero and the
provisions of FAS 121, depreciation of Clinton was discontinued.
Concurrent with the decision to exit Clinton operations, IP accrued the
estimated cost to decommission the facility. Recognition of this liability,
net of previously accrued amounts, resulted in a $486.6 million charge to
earnings. IP also recorded a regulatory asset of $72.3 million reflecting
probable future collections from IP's customers of decommissioning costs
deemed recoverable. The regulatory asset was recognized as a credit to
expense, offsetting a portion of the Clinton impairment.
Also concurrent with the decision to exit Clinton operations, IP recorded
other exit-related costs of $115.5 million. These other exit costs included
termination fees for nuclear fuel contracts, costs to transition the plant
from an operating mode to a decommissioning mode, employee severance, pension
curtailment benefits and other postretirement benefit costs. See "Note 11 -
Pension and Other Benefits Costs" for additional information. These costs
were recognized as charges to earnings.
P.A. 90-561 allows utilities to recover potentially non-competitive
investment costs ("stranded costs") from retail customers during the
transition period, which extends until December 31, 2006, with possible
extension to December 31, 2008. During this period, IP is allowed to recover
stranded costs through frozen bundled rates and transition charges from
customers who select other electric suppliers. In May 1998, the SEC Staff
issued interpretive guidance on the appropriate accounting treatment during
regulatory transition periods for asset impairments and the related regulated
cash flows designed to recover such impairments. The Staff's guidance
established that an impaired portion of plant assets identified in a state's
legislation or rate order for recovery by means of a regulated cash flow
should be treated as a regulatory asset in the separable portion of the
enterprise from which the regulated cash flows are derived. Based on this
guidance and on provisions of P.A. 90-561, IP recorded a regulatory asset of
$457.3 million for the portion of IP's stranded costs deemed probable of
recovery during the transition period. The regulatory asset was recognized as
a credit to expense, offsetting a portion of the Clinton impairment.
The Clinton impairment and accrual of exit-related costs resulted in an
impairment loss of $1,523.7 million, net of income taxes. IP had an
accumulated deficit in retained earnings of $1,565.9 million after recording
the impairment loss.
REVALUATION OF ASSETS AND LIABILITIES The quasi-reorganization necessitated a
review of IP's assets and liabilities to determine whether the book value of
such items needed to be adjusted to reflect their fair value. IP determined
that its fossil generation assets were not stated at fair value, and an
economic assessment was made using projections of on-going operating costs,
future prices for fossil fuels, and market prices of electricity in IP's
service area. Management concluded that IP's fossil generation assets had a
fair value of $2,867.0 million. This fair value was determined using the
after-tax cash flows of the fossil assets. Prior to the quasi-reorganization,
the fossil generation assets' book value, net of accumulated depreciation,
was $631.7 million. The adjustment to fair value resulted in a write-up of
$2,235.3 million, which was recognized as an increase in retained earnings.
IP determined that the book value of its mandatorily redeemable preferred
stock and long-term debt attributable to the generation portion of the
business was less than its fair value, requiring an adjustment of $27.3
million. These adjustments to fair value were recognized as decreases in
retained earnings. The book value of current assets and liabilities equaled
fair value and therefore required no adjustments. IP's electric transmission
and distribution assets and its gas distribution assets are still subject to
cost-based rate regulation and therefore required no adjustment. See "Note 13
- - Fair Value of Financial Instruments" for additional information.
EARLY ADOPTION OF ACCOUNTING PRONOUNCEMENTS As part of the
quasi-reorganization, IP was required to adopt all existing accounting
pronouncements. The effect of adopting the accounting pronouncements was $7.3
million, which was recognized as a direct charge to retained earnings. See
"Note 1 - Summary of Significant Accounting Policies" and "Note 14 -
Financial and Other Derivative Instruments" for additional information.
REMAINING DEFICIT IN RETAINED EARNINGS After the revaluation of other assets
and liabilities to their fair value and the early adoption of accounting
pronouncements, the accumulated deficit in retained earnings was $238.7
million, which was eliminated by a transfer from common stock equity.
A summary of consolidated retained earnings and the effects of the Clinton
impairment and quasi-reorganization on the retained earnings balance follows:
(Millions of dollars)
- ---------------------------------------------------------------------------------------------
Retained earnings (deficit) at December 31, 1998, prior to Clinton
impairment and quasi-reorganization $ (42.2)
- ---------------------------------------------------------------------------------------------
Clinton impairment (charged)/credited to earnings:
Clinton plant, nuclear fuel, and materials and supplies (2,594.4)
Decommissioning costs, net of regulatory asset (414.3)
Other exit costs (115.5)
Transition period cost recovery 457.3
Income taxes 1,143.2
- ---------------------------------------------------------------------------------------------
Total Clinton impairment (1,523.7)
- ---------------------------------------------------------------------------------------------
Accumulated deficit in retained earnings (1,565.9)
- ---------------------------------------------------------------------------------------------
Quasi-reorganization (charged)/credited to retained earnings:
Generation assets fair value adjustment 2,235.3
Mandatorily redeemable preferred stock and
long-term debt fair value adjustment (27.3)
Early adoption of accounting pronouncements (7.3)
Income taxes (873.5)
- ---------------------------------------------------------------------------------------------
Total quasi-reorganization 1,327.2
- ---------------------------------------------------------------------------------------------
Retained earnings deficit at December 31, 1998 (238.7)
Transfer from common stock equity 238.7
- ---------------------------------------------------------------------------------------------
Retained earnings balance at December 31, 1998, after
quasi-reorganization $ -
- ---------------------------------------------------------------------------------------------
SALE OF CLINTON TO AMERGEN On April 15, 1999, IP announced that it had
reached interim agreements with AmerGen and PECO, whereby AmerGen would
purchase and operate Clinton and IP would buy at least 80% in 1999 and at
least 75% during the years 2000 through 2004 of the plant's electricity
output. Under the interim agreements, PECO was responsible for Clinton's
direct operating and capital expenses and continued to assist with the
management of the plant under the existing management services contract while
IP compensated PECO for management services based on the amount of
electricity the plant produced. On July 1, 1999, IP announced that it had
signed a definitive asset sale agreement and a power purchase agreement with
AmerGen. In December 1999, IP's sale of Clinton to AmerGen was completed.
AmerGen paid IP $12.4 million for the plant and property.
At December 31, 1998, IP accounted for its decision to exit Clinton based
on the expectation of plant closure. IP revised its impairment of
Clinton-related assets and accruals for exit-related costs in accordance with
the terms of the sale in December 1999. The net decrease in the impairment
and the accruals was recognized as an increase in common stock equity,
revising the original effect of the 1998 quasi-reorganization on common stock
equity. The change in the impairment loss and the net reductions in the
exit-related accruals resulted in an increase in common stock equity of $88.2
million as follows:
Increase (decrease) in common stock equity (Millions of dollars)
- --------------------------------------------------------------------------------
Clinton plant impairment $ 12.4
Decommissioning costs, net of regulatory asset 288.5
Other shutdown-related costs 129.1
Power purchase agreement costs (145.0)
Other sale-related costs (5.6)
Transition period cost recovery (115.9)
Income taxes (75.3)
- --------------------------------------------------------------------------------
Total change in impairment loss and accruals $ 88.2
- --------------------------------------------------------------------------------
DECOMMISSIONING COSTS AND DECOMMISSIONING REGULATORY ASSET
Accrual Accrual
Balance at 1999 Other Cash Balance at
(Millions of dollars) December 31, 1998 Accruals Adjustments Payments December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
Decommissioning costs $ 567.4 $ - $ (330.6) $ (211.9) $ 24.9
- ------------------------------------------------------------------------------------------------------------------------------
As a result of the sale, AmerGen has assumed responsibility for operating
and ultimately decommissioning Clinton. However, IP was required to transfer
its decommissioning trust funds in the amount of $98.5 million to AmerGen on
the sale closing date and make an additional payment of $113.4 million to the
decommissioning trust funds. In addition, IP is responsible for five future
annual payments of approximately $5 million to the decommissioning trust
funds. The reduction in the decommissioning liability was $330.6 million. IP
also reversed comprehensive income of $6.2 million, which had been recorded
on the decommissioning trust funds. The accrual balance for decommissioning
costs at December 31, 1999 is $24.9 million, of which $5.0 million is
included in other current liabilities and $19.9 million is included in other
deferred credits in the accompanying consolidated balance sheet.
In November 1999, the ICC allowed for continued recovery of
decommissioning costs associated with Clinton after the sale to AmerGen. IP
adjusted the regulatory asset for probable future collections from IP's
customers of decommissioning costs to reflect the ICC's limitation on
recovery of such costs to an amount corresponding to approximately 75% of
IP's future payment responsibility for decommissioning costs under the asset
sale agreement. The decrease in the regulatory asset was $48.3 million.
At December 31, 1999, the regulatory asset balance was $18.7 million. See
"Note 1 - Summary of Significant Accounting Policies" for additional
information.
The following table summarizes the accruals that IP recorded in December
1998 and December 1999, adjustments to the accruals, cash payments, and the
balances of the accruals at December 31, 1999 by income statement line item
in which the costs would have otherwise been recognized:
Accrual Accrual
Balances at 1999 Other Cash Balances at
(Millions of dollars) December 31, 1998 Accruals Adjustments Payments December 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Contract termination costs $ 7.1 $ - $ (7.1) $ - $ -
Transition costs from operating
mode to decommissioning mode 76.9 - (76.9) - -
Employee severance costs 42.7 - (37.1) (5.6) -
Pension curtailment benefits* (11.9) - (7.1) - (19.0)
Other postretirement benefits* 0.7 - (0.9) - (0.2)
- ------------------------------------------------------------------------------------------------------------------------------
$ 115.5 $ - $(129.1) $(5.6) $(19.2)
- ------------------------------------------------------------------------------------------------------------------------------
* These amounts are included in the curtailment gain in "Note 11 - Pension and Other Benefits Costs."
POWER PURCHASED
Power purchase agreement costs $ - $ 145.0 $ - $ - $145.0
- ------------------------------------------------------------------------------------------------------------------------------
OTHER SHUTDOWN-RELATED COSTS In December 1999, IP adjusted various accruals for
other exit-related costs that were originally recorded in December 1998. IP
reversed contract termination fees for nuclear fuel contracts of $7.1 million,
which were transferred to AmerGen. In addition, IP reversed costs to transition
the plant from an operating mode to a decommissioning mode of $76.9 million. IP
also reduced its accrual for employee severance costs by $37.1 million and paid
$5.6 million to AmerGen on the sale closing date for severance costs.
Pension curtailment benefits increased by $7.1 million, and other
postretirement benefit costs decreased by $.9 million.
POWER PURCHASE AGREEMENT COSTS The Clinton sale was contingent on IP signing
a power purchase agreement with AmerGen. The power purchase agreement
requires that IP purchase 75% of Clinton's output over the 5-year life of the
agreement at fixed prices that exceed current and projected wholesale prices.
Therefore, IP accrued $145.0 million for the premium that IP estimates it is
paying over the life of the agreement, which will be amortized based on the
energy purchased from AmerGen. At December 31, 1999, $26.1 million is
included in other current liabilities and $118.9 million is included in other
deferred credits in the accompanying consolidated balance sheet.
TRANSITION PERIOD COST RECOVERY If IP had known at December 31, 1998 that the
Clinton exit would ultimately be concluded as a sale transaction, the
impairment loss would have been lower and IP would have recorded a lower
transition period cost recovery regulatory asset. Accordingly, as a result of
the adjustments which decreased the accruals and the impairment loss, IP
reduced its transition period cost recovery regulatory asset by $115.9
million.
NOTE 3 - RELATED PARTIES
Effective October 1, 1999 IP transferred its wholly owned fossil generating
assets and other generation-related assets and liabilities at net book value,
to Illinova, in exchange for an unsecured note receivable of $2.8 billion.
Illinova then transferred the fossil generating assets to its subsidiary,
IPMI. The note matures on September 30, 2009 and bears interest at an annual
rate of 7.5%, due semiannually on the first day of April and October. At
December 31, 1999, IP had outstanding principal and interest balances of $2.6
billion and $51 million, respectively, on the note from Illinova. IP
recognized a total of $52.4 million interest income from Illinova, including
$51 million related to the note.
Effective October 1, 1999, IP and IPMI entered into a power purchase
agreement (PPA), whereby IP would buy power from IPMI for a primary term
extending through December 31, 2004, with provisions to extend the PPA
thereafter on an annual basis, subject to concurrence by both parties. The
PPA defines the terms and conditions under which IPMI provides capacity and
energy to IP, using a tiered pricing structure. In addition, IP sells gas to
IPMI which periodically uses gas for the generation of electricity. In 1999,
IP purchases of electricity from IPMI, net of gas sales to IPMI, totaled
$101.0 million.
Effective October 1, 1999, IP and IPMI began operating under a Services
and Facilities Agreement, whereby IP and IPMI exchange services such as
financial, legal, information technology and human resources as well as share
facility space. In 1999, IP recorded $10.3 million of income, net of
expenses, associated with such agreement. At December 31, 1999, IP maintained
a net receivable position for the same amount as reflected in the
accompanying Consolidated Balance Sheet.
IIC, a wholly owned subsidiary of Illinova, is a captive insurance company
whose primary business is to insure the risks related to or associated with
business enterprises of IP and other subsidiaries of Illinova. During 1999,
IP paid premiums of $7.6 million to IIC to insure certain risks of IP.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
COMMITMENTS
IP has contracts with various natural gas suppliers and interstate pipelines
to provide natural gas supply, transportation, and leased storage. Estimated
committed natural gas, transportation, and leased storage costs for 2000
through 2004 total $61 million. Total natural gas purchased was $164 million
in 1999, $157 million in 1998, and $185 million in 1997. IP anticipates that
all gas-related costs will be recoverable under IP's UGAC.
UTILITY EARNINGS CAP P.A. 90-561 contains floor and ceiling provisions for
IP's ROE. During the transition period ending in 2006 (or 2008 at the option
of the utility and with approval by the ICC), IP may request an increase in
its base rates if the two-year average of its earned ROE is below the
two-year average of the monthly average yields of 30-year U.S. Treasury bonds
for the same two years. Conversely, if during the transition period the
two-year average of its earned ROE exceeds the two-year average of the
monthly average yields of the 30-year U.S. Treasury bonds for the same two
years, plus 5.5% in 1999 or 6.5% in 2000 through 2004 (which increases to
8.5% in 2000 through 2004 if a utility chooses not to implement transition
charges after 2006), IP must refund to customers 50 percent of the
"overearnings." Regulatory asset amortization is included in the calculation
of ROE for the ceiling or overearnings test, but is not included in the
calculation for the floor test.
NUCLEAR DECOMMISSIONING COSTS See "Note 2 - Clinton Impairment,
Quasi-Reorganization and Sale of Clinton" for additional information on the
sale of Clinton Power Station.
ENVIRONMENTAL MATTERS
CLEAN AIR ACT Prior to the transfer of its fossil generating facilities to
Illinova on October 1, 1999, IP purchased emission allowances to comply with
the SO(2) emission reduction requirements of Phase I (1995-1999) of the Acid
Rain Program (Title 4) of the 1990 CAAA. An emission allowance is the
authorization by the U.S Environmental Protection Agency (U.S. EPA) to emit
one ton of SO(2). The ICC approved IP's Phase I Acid Rain Compliance Plan in
September 1993, and IPMI is continuing to implement that plan. IP is no longer
responsible for purchasing emission allowances.
To comply with the Phase I NOx emission reduction requirements of the
Acid Rain Program of the Clean Air Act, IP installed low-NOx burners at
Baldwin Unit 3 and Vermilion Unit 2. On November 29, 1994, the Phase I NOx
rules were remanded to the U.S. EPA. On April 13, 1995, the U.S. EPA
reinstated, with some modifications, the Phase I NOx rules effective January
1, 1996. Phase I of the Acid Rain NOx reduction program ended December 31,
1999.
The U.S. EPA issued revised Phase II NOx emission limits on December 10,
1996; and IP prepared a Phase II Compliance Plan. IPMI is responsible for
completion of the Phase II Compliance Plan.
U.S. ENVIRONMENTAL PROTECTION AGENCY COMPLAINT On November 3, 1999, the U.S.
EPA issued a NOV against IP and, with the DOJ, filed Complaint No. 99C833
against IP in the U.S. District Court, Southern District of Illinois. Similar
notices and lawsuits were filed against a number of other utilities. Both the
NOV and Complaint allege violations of the Clean Air Act and regulations
thereunder. More specifically, both allege, based on the same events, that
certain equipment repairs, replacements and maintenance activities at IP's
three generating units at Baldwin, prior to their transfer to Illinova,
constituted "major modifications" under either or both the Prevention of
Significant Deterioration and the New Source Performance Standards
regulations. When non-exempt "major modifications" occur, the Clean Air Act
and related regulations generally require that generating facilities meet
more stringent emissions standards. The regulations under the Clean Air Act
provide certain exemptions to the definition of "major modifications,"
particularly an exemption for routine repair, replacement or maintenance.
Management has analyzed each of the activities covered by the U.S. EPA's
allegations and believes they are all done routinely throughout the utility
industry as necessary to maintain the operational efficiency and safety of
the equipment, and are covered by the exemption for routine repair,
replacement and maintenance. Management believes that the U.S. EPA is
changing, or attempting to change through enforcement actions, the intent and
meaning of its regulations and that, even assuming the activities in question
were found not to qualify for the routine exemption, there were no increases
either in annual emissions or in the maximum hourly emissions achievable at
any of the units caused by any of the activities. The regulations provide an
exemption for increased hours of operation or production rate and for
increases in emissions resulting from demand growth. Although none of IP's
other facilities is covered in the Complaint and NOV, the U.S. EPA has
officially requested information concerning activities at IP's Vermilion,
Wood River, and Hennepin plants, also prior to their transfer to Illinova. It
is possible that the U.S. EPA will eventually commence enforcement actions
against those plants. The U.S. EPA has the authority to seek penalties for
the alleged violations in question at the rate of up to $27,500 per day for
each violation. The U.S. EPA also may be seeking installation of BACT, or
equivalent, at Baldwin and possibly at the other three plants. A significant
portion of the cost of BACT is already included in the capital budget in
connection with previously planned pollution control upgrades. U.S. EPA's and
DOJ's claims are believed to be without merit, with no likely outcome that
would have a material adverse effect on IP's operations or financial
performance.
MANUFACTURED-GAS PLANTS IP's estimated liability for MGP site remediation is
$58 million. This amount represents IP's current estimate of the costs it
will incur to remediate the 24 MGP sites for which it is responsible. Because
of the unknown and unique characteristics at each site, IP cannot currently
determine its ultimate liability for remediation of the sites.
In October 1995, IP initiated litigation against a number of its
insurance carriers. Settlement proceeds recovered from these carriers offset
a portion of the MGP remediation costs and are credited to customers through
the tariff rider mechanism which the ICC previously approved. Cleanup costs
in excess of insurance proceeds are considered probable of recovery from IP's
transmission and distribution customers. See "Note 1 - Summary of Significant
Accounting Policies" for additional information.
OTHER
LEGAL PROCEEDINGS IP is involved in legal or administrative proceedings
before various courts and agencies with respect to matters occurring in the
ordinary course of business. Management believes that the final disposition
of these proceedings will not have a material adverse effect on the
consolidated financial position or the results of operations.
ACCOUNTS RECEIVABLE IP sells electric energy and natural gas to residential,
commercial, and industrial customers throughout Illinois. At December 31,
1999, 58%, 28%, and 14% of "Accounts receivable - Service" were from
residential, commercial, and industrial customers, respectively. IP maintains
reserves for potential credit losses and such losses have been within
management's expectations. The reserve for doubtful accounts remained at $5.5
million in 1999.
INTERNAL REVENUE SERVICE AUDIT The Internal Revenue Service is currently
auditing Illinova's federal income tax returns for the years 1994 through
1997. At this time, the outcome of the audit cannot be determined. Management
does not expect that the results will have a material adverse effect on IP's
financial position or results of operations. For a detailed discussion of
income taxes, see "Note 7 - Income Taxes."
NOTE 5 - LINES OF CREDIT AND SHORT-TERM LOANS
IP has total lines of credit represented by bank commitments amounting to
$350.0 million, all of which were unused at December 31, 1999. These lines of
credit are renewable in May 2000 and May 2002. These bank commitments support
the amount of commercial paper outstanding at any time, limited only by the
amount of unused bank commitments, and are available to support IP
activities. At December 31, 1999 and 1998, IP had $302.3 million and $97.6
million of commercial paper outstanding, respectively.
IP pays facility fees up to .20% per annum on $350.0 million of the total
lines of credit, regardless of usage. The interest rate on borrowings under
these agreements is, at IP's option, based on the lending banks' reference
rate, their Certificate of Deposit rate, the borrowing rate of key banks in
the London interbank market, or competitive bid.
IP has letters of credit capacity totaling $198.2 million, all of which
were undrawn at December 31, 1999. IP pays fees up to .98% per annum on the
undrawn amount of credit.
At December 31, 1999 and 1998, IP had $25 million and $50 million of
extendible floating rate notes outstanding, respectively. IP incurred
interest on such notes at a rate of 6.7% during 1999. The outstanding notes
mature on April 10, 2000.
(Millions of dollars, except rates) 1999 1998
------- -------
Short-term borrowings at December 31, $ 327.3 $ 147.6
Weighted average interest rate at December 31, 6.3% 6.0%
Maximum amount outstanding at any month end $ 374.3 $ 370.9
Average daily borrowings outstanding during the year $ 266.1 $ 321.0
Weighted average interest rate during the year 5.5% 5.7%
NOTE 6 - FACILITIES AGREEMENTS
On March 13, 1997, the NRC issued an order approving the transfer to IP of
the Clinton operating license related to Soyland's 13.2% ownership
obligations in connection with the transfer from Soyland to IP of all of
Soyland's interest in Clinton pursuant to an agreement reached in 1996.
Soyland's title to the plant and directly related assets, such as nuclear
fuel, was transferred to IP on May 1, 1997. Soyland's nuclear decommissioning
trust assets were transferred to IP on May 19, 1997, consistent with IP's
assumption of all of Soyland's ownership obligations, including those related
to decommissioning.
FERC approved an amended PCA between Soyland and IP in July 1997. The
amended PCA obligates Soyland to purchase all of its capacity and energy
needs from IP for at least 10 years. The amended PCA provides that a contract
cancellation fee will be paid by Soyland to IP in the event that a Soyland
member terminates its membership in Soyland. In May 1997, three distribution
cooperative members terminated their membership by buying out of their
respective long-term wholesale power contracts with Soyland. This action
resulted in Soyland paying a fee of $20.8 million to IP in June 1997 to
reduce its future base capacity charges. Fee proceeds of $2.9 million were
used to offset IP's costs of acquiring Soyland's share of Clinton, and the
remaining $17.9 million was recorded as interchange revenue.
In December 1997, Soyland signed a letter of intent to pay in advance the
remainder of its base capacity charges in the PCA, approximately $70 million.
Soyland received the necessary financing and regulatory approvals in the
second quarter of 1998. IP received $30 million and $40 million from Soyland
during the first and second quarters of 1998, respectively. The prepayment
was deferred and was being recognized as interchange revenue evenly over the
initial term of the PCA, September 1, 1996, through August 31, 2006. In
December 1998, Soyland and IP agreed to a restructuring of the PCA in which
IP acts as an agent for Soyland in obtaining and scheduling power and energy
and related transmission from other parties. Pursuant to a comprehensive
agreement dated March 1, 1999, the remaining deferred revenue of $61 million
was brought into income in the first quarter of 1999 and, subsequent to
December 31, 1999, IP has no further power or energy supply obligations to
Soyland.
NOTE 7 - INCOME TAXES
Deferred tax assets and liabilities were comprised of the following:
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------
Balances as of December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
Deferred tax assets
- --------------------------------------------------------------------------------------------------------
Current -
Misc. book/tax recognition differences $ 19.7 $ 9.2
- --------------------------------------------------------------------------------------------------------
Noncurrent -
Depreciation and other property related 45.7 150.4
Alternative minimum tax 164.6 140.5
Unamortized investment tax credit 13.8 18.1
Misc. book/tax recognition differences 91.7 375.0
- --------------------------------------------------------------------------------------------------------
315.8 684.0
- --------------------------------------------------------------------------------------------------------
Total deferred tax assets $ 335.5 $ 693.2
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities
- --------------------------------------------------------------------------------------------------------
Current -
Misc. book/tax recognition differences $ 1.9 $ 0.1
- --------------------------------------------------------------------------------------------------------
Noncurrent -
Depreciation and other property related 1,218.8 1,292.8
Misc. book/tax recognition differences 172.2 240.7
- --------------------------------------------------------------------------------------------------------
1,391.0 1,533.5
- --------------------------------------------------------------------------------------------------------
Total deferred tax liabilities $1,392.9 $1,533.6
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Income taxes included in the Consolidated Statement of Income consist of the
following components:
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Current taxes -
Included in operating
expenses and taxes $47.6 $7.6 $72.7
Included in other income
and deductions (134.9) (4.2) (.7)
- --------------------------------------------------------------------------------------------------------
Total current taxes (87.3) 3.4 72.0
- --------------------------------------------------------------------------------------------------------
Deferred taxes -
Included in operating
expenses and taxes
Property related differences 131.7 (30.0) 9.2
Alternative minimum tax (24.1) 16.4 41.7
Gain/loss on reacquired debt 4.9 3.4 .4
Clinton plant impairment - (982.8) -
Enhanced retirement and severance - - .5
Misc. book/tax recognition differences 99.0 (20.0) (16.7)
Included in other income
and deductions
Property related differences (53.8) .3 (.4)
Misc. book/tax recognition differences 2.1 .3 1.5
- --------------------------------------------------------------------------------------------------------
Total deferred taxes 159.8 (1,012.4) 36.2
- --------------------------------------------------------------------------------------------------------
Deferred investment tax credit - net
Included in operating expenses and taxes (1.2) (8.3) (7.3)
Included in other income and deductions -
Clinton plant impairment - (160.4) -
- --------------------------------------------------------------------------------------------------------
Total investment tax credit (1.2) (168.7) (7.3)
- --------------------------------------------------------------------------------------------------------
Total income taxes (benefits) from continuing operations $71.3 ($1,177.7) $100.9
- --------------------------------------------------------------------------------------------------------
Income tax (benefit), extraordinary item -
Current tax expense - - (17.8)
Deferred tax expense - - (100.2)
- --------------------------------------------------------------------------------------------------------
Total extraordinary item - - (118.0)
- --------------------------------------------------------------------------------------------------------
Total income taxes (benefits) $71.3 ($1,177.7) ($17.1)
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999, 1998 and 1997, income tax expenses
(benefits) in the amounts of $16.9 million, ($3.6) million, and ($1.5)
million, respectively, are reported in Miscellaneous-net in the accompanying
Consolidated Statements of Income. Other tax expenses (benefits) for the years
ended December 31, 1999, 1998 and 1997 are reported as separate components on
the accompanying Consolidated Statements of Income.
The reconciliations of income tax expense to amounts computed by applying the
statutory tax rate to reported pretax income from continuing operations for the
period are set-out below:
(Millions of dollars)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Income tax expense (benefit) at the
federal statutory tax rate $59.9 ($886.9) $88.1
Increases / (decreases) in taxes
resulting from -
State taxes, net of federal effect 13.2 (196.0) 11.8
Investment tax credit amortization (1.2) (8.3) (7.3)
Clinton plant impairment - (85.4) -
Depreciation not normalized 2.0 4.4 11.3
Interest expense on preferred securities (6.7) (6.8) (6.9)
Other - net 4.1 1.3 3.9
- ----------------------------------------------------------------------------------------------------------------
Total income taxes (benefits) from continuing operations $71.3 ($1,177.7) $100.9
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Combined federal and state effective income tax rates were 38.7%, 43.1%,
and 40.1% for the years 1999, 1998, and 1997 respectively.
IP is included in the consolidated federal income tax and combined state
tax returns of Illinova. Under Illinova's income tax allocation agreement,
each subsidiary calculates its own tax liability.
The Internal Revenue Service is currently auditing Illinova's consolidated
federal income tax returns for the years 1994 through 1997. The audits are
not expected to have a material adverse effect on Illinova's consolidated
financial position or results of operations.
IP is subject to the Alternative Minimum Tax , and has an Alternative
Minimum Tax Credit carryforward at December 31, 1999, of approximately $164.6
million. This credit can be carried forward indefinitely to offset future
regular income tax liabilities in excess of the tentative minimum tax.
Because of the passage of P.A. 90-561 in 1997, IP's electric generation
business no longer meets the criteria for application of FAS 71. As required
by FAS 101, "Regulated Enterprises - Accounting for the Discontinuation of
Application of FASB Statement No. 71", the income tax effects of the
write-off of regulatory assets and liabilities related to electric generation
are reflected in the extraordinary item recorded in 1997.
NOTE 8 - LONG-TERM DEBT
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
First mortgage bonds--
6 1/2% series due 1999 $ - $ 72.0
7.95% series due 2004 - 39.0
7 3/8% series due 2021 (Pollution Control Series J) - 84.7
8 3/4% series due 2021 - 57.1
5.70% series due 2024 (Pollution Control Series K) - 35.6
7.40% series due 2024 (Pollution Control Series L) - 84.1
- ------------------------------------------------------------------------------------------------------------------------
Total first mortgage bonds - 372.5
- ------------------------------------------------------------------------------------------------------------------------
New mortgage bonds--
6 1/8% series due 2000 40.0 40.0
5.625% series due 2000 110.0 110.0
6.25% series due 2002 95.7 100.0
6.0% series due 2003 90.0 100.0
6 1/2% series due 2003 100.0 100.0
6 3/4% series due 2005 70.0 70.0
7.5% series due 2009 250.0 -
8.0% series due 2023 - 229.0
5.70% series due 2024 (Pollution Control Series U) 35.6 -
7.40% series due 2024 (Pollution Control Series V) 84.1 -
7 1/2% series due 2025 97.6 148.5
5.40% series due 2028 (Pollution Control Series A) 18.7 18.7
5.40% series due 2028 (Pollution Control Series B) 33.8 33.8
Adjustable rate series due 2028
(Pollution Control Series M, N, and O) 111.8 111.8
Adjustable rate series due 2032
(Pollution Control Series P, Q, and R) 150.0 150.0
- ------------------------------------------------------------------------------------------------------------------------
Total new mortgage bonds 1,287.3 1,211.8
- ------------------------------------------------------------------------------------------------------------------------
Total mortgage bonds 1,287.3 1,584.3
- ------------------------------------------------------------------------------------------------------------------------
Transitional Funding Trust Notes--
5.39% due 2000 23.6 110.0
5.26% due 2001 100.0 100.0
5.31% due 2002 80.0 80.0
5.34% due 2003 85.0 85.0
5.38% due 2005 175.0 175.0
5.54% due 2007 175.0 175.0
5.65% due 2008 139.0 139.0
- ------------------------------------------------------------------------------------------------------------------------
Total transitional funding trust notes 777.6 864.0
- ------------------------------------------------------------------------------------------------------------------------
Variable rate long-term debt due 2017 75.0 75.0
- ------------------------------------------------------------------------------------------------------------------------
2,139.9 2,523.3
Adjustment to Fair Value 11.9 25.3
Unamortized discount on debt (9.0) (15.5)
- ------------------------------------------------------------------------------------------------------------------------
Total long-term debt excluding obligations of IP Fuel Company 2,142.8 2,533.1
Obligations of IP Fuel Company - 132.0
- ------------------------------------------------------------------------------------------------------------------------
2,142.8 2,665.1
Long-term debt maturing within one year (236.4) (506.6)
- ------------------------------------------------------------------------------------------------------------------------
Total long-term debt $ 1,906.4 $ 2,158.5
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
In the above table, the "adjustment to fair value" is the total adjustments
of debt to fair value in the quasi-reorganization. The adjustments to the
fair value of each debt series are being amortized over its remaining life to
interest expense. See "Note 2 - Clinton Impairment, Quasi-Reorganization and
Sale of Clinton" for more information.
In June 1999, IP issued $250 million of 7.5% New Mortgage Bonds due 2009.
In January 1999, $57.1 million of 8 3/4% First Mortgage Bonds due 2021 and
$229 million of 8.0% New Mortgage Bonds due 2023 were purchased through a
redemption notice. IP also redeemed $5.4 million of 7.95% First Mortgage
Bonds due 2004 in January 1999. In February 1999, IP redeemed $36.8 million
of 6 1/2% First Mortgage Bonds due 1999 and $5 million of 7.95% First
Mortgage Bonds due 2004.
During March 1999, IP redeemed $12.5 million of 7.95% First Mortgage Bonds
due 2004. IP redeemed $39.9 million of 7 1/2% New Mortgage Bonds due 2025 in
April 1999, and redeemed an additional $11 million of the 7 1/2% series in
October 1999. Also, $10 million of 6.0% New Mortgage Bonds due 2003 were
redeemed in August 1999 and $4.3 million of 6.25% New Mortgage Bonds due 2002
were redeemed in October 1999.
On July 20, 1999, IP's 1943 mortgage (First Mortgage) was retired. All
remaining First Mortgage debt was substituted with debt issued under the 1992
mortgage (New Mortgage) or defeased. New Mortgage Bonds of $35.6 million with
a coupon rate of 5.70% due 2024 (Series K) and $84.1 million with a coupon
rate of 7.40% due 2024 (Series L) were substituted for First Mortgage Bonds
with identical terms and amounts (replacement Series U and V). With proceeds
received from the December 1998 securitization issuance, IP defeased $35.2
million of 6 1/2% First Mortgage Bonds due 1999, $16.1 million of 7.95% First
Mortgage Bonds due 2004 and $84.7 million of 7 3/8% First Mortgage Bonds due
2021.
During January 2000, IP repurchased $32 million of 7 1/2% New Mortgage
Bonds due 2025.
For the years 2000, 2001, 2002, 2003, and 2004, IP has long-term debt
maturities, excluding the Transitional Funding Trust Notes (the Notes) in the
aggregate of (in millions) $150.0, $0.0, $95.7, $190.0, and $0.0,
respectively.
During 1999, IP paid $132 million to extinguish all obligations of IP Fuel
Company. IP Fuel Company was formed for the purpose of leasing nuclear fuel
to IP for Clinton. There were no obligations of IP Fuel Company at December
31, 1999.
In December 1998, Illinois Power Special Purpose Trust issued $864 million
of Transitional Funding Trust Notes as allowed under the Illinois Electric
Utility Transition Funding Law in P.A. 90-561. As of December 31, 1999, IP
has used $674.3 million of the funds to repurchase outstanding debt
obligations and $49.3 million to repurchase 2.3 million shares of IP's common
stock owned by Illinova. During 1999, IP paid down the Notes by $86.4
million. IP plans to pay down such Notes ratably through 2008; therefore, at
December 31, 1999, $86.4 million is classified as Long-term debt maturing
within one year.
At December 31, 1999, the aggregate total of unamortized debt expense and
unamortized loss on reacquired debt was approximately $91.8 million. This
amount is included in the Consolidated Balance Sheet under "Other Deferred
Charges."
The remaining balance of net bondable additions at December 31, 1999, was
approximately $293 million.
NOTE 9 - PREFERRED STOCK
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
SERIAL PREFERRED STOCK, cumulative, $50 par value --
Authorized 5,000,000 shares; 912,675 and 1,139,110 shares outstanding,
respectively
1999 1998 REDEMPTION
SERIES SHARES SHARES PRICES
4.08% 225,510 283,290 $ 51.50 $11.3 $14.1
4.26% 104,280 136,000 51.50 5.2 6.8
4.70% 145,170 176,000 51.50 7.2 8.8
4.42% 102,190 134,400 51.50 5.1 6.7
4.20% 143,760 167,720 52.00 7.2 8.4
7.75% 191,765 241,700 50.00 after July 1, 2003 9.6 12.1
Net premium on preferred stock 0.2 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Preferred Stock, $50 par value $45.8 $57.1
- ------------------------------------------------------------------------------------------------------------------------------------
SERIAL PREFERRED STOCK, cumulative, without par value--
Authorized 5,000,000 shares; none outstanding, - -
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERENCE STOCK, cumulative, without par value --
Authorized 5,000,000 shares; none outstanding - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total Serial Preferred Stock and Preference Stock $45.8 $57.1
- ------------------------------------------------------------------------------------------------------------------------------------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF:
ILLINOIS POWER CAPITAL, L.P.
Monthly Income Preferred Securities, cumulative, $25 liquidation
preference--Authorized 3,880,000 shares; 3,725,100 and $93.1 $97.0
3,880,000 shares outstanding, respectively
ILLINOIS POWER FINANCING I
Trust Originated Preferred Securities, cumulative, $25 liquidation
preference--4,000,000 shares authorized and outstanding 100.0 100.0
ADJUSTMENT TO FAIR VALUE 0.3 2.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total Company Obligated Mandatorily
Redeemable Preferred Stock $193.4 $199.0
- ------------------------------------------------------------------------------------------------------------------------------------
In the above table, only the MIPS and TOPrS were restated to their fair value
in the quasi-reorganization. The serial preferred stock was not restated
because it is equity rather than an asset or a liability. The increase in the
value of the MIPS and the TOPrS is being amortized to interest expense over
the minimum remaining life of the securities. See "Note 2 - Clinton
Impairment, Quasi-Reorganization and Sale of Clinton" for more information.
Serial Preferred Stock ($50 par value) is redeemable at the option of IP,
in whole or in part, at any time with not less than 30 days and not more than
60 days notice by publication. The MIPS mature on September 30, 2043, and are
redeemable at IP's option, in whole or in part, on or after October 6, 1999,
with not less than 30 days and not more than 60 days notice by publication.
The TOPrS mature on January 31, 2045, and may be redeemed at IP's option, in
whole or in part, at any time on or after January 31, 2001.
Illinois Power Capital, L.P., is a limited partnership in which IP serves
as a general partner. Illinois Power Capital issued (1994) $97 million of
tax-advantaged MIPS at 9.45% (5.67% after-tax rate) with a liquidation
preference of $25 per share. IP consolidates the accounts of Illinois Power
Capital, L.P.
IPFI is a statutory business trust in which IP serves as sponsor. IPFI
issued (1996) $100 million of TOPrS at 8% (4.8% after-tax rate). IP
consolidates the accounts of IPFI.
During 1999, IP redeemed $11.3 million of various issues of Serial
Preferred Stock, and $3.9 million of Illinois Power Capital, L.P. tax
advantaged MIPS. Proceeds from the Transitional Funding Trust Notes were used
for these redemptions. The carrying amount of these securites was $1.7
million greater than consideration paid which has been included in net income
applicable to common stock in the 1999 Consolidated Statement of Income.
Under the Restated Articles of Incorporation common stock dividends are
subject to the preferential rights of the holders of preferred and preference
stock.
NOTE 10 - COMMON STOCK AND RETAINED EARNINGS
As of December 31, 1998, Illinois Power effected a quasi-reorganization in
which IP's accumulated deficit in retained earnings of $1,565.9 million was
eliminated by a $1,327.2 million restatement of other assets and liabilities
to their fair value and a transfer of $238.7 million from common stock
equity. See "Note 2 -Clinton Impairment, Quasi-Reorganization and Sale of
Clinton" for additional information regarding the effects upon retained
earnings.
On December 15, 1999, IP sold Clinton to AmerGen, which resulted in a
revision to the impairment of Clinton-related assets and the previously
accrued nuclear investment exit-related costs. The net decrease in the
impairment and the accruals was $88.2 million, which was recognized as an
increase in common stock equity, revising the original effect of the 1998
quasi-reorganization on common stock equity.
On December 22, 1998, IPSPT issued $864 million of Transitional Funding
Trust Notes, with IP as servicer. As of December 31, 1998, IP used $49.3
million of the funds to repurchase 2.3 million of its common shares from
Illinova.
In 1998 and 1997, IP repurchased 3,323,079 and 6,017,748 shares,
respectively, of its common stock from Illinova. Under Illinois law, such
shares may be held as treasury stock and treated as authorized but unissued,
or may be canceled by resolution of the Board of Directors. IP holds the
common stock as treasury stock and deducts it from common equity at the cost
of the repurchased shares.
IP employees participate in an ESOP that includes an incentive
compensation feature that is tied to employee achievement of specified
corporate performance goals. This arrangement began in 1991 when IP loaned
$35 million to the Trustee of the Plans, which used the loan proceeds to
purchase 2,031,445 shares of IP's common stock on the open market. IP
financed the loan with funds borrowed under its bank credit agreements. The
loan and common shares became Illinova instruments on formation of Illinova
in May 1994. These shares are held in a Loan Suspense Account under the ESOP
and are released and allocated to the accounts of participating employees as
the loan is repaid by the Trustee with cash contributed by IP for company
stock matching and incentive compensation awards. Common dividends received
on allocated and unallocated shares held by the Plan are used to repay the
loan which then releases additional shares to cover dividends on shares held
in participating employees' accounts. The number of shares released when
funds are received by the Trustee is based on the closing price of the common
stock on the last day of the award period or the common stock dividend date.
At December 31, 1999, 38,772 shares remain unallocated.
For the year ended December 31, 1999, 131,196 common shares were allocated
to salaried employees and 102,628 shares to employees covered under the
Collective Bargaining Agreement through the matching contribution feature of
the ESOP arrangement. Under the incentive compensation feature, 189,121
common shares were allocated to employees for the year ended December 31,
1999. Using the shares allocated method, IP recognized $5.2 million of
expense in 1999. During 1999, 1998, and 1997, IP contributed $10.0 million,
$4.7 million, and $5.0 million, respectively, to the ESOP. Interest paid on
the ESOP debt was approximately $.5 million in 1999, $.9 million in 1998, and
$1.3 million in 1997, and dividends used for debt service were approximately
$2.1 million in 1999, $2.2 million in 1998, and $2.3 million in 1997.
In 1992, the Board of Directors adopted and the shareholders approved a
Long-Term Incentive Compensation Plan (the Plan) for officers or employee
members of the Board, but excluding directors who are not officers or
employees. Restricted stock, incentive stock options, non-qualified stock
options, stock appreciation rights, dividend equivalents, and other
stock-based awards may be granted under the Plan for up to 1,500,000 shares
of Illinova's common stock. These stock-based awards generally vest over
three years, have a maximum term of 10 years and have exercise prices equal
to the market price on the date the awards were granted. The following table
outlines the activity under this Plan at December 31, 1999.
- -------------------------------------------------------------------------------------------------------------------
Year Options Grant Year Expiration Options Options
Granted Granted Price Exercisable Date Exercised Forfeited
- -------------------------------------------------------------------------------------------------------------------
1992 62,000 $23.375 1996 6/10/02 45,000 10,500
1993 73,500 $24.250 1997 6/09/03 47,000 10,500
1994 82,650 $20.875 1997 6/08/04 36,600 4,400
1995 69,300 $24.875 1998 6/14/05 7,800 11,000
1996 80,500 $29.750 1999 2/07/06 - 6,500
1997 82,000 $26.125 2000 2/12/07 - 6,000
1998 120,500 $29.094 2001 2/11/08 - -
1998 165,000 $30.250 2001 6/24/08 - -
1999 30,000 $24.688 2002 1/18/09 - -
1999 165,500 $24.281 2002 2/10/09 - -
1999 30,000 $21.781 2002 4/12/09 - -
1999 187,020 $31.125 2002 12/8/09 - -
- -------------------------------------------------------------------------------------------------------------------
In August 1999, the Board accelerated the vesting of stock options (other
than those granted to the CEO) contingent on merger consummation. See "Note
16 -Subsequent Event" for information on merger activity.
PRO FORMA DISCLOSURES
In October 1995, the FASB issued FAS No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
As permitted by FAS 123, IP continues to account for its stock options in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." All stock options granted to IP employees are
options to purchase Illinova common shares.
Had compensation expense for stock options held by IP employees been
recognized based on the fair value on the grant date under the methodology
prescribed by FAS 123, IP's net income (loss) applicable to common stock for
the three years ended December 31, would have been impacted as shown in the
following table (in millions).
1999 1998 1997
---- ---- ----
Reported net income (loss) applicable to common stock $95.6 $(1,572.2) $(65.5)
Pro forma net income (loss) applicable to common stock $94.4 $(1,572.9) $(65.8)
The fair value of options granted, which is amortized to expense over the
option vesting period in determining the pro forma impact, is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
1999 1998 1997
------ ------ ------
Expected life of options 10 years 10 years 10 years
Risk-free interest rates 5.54% 5.61% 5.75%
Expected volatility of stock 33% 24% 19%
Expected dividend yield 4.4% 4.5% 5.3%
The weighted average fair value of options granted during 1999, 1998, and
1997 was $4.77, $4.04, and $3.31 per share, respectively.
NOTE 11 - PENSION AND OTHER BENEFITS COSTS
Illinova offers certain benefit plans to employees of Illinova and its
principal subsidiaries. IP is sponsor and administrator of the benefit plans
disclosed below.
IP is reimbursed by the other Illinova subsidiaries for their share of the
expenses of the benefit plans. The values and discussion below represent the
plans in total, including the amounts attributable to the other subsidiaries.
(Millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 475.2 $ 417.6 $ 95.5 $ 89.4
Service cost 16.3 12.8 3.1 2.6
Interest cost 32.7 30.4 7.2 6.3
Participant contributions - - - 0.4
Plan amendments 0.4 2.0 - -
Actuarial (gain)/loss (53.8) 45.2 (0.9) 3.8
Special termination benefits 6.3 - - -
Curtailment (gain)/loss (22.6) - (8.9) -
Benefits paid (37.2) (32.8) (5.1) (7.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 417.3 $ 475.2 $ 90.9 $ 95.5
- ------------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 477.5 $ 432.1 $ 63.7 $ 49.7
Actual return on plan assets 120.6 73.7 9.8 9.2
Employer contributions 18.4 4.5 10.9 11.4
Participant contributions - - 0.8 0.4
Benefits paid (37.2) (32.8) (5.1) (7.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 579.3 $ 477.5 $ 80.1 $ 63.7
- -------------------------------------------------------------------- --------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS
Funded status $ 162.0 $ 2.3 $(10.8) $(31.8)
Unrecognized actuarial (gain)/loss (165.4) (32.1) (13.8) (7.3)
Unrecognized prior service cost 10.5 17.6 - -
Unrecognized transition obligation/(asset) (17.7) (21.9) 25.6 36.0
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized (gain)/loss $ (10.6) $ (34.1) $ 1.0 $ (3.1)
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS CONSIST OF:
Prepaid benefit cost $ 5.1 $ 1.9 $ 1.0 $ -
Accrued benefit liability (15.7) (36.0) - (3.1)
- ------------------------------------------------------------------------------------------------------------------------------------
Net amount recognized (gain)/loss $ (10.6) $ (34.1) $ 1.0 $ (3.1)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS AS OF DECEMBER 31
Discount rate 8.0% 7.0% 8.0% 7.0%
Expected return on plan assets 9.5% 9.5% 9.5% 9.5%
Rate of compensation increase 4.5% 4.5% 4.5% 5.5%
Medical trend - initial trend 6.9% 6.9%
Medical trend - ultimate trend 5.5% 5.5%
Medical trend - year of ultimate trend 2005 2005
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 16.3 $ 12.8 $ 10.2 $ 3.1 $ 2.6 $ 1.9
Interest cost 32.7 30.4 28.2 7.2 6.3 5.9
Expected return on plan assets (40.7) (35.3) (31.7) (6.0) (4.4) (3.0)
Amortization of prior service cost 1.9 1.9 1.9 - - -
Amortization of transition liability/(asset) (4.2) (4.2) (4.2) 2.7 2.7 2.7
Recognized net actuarial (gain)/loss - - 4.2 - - (0.3)
- -------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 6.0 $ 5.6 $ 8.6 $ 7.0 $ 7.2 $ 7.2
Additional cost/(income) due to FAS 88 (12.7) - - (0.2) - -
- -------------------------------------------------------------------------------------------------------------
Total net periodic benefit cost/(income) $ (6.7) $ 5.6 $ 8.6 $ 6.8 $ 7.2 $ 7.2
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
For measurement purposes, a 6.9% health care trend rate was used for 2000.
Trend rates were assumed to decrease gradually to 5.5% in 2005 and remain at
this level going forward. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan.
A one percentage point change in assumed health care cost trend rates would
have the following effects for 1999:
(Millions of dollars)
- -------------------------------------------------------------------------------------------------
1 Percentage 1 Percentage
Point Increase Point Decrease
- -------------------------------------------------------------------------------------------------
Aggregate effect on service cost and interest cost $ 1.3 $ (1.2)
Effect on accumulated postretirement benefit obligation 9.8 (8.9)
- -------------------------------------------------------------------------------------------------
The unrecognized prior service cost is amortized on a straight-line basis
over the average remaining service period of employees who are expected to
receive benefits under the plan.
Concurrent with the decision to exit Clinton operations, IP recognized a
pension plan curtailment gain of $11.9 million and additional postretirement
medical plan curtailment costs of $.7 million at December 31, 1998. These
amounts were recognized in the 1998 Consolidated Statement of Income;
however, these amounts are not reflected in the 1998 amounts in the above
tables.
Revisions to the curtailment amounts resulted from the sale of Clinton.
The sale of Clinton resulted in a pension plan curtailment gain of $22.6
million and a postretirement medical plan curtailment gain of $8.9 million.
Unrecognized prior service cost and transition obligation were immediately
recognized as a result of the Clinton sale curtailment in accordance with FAS
88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," accounting methods.
The net result of FAS 88 accounting for the Clinton sale was a one-time
pension plan income item of $19.0 million and a postretirement medical plan
income item of $.2 million in addition to the ongoing plans' net periodic
pension expense. The 1999 pension plan curtailment gain of $19.0 million and
the postretirement medical plan curtailment gain of $.2 million were not
recognized in the 1999 Consolidated Statement of Income. Rather, these
curtailment gains were recognized as an adjustment to common stock equity, as
explained in "Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of
Clinton." These amounts are reflected in the 1999 amounts in the above tables.
The supplemental executive retirement plan (SERP) accrued benefits were
paid as a lump sum to all participants as of December 31, 1999. As a result,
IP recognized an immediate one-time cost of $6.3 million and the SERP plan
ceased to exist as of December 31, 1999.
The former IP employees who are now employed by AmerGen due to the sale of
Clinton are considered to be terminated employees in the pension plans with
the following exceptions: (1) employees at Clinton who have not completed the
vesting requirements to qualify for benefits under the provision of the IP
pension plans can meet the service requirements for vesting by remaining
employed at AmerGen until the vesting requirement is fulfilled, and (2)
employees who remain at Clinton until age 55 are entitled to the same early
retirement benefit reductions as an active employee at IP who chooses to
retire between ages 55 and 62. As a result, IP retained the assets and
obligations to provide pension benefits (based on service with IP) to AmerGen
employees when they terminate or retire.
The former IP employees who are now employeed by AmerGen due to the sale
of Clinton who have met the eligibility requirements for postretirement
welfare benefits will remain eligible for these benefits and continue to
accrue service towards these benefits while employed by AmerGen. Those
employees who have not yet met the eligibility requirement for the
postretirement welfare plans, but who are age 50 or over at the time of the
sale, will be able to accrue service at AmerGen towards the eligibility and
benefits under the IP plans.
NOTE 12 - SEGMENTS OF BUSINESS
In 1997, the FASB issued FAS 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement supersedes FAS 14,
"Financial Reporting for Segments of a Business Enterprise," and establishes
new standards for defining a company's segments and disclosing information
about them.
The new statement requires that segments be based on the internal
structure and reporting of a company's operations. Because of the realignment
of Illinois Power into five operating segments during 1998, Illinois Power
has determined that it is not practicable to present the new segment
information for 1997 because it is not available and the cost to develop it
is excessive. Therefore, the information for 1998 and 1999 is presented under
the format specified by FAS 131; the comparative information for 1999, 1998,
and 1997 is presented in accordance with FAS 14.
1999 AND 1998
IP is comprised of five business groups. The business groups and their
principal services are as follows:
- - Customer Service Business Group - transmission, distribution, and sale of
electric energy; distribution, transportation, and sale of natural gas.
- - Wholesale Energy Business Group - fossil-fueled electric generation and
wholesale electricity transactions. Effective October 1, 1999, the
Wholesale Energy Business Group was transferred to its parent, Illinova,
and subsequently to its affiliate, IPMI.
- - Nuclear Generation Business Group - nuclear-fueled electric generation. The
nuclear assets were sold to AmerGen on December 15, 1999. See "Note 2 -
Clinton Impairment, Quasi-Reorganization and Sale of Clinton" for
additional information.
- - Financial Business Group - provides financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services.
- - Support Services Business Group - provides specialized support functions,
including information technology, human resources, environmental resources,
purchasing and materials management, and public affairs.
Of the above-listed segments, the Financial Business Group and the Support
Services Business Group did not individually meet the minimum threshold
requirements for separate disclosure and are combined in the Other category.
In 1998, three measures were used to judge segment performance:
contribution margin, cash flow, and return on net invested capital. Return on
net invested capital was deleted as a corporate measure in 1999.
ILLINOIS POWER
(Millions of dollars)
Customer Wholesale Total
1999 Service Energy Nuclear Other (6) Company
- ----------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 1,488.8 $ 380.5 $ 33.9 $ - $ 1,903.2
Intersegment revenue (1) - 352.7 146.4 (499.1) -
--------------------------------------------------------------------------
Total Revenue 1,488.8 733.2 180.3 (499.1) 1,903.2
Depreciation and amortization expense 94.5 76.9 6.8 - 178.2
Other operating expenses (1) 1,040.9 548.4 339.1 (475.5) 1,452.9
--------------------------------------------------------------------------
Operating income (loss) 353.4 107.9 (165.6) (23.6) 272.1
Interest expense (7) 105.5 68.7 (25.8) - 148.4
AFUDC (4.2) - - - (4.2)
--------------------------------------------------------------------------
Net income (loss) before taxes 252.1 39.2 (139.8) (23.6) 127.9
Income tax expense (benefit) 94.9 13.4 (53.8) 16.8 71.3
Miscellaneous-net 0.5 - (3.0) 6.1 3.6
Interest revenue (8) - - - (60.1) (60.1)
--------------------------------------------------------------------------
Net income (loss) after taxes 156.7 25.8 (83.0) 13.6 113.1
Preferred dividend requirement and
carrying amount over consideration paid
for redeemed preferred stock 13.6 9.1 (3.6) (1.6) 17.5
--------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 143.1 $ 16.7 $ (79.4) $ 15.2 $ 95.6
- ----------------------------------------------------------------------------------------------------------------------------
Other information --
Total assets (2) $ 2,507.8 $ - $ - $ 2,790.0 $ 5,297.8
Total expenditures for additions to
long-lived assets 111.1 79.1 - 7.0 197.2
- ----------------------------------------------------------------------------------------------------------------------------
Corporate Measures --
Contribution margin (3) $ 212.7 $ 65.1 $ (97.5) $ 13.5 $ 193.8
Cash flow (4) 125.5 (121.4) (242.9) 237.5 (1.3)
Return on net invested capital (5) N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
(1) Intersegment revenue priced at 2.9 cents per kwh delivered for 1999.
Intersegment expense is reflected in other operating expenses for
Customer Service. Intersegment activity is shown for management
reporting purposes but is eliminated in consolidation. Effective October
1, 1999, Customer Service reflects power purchased in Other operating
expense at the PPA price between IP and IPMI of $106 million.
(2) Primary assets in Other include notes receivable from Illinova.
Effective October 1, 1999, the Wholesale Energy Business Group was
transferred to its parent, Illinova, and subsequently to its affiliate,
IPMI.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(4) Cash flow before financing activities and strategic investments.
(5) Return on net invested capital was deleted as a corporate measure in
1999.
(6) Other includes those segments that did not individually meet the minimum
threshold requirements for separate disclosure and intersegment
elimination entries.
(7) Interest expense is allocated based on net invested capital of the
segments.
(8) Interest revenue includes interest on notes receivable from Illinova
and other affiliates of $52.4 million.
GEOGRAPHIC INFORMATION
(Millions of dollars)
- -----------------------------------------------------------------------
December 31, 1999 1998 1997
- -----------------------------------------------------------------------
Revenues: (1)
United States $1,903.2 $2,069.2 $1,773.9
======================================
Long-lived assets: (2)
United States $1,752.3 $4,440.5 $4,534.1
======================================
(1) Revenues are attributed to geographic regions based on location of customer.
(2) Long-lived assets include plant, equipment, and investments in subsidiaries.
ILLINOIS POWER
(Millions of dollars)
Customer Wholesale Total
1998 * Service Energy Nuclear Other (6) Company
- ------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $ 1,505.7 $ 557.2 $ 6.3 $ - $ 2,069.2
Intersegment revenue (1) - 482.3 (2.4) (479.9) -
----------------------------------------------------------------------------
Total Revenue 1,505.7 1,039.5 3.9 (479.9) 2,069.2
Depreciation and amortization expense 68.3 30.3 99.1 5.9 203.6
Other operating expenses (1) 909.9 996.3 366.9 (477.0) 1,796.1
----------------------------------------------------------------------------
Operating income (loss) 527.5 12.9 (462.1) (8.8) 69.5
Interest expense (7) 53.9 16.2 64.8 - 134.9
AFUDC (0.1) (0.9) (2.5) 0.3 (3.2)
----------------------------------------------------------------------------
Net income (loss) before taxes 473.7 (2.4) (524.4) (9.1) (62.2)
Income tax expense (benefit) 194.0 (5.4) (226.2) 3.2 (34.4)
Miscellaneous-net 0.5 (1.0) 0.1 3.2 2.8
Interest revenue - - - (1.9) (1.9)
----------------------------------------------------------------------------
Net income (loss) after taxes 279.2 4.0 (298.3) (13.6) (28.7)
Preferred dividend requirement 7.3 2.4 10.1 - 19.8
----------------------------------------------------------------------------
Net income (loss) $ 271.9 $ 1.6 $ (308.4) $ (13.6) $ (48.5)
Clinton plant impairment loss, net of tax - - 1,523.7 - 1,523.7
----------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 271.9 $ 1.6 $(1,832.1) $ (13.6) $ (1,572.2)
- ------------------------------------------------------------------------------------------------------------------------------
Other information --
Total assets (2) $ 2,290.4 $ 3,043.7 $ 241.4 $ 528.6 $ 6,104.1
Total expenditures for additions to
long-lived assets 124.4 116.0 62.5 8.6 311.5
- ------------------------------------------------------------------------------------------------------------------------------
Corporate Measures --
Contribution margin (3) $ 306.7 $ 8.6 $ (261.3) $ (13.5) $ 40.5
Cash flow (4) 266.9 26.3 (266.1) (20.2) 6.9
Return on net invested capital (5) 16.1% 0.4% N/A N/A 1.1%
- ------------------------------------------------------------------------------------------------------------------------------
* Restated to reflect change in management philosophy of allocation between
business segments and to make comparable to the 1999 segment information.
The restatement primarily relates to the transfer of the transition period
cost recovery asset from Nuclear to Customer Service.
(1) Intersegment revenue priced at 2.5 cents per kwh delivered.
Intersegment expense is reflected in other operating expenses for
Customer Service.
Nuclear reflects a replacement power expense for the increment of market
price over the intersegment price for 1998. Intersegment activity is
shown for management reporting purposes but is eliminated in
consolidation.
(2) Primary assets for Nuclear include decommissioning assets, shared general
and intangible plant and nuclear fuel.
(3) Contribution margin represented by net income before financing costs
(net-of-tax) and preferred dividend requirement.
(4) Cash flow before financing activities and strategic investments.
(5) Return on net invested capital calculated as contribution margin divided
by net invested capital (includes Clinton plant impairment loss and
quasi-reorganization).
(6) Other includes those segments that did not individually meet the minimum
threshold requirements for separate disclosure and intersegment elimination
entries.
(7) Interest expense is allocated based on net invested capital of the segments.
1999, 1998, and 1997
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
1999
Total
Electric Gas Company
- -------------------------------------------------------------------------------------------------------------------------------
Operation information -
Operating revenues $ 1,598.8 $ 304.4 $ 1,903.2
Operating expenses, excluding provision for
income taxes 1,358.9 272.2 1,631.1
Clinton plant impairment loss - - -
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income 239.9 32.2 272.1
AFUDC 4.0 0.2 4.2
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income, including AFUDC $ 243.9 $ 32.4 $ 276.3
- -----------------------------------------------------------------------------------------------------------
Other deductions, net (56.5)
Interest charges 148.4
Income tax - Clinton impairment -
Provision for income taxes 71.3
- -------------------------------------------------------------------------------------------------------------------------------
Net income 113.1
Extraordinary item (net of taxes) -
Preferred dividend requirements (19.2)
Carrying value over (under) consideration
paid for redeemed preferred stock 1.7
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ 95.6
===============================================================================================================================
Other information -
Depreciation and amortization $ 125.6 $ 26.2 $ 151.8
- -------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 175.9 $ 21.3 $ 197.2
- -------------------------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets(1) $ 1,778.9 $ 461.0 $ 2,239.9
- -----------------------------------------------------------------------------------------------------------
Nonutility plant and other investments 13.1
Assets utilized for overall operations 3,044.8
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,297.8
===============================================================================================================================
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
1998
Total
Electric Gas Company
- -------------------------------------------------------------------------------------------------------------------------------
Operation information -
Operating revenues $ 1,781.4 $ 287.8 $ 2,069.2
Operating expenses, excluding provision for
income taxes 1,747.6 252.1 1,999.7
Clinton plant impairment loss 2,666.9 - 2,666.9
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income (2,633.1) 35.7 (2,597.4)
AFUDC 3.1 0.1 3.2
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income, including AFUDC $ (2,630.0) $ 35.8 $ (2,594.2)
- -----------------------------------------------------------------------------------------------------------
Other deductions, net 1.0
Interest charges 134.9
Income tax - Clinton impairment (1,143.2)
Provision for income taxes (34.5)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (1,552.4)
Extraordinary item (net of taxes) -
Preferred dividend requirements (19.8)
Carrying value over (under) consideration
paid for redeemed preferred stock -
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (1,572.2)
===============================================================================================================================
Other information -
Depreciation and amortization $ 177.9 $ 25.7 $ 203.6
- -------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 285.6 $ 25.9 $ 311.5
- -------------------------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets(2) $ 4,843.3 $ 457.9 $ 5,301.2
- -----------------------------------------------------------------------------------------------------------
Nonutility plant and other investments 2.3
Assets utilized for overall operations 800.6
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,104.1
===============================================================================================================================
(Millions of dollars)
- -------------------------------------------------------------------------------------------------------------------------------
1997
Total
Electric Gas Company
- -------------------------------------------------------------------------------------------------------------------------------
Operation information -
Operating revenues $ 1,420.0 $ 353.9 $ 1,773.9
Operating expenses, excluding provision for
income taxes 1,081.3 311.5 1,392.8
Clinton plant impairment loss - - -
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income 338.7 42.4 381.1
AFUDC 4.9 0.1 5.0
- -------------------------------------------------------------------------------------------------------------------------------
Pre-tax operating income, including AFUDC $ 343.6 $ 42.5 $ 386.1
- ----------------------------------------------------------------------------------------------------------
Other deductions, net (1.5)
Interest charges 135.9
Income tax - Clinton impairment -
Provision for income taxes 100.9
- -------------------------------------------------------------------------------------------------------------------------------
Net income 150.8
Extraordinary item (net of taxes) (195.0)
Preferred dividend requirements (21.5)
Carrying value over (under) consideration
paid for redeemed preferred stock 0.2
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $ (65.5)
===============================================================================================================================
Other information -
Depreciation and amortization $ 171.5 $ 24.1 $ 195.6
- -------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 201.3 $ 22.6 $ 223.9
- -------------------------------------------------------------------------------------------------------------------------------
Investment information -
Identifiable assets(3) $ 4,508.1 $ 453.8 $ 4,961.9
- ----------------------------------------------------------------------------------------------------------
Nonutility plant and other investments 5.7
Assets utilized for overall operations 323.9
- -------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,291.5
===============================================================================================================================
(1) 1999: Utility plant, materials and supplies, prepaid and deferred energy
costs, and transition period cost recovery.
(2) 1998: Utility plant, nuclear fuel, materials and supplies, prepaid and
deferred energy costs, and transition period cost recovery.
(3) 1997: Utility plant, nuclear fuel, materials and supplies, deferred Clinton
costs, and prepaid and deferred energy costs.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is presented in accordance with the requirements of FAS 107, "Disclosures
about the Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by IP using available market information and
valuation methodologies discussed below.
IP adopted FAS 133 early due to the quasi-reorganization in 1998.
Accordingly, assets and liabilities were adjusted to reflect current fair value.
See "Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of Clinton" for
more information.
- ------------------------------------------------------------ --------------------- ---------------------
1999 1998
----------- --------- ----------- ---------
Carrying Fair Carrying Fair
(Millions of dollars) Value Value Value Value
- ------------------------------------------------------------ ----------- --------- ----------- ---------
Nuclear decommissioning
trust funds $ - $ - $ 84.1 $ 84.1
Cash and cash equivalents 23.5 23.5 504.5 504.5
Mandatorily redeemable
preferred stock 193.4 169.9 199.0 200.0
Long-term debt (including current maturities) 2,142.8 2,061.2 2,533.1 2,545.2
Notes payable 327.3 327.3 147.6 147.6
Other Financial Instruments:
Trading assets (liabilities)
Energy futures and forward contracts - - (28.0) (28.0)
Non-Trading assets (liabilities)
Energy futures and forward contracts - - (5.4) (5.4)
Non-Trading/Emission Allowances assets (liabilites)
Forward Contracts - - (2.0) (2.0)
Option Contracts - - (0.2) (0.2)
- ------------------------------------------------------------ ----------- --------- ----------- ---------
The operations of IP are subject to regulation; therefore, gains or losses
on the redemption of long-term debt may be included in rates over a
prescribed amortization period, if they are in fact, settled at amounts
approximating those in the above table.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments listed in the table above:
NUCLEAR DECOMMISSIONING TRUST FUNDS For 1998 the fair values of
available-for-sale marketable debt securities and equity investments held by
the Nuclear Decommissioning Trust were based on quoted market prices at the
reporting date for those or similar investments. The fund was transferred to
AmerGen with the sale of the Clinton Power Station in December 1999. See
"Note 2 - Clinton Impairment, Quasi-Reorganization and Sale of Clinton" for
more information.
CASH AND CASH EQUIVALENTS The carrying amount of cash and cash equivalents
approximates fair value due to the short maturity of these instruments.
MANDATORILY REDEEMABLE PREFERRED STOCK AND LONG-TERM DEBT The fair value of
IP mandatorily redeemable preferred stock and long-term debt is estimated
based on the quoted market prices for similar issues or by discounting
expected cash flows at the rates currently offered to IP for debt of the same
remaining maturities, as advised by IP bankers.
NOTES PAYABLE The carrying amount of notes payable approximates fair value
due to the short maturity of these instruments.
OTHER FINANCIAL INSTRUMENTS Other financial instruments are comprised of
derivative instruments which are stated at market value in accordance with
the accounting prescribed in FAS 133 and EITF 98-10. See "Note 14 - Financial
and Other Derivative Instruments" for more information. Fair value is
determined using quoted market prices or indices.
NOTE 14 - FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS
TRADING ACTIVITIES IP engaged in the brokering and marketing of electricity
until September 30, 1999. Effective October 1, 1999, IP's wholly owned fossil
generating assets were transferred to Illinova. Illinova subsequently
transferred these assets to IPMI. For more information regarding the transfer
of the wholly owned fossil generation, see "Note 3 - Related Parties"
Consequently, all trading activities for the last quarter of 1999 were
conducted by IPMI. During the first three quarters of 1999, IP used a variety
of instruments, including fixed-price swap agreements, variable-price swap
agreements, exchange-traded energy futures, swaps, and options contracts, and
over-the-counter forwards, swaps, and options.
As of December 31, 1998, IP adopted EITF 98-10. IP recorded its trading
instruments at fair value in accordance with EITF 98-10's application
criteria. Until September 30, 1999 and at December 31, 1998, derivative
assets and liabilities were recorded on the Consolidated Balance Sheets at
fair value with unrealized gains and losses shown net in the Consolidated
Statements of Income. During 1999 and 1998, IP recorded realized gains and
losses as components of operating revenues and operating expenses in the
Consolidated Statements of Income.
The notional quantities and maximum terms of commodity instruments held
for trading purposes at December 31, 1999 and 1998, are presented below:
- ---------------------------- -------------------------- -------------------------- --------------------------
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
- ---------------------------- -------------------------- -------------------------- --------------------------
Electricity
1999 - - N/A
1998 5,174 MW 5,524 MW 1 yr
- ---------------------------- -------------------------- -------------------------- --------------------------
All notional amounts reflect the volume of transactions but do not
represent the dollar amounts or actual megawatts exchanged by the parties to
the contracts. Accordingly, notional amounts do not accurately measure IP's
exposure to market or credit risk.
The estimated fair value of commodity instruments held for trading
purposes at December 31, 1999 and 1998, are presented below:
- ------------------------------------- ----------------------------------- -----------------------------------
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
- ------------------------------------- ----------------------------------- -----------------------------------
Electricity
1999 - -
1998 $21.8 $49.8
- ------------------------------------- ----------------------------------- -----------------------------------
The 1998 fair value was estimated using quoted prices and indices where
available and considering the liquidity of the market for the instrument. The
fair values were subject to volatility based on changing market conditions.
The weighted average term of the trading portfolio, based on volume was
less than one year. Terms regarding cash settlements of these contracts
varied with respect to the actual timing of cash receipts and payments.
NON-TRADING ACTIVITIES To reduce the risk from market fluctuations in the price
and availability of electricity and related transmission, IP entered into
forward transactions, swaps, and options (energy derivatives) until September
30, 1999. Prior to October 1, 1999, IP used these instruments to hedge expected
purchases, sales, and transmission of electricity (a portion of which were firm
commitments at the inception of the hedge). The weighted average maturity of
these instruments was less than one year. Effective October 1, 1999, IP's
wholly owned fossil generating assets were transferred to Illinova.
Subsequently, Illinova transferred these assets to IPMI. Consequently, all
non-trading activities were performed by IPMI during the last quarter of 1999.
For more information regarding the transfer of wholly owned fossil generating
assets, see "Note 3 - Related Parties."
As of December 31, 1998, IP adopted FAS 133. IP's derivative assets and
liabilities were recorded on the Consolidated Balance Sheets at fair value
with unrealized gains and losses shown net in the equity section of the
Consolidated Balance Sheets as a part of the quasi-reorganization. In 1999,
hedge accounting was not applied, and unrealized gains and losses are shown
net in the Consolidated Statements of Income. IP recorded realized gains and
losses as components of operating revenues and operating expenses in the
Consolidated Statements of Income.
Periodically, IP has utilized interest rate derivatives (principally
interest rate swaps and caps) to adjust the portion of its overall borrowings
subject to interest rate risk. As of December 31, 1999 and 1998, there were
no interest rate derivatives outstanding.
In order to hedge expected purchases of emission allowances, IP entered
into forward contracts with other utilities to mitigate the risk from market
fluctuations in the price of the allowances. The notional amount of the two
forward contracts at December 31,1998 was 32,000 emission allowances, with a
fair value of $2 million. The maximum term of the forward contracts was five
years, commencing in 1993. Both contracts expired in January 1999. At
December 31, 1999, there were no forward contracts outstanding.
The notional quantities and the average term of the energy derivative
commodity instruments held for other than trading purposes at December 31,
1999 and 1998, follows:
- ---------------------------- -------------------------- -------------------------- --------------------------
Volume-Fixed Volume-Fixed Average
Price Payor Price Receiver Term
- ---------------------------- -------------------------- -------------------------- --------------------------
Electricity
1999 - - N/A
1998 1,450 MW 1,050 MW 1 yr
- ---------------------------- -------------------------- -------------------------- --------------------------
The notional amount is intended to be indicative of the level of
activity in such derivatives, although the amounts at risk are significantly
smaller because changes in the market value of these derivatives generally
are offset by changes in the value associated with the underlying physical
transactions or in other derivatives. When energy derivatives are closed out
in advance of the underlying commitment or anticipated transaction, the
market value changes may not be offset because price movement correlation
ceases to exist when the positions are closed.
The estimated fair value of energy derivative commodity instruments held
for non-trading purposes at December 31, 1999 and 1998, are presented below:
- ------------------------------------- ----------------------------------- -----------------------------------
Fair Value Fair Value
(Millions of dollars) Assets Liabilities
- ------------------------------------- ----------------------------------- -----------------------------------
Electricity
1999 - -
1998 $4.2 $9.6
- ------------------------------------- ----------------------------------- -----------------------------------
The 1998 fair value was estimated using quoted prices and indices where
available, and considering the liquidity of the market for the instrument.
The fair values were subject to significant volatility based on changing
market conditions. At December 31, 1999, IP had no energy derivative
commodity instruments held for non-trading purposes.
The average maturity and fair value discussed above were not necessarily
indicative of likely future cash flows. Terms regarding cash settlements of
these contracts varied with respect to the actual timing of cash receipts and
payments.
TRADING AND NON-TRADING - GENERAL POLICY In addition to the risk associated
with price movements, credit risk is also part of IP's risk management
activities. Credit risk relates to the risk of loss resulting from
non-performance of contractual obligations by a counterparty. While IP has
experienced no significant losses due to credit risk, off-balance-sheet risk
exists to the extent that counterparties to these transactions may fail to
perform as required by the terms of each contract. In order to minimize this
risk, IP enters into such contracts with those counterparties only after an
appropriate credit review has been performed. IP periodically reviews the
effectiveness of these financial contracts in achieving corporate objectives.
Should the counterparties to these contracts fail to perform, IP could be
forced to acquire alternative hedging arrangements or be required to honor
the underlying commitment at then current market prices. In such an event, IP
might incur additional loss to the extent of amounts, if any, already paid to
the counterparties. In view of its criteria for selecting counterparties and
its experience to date in successfully completing these transactions, IP
believes that the risk of incurring a significant financial statement loss
due to the non-performance of counterparties to these transactions is remote.
ILLINOIS POWER COMPANY
N O T E 15 - QUARTERLY CONSOLIDATED FINANCIAL INFORMATION AND COMMON STOCK
DATA (UNAUDITED)
(Millions of dollars)
- --------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 472.3 $ 378.1 $ 676.3 $ 376.5
Operating income (loss) 55.4 53.4 94.0 14.9
Net income (loss) 23.0 20.0 59.8 10.3
Net income (loss) applicable to common stock 18.8 15.0 56.1 5.7
Cash dividends declared on common stock - 19.5 21.4 -
Cash dividends paid on common stock - 19.5 21.4 -
In addition to amounts disclosed elsewhere, during the fourth quarter of 1999,
IP incurred $5.7 million expenses related to the merger of Illinova and
Dynegy. See "Note 16 - Subsequent Event" for additional information.
First Quarter Second Quarter Third Quarter Fourth Quarter
1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues $ 489.5 $ 467.0 $ 715.3 $ 397.4
Operating income (loss) 61.8 (9.8) 66.5 (1,702.2)
Net income (loss) 30.4 (40.6) 35.4 (1,577.6)
Net income (loss) applicable to common stock 25.5 (45.6) 30.4 (1,582.5)
Cash dividends declared on common stock - 42.8 - 40.4
Cash dividends paid on common stock 22.2 20.5 22.2 40.4
NOTE 16 - SUBSEQUENT EVENT
DYNEGY MERGER On February 1, 2000, Dynegy, a Delaware corporation since
renamed Dynegy Holdings Inc. (Old Dynegy), and Illinova merged in a
transaction (the Merger) in which each of Old Dynegy and Illinova became
wholly owned subsidiaries of Dynegy Inc., a newly formed Illinois corporation
(New Dynegy). This Merger, which was approved by shareholders of both Old
Dynegy and Illinova on October 11, 1999, resulted in each share of Illinova
common stock, no par value per share, being converted into one share of New
Dynegy Class A common stock, no par value per share. This Merger will be
accounted for under the purchase method of accounting and Old Dynegy will be
the acquirer for accounting purposes.
Illinois Power Company
S E L E C T E D C O N S O L I D A T E D F I N A N C I A L D A T A
(Millions of dollars)
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Operating revenues
Electric $ 1,178.6 $ 1,224.2 $1,244.4 $1,202.9 $1,252.6
Electric interchange 420.2 557.2 175.6 137.6 116.3
Gas 304.4 287.8 353.9 348.2 272.5
- --------------------------------------------------------------------------------------------------------------------------------
Total operating revenues $ 1,903.2 $ 2,069.2 $1,773.9 $1,688.7 $1,641.4
- --------------------------------------------------------------------------------------------------------------------------------
Extraordinary item net of income tax benefit $ - $ - $ (195.0) $ - $ -
Net income (loss) after extraordinary item $ 113.1 $(1,552.4) $ (44.2) $ 228.6 $ 182.7
Effective income tax rate 38.7% 43.1% 40.1% 37.6% 39.1%
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable
to common stock $ 95.6 $(1,572.2) $ (65.5) $ 205.6 $ 155.5
Cash dividends declared on common stock 40.9 83.2 91.1 87.1 77.9
Cash dividends paid on common stock 40.9 105.4 92.4 84.8 75.3
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,297.8 $ 6,104.1 $5,291.5 $5,568.5 $5,567.2
- --------------------------------------------------------------------------------------------------------------------------------
Capitalization
Common stock equity $ 1,035.2 $ 892.2 $1,299.1 $1,576.1 $1,478.1
Preferred stock 45.8 57.1 57.1 96.2 125.6
Mandatorily redeemable preferred stock 193.4 199.0 197.0 197.0 97.0
Long-term debt 1,906.4 2,158.5 1,617.5 1,636.4 1,739.3
- --------------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 3,180.8 $ 3,306.8 $3,170.7 $3,505.7 $3,440.0
- --------------------------------------------------------------------------------------------------------------------------------
Retained earnings $ 54.7 $ - $ 89.5 $ 245.9 $ 129.6
- --------------------------------------------------------------------------------------------------------------------------------
Capital expenditures $ 197.2 $ 311.5 $ 223.9 $ 187.3 $ 209.3
Cash flows from operations $ 149.8 $ 313.3 $ 423.7 $ 449.8 $ 479.8
AFUDC as a percent of earnings
applicable to common stock 4.4% (0.2)% (7.6)% 3.2% 3.9%
Ratio of earnings to fixed charges 2.16 N/A 2.73 3.40 2.77
- --------------------------------------------------------------------------------------------------------------------------------
S E L E C T E D I L L I N O I S P O W E R C O M P A N Y S T A T I S T I C S
1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
ELECTRIC SALES IN KWH (MILLIONS)
Residential 4,976 4,893 4,734 4,782
Commercial 4,200 4,053 3,943 3,894
Industrial 8,776 8,701 8,403 8,493
Other 372 375 426 367
- -----------------------------------------------------------------------------------------------------------------------------
Sales to ultimate consumers 18,324 18,022 17,506 17,536
Interchange 6,525 16,199 7,230 5,454
Wheeling 3,872 2,710 3,253 928
- -----------------------------------------------------------------------------------------------------------------------------
Total electric sales 28,721 36,931 27,989 23,918
- -----------------------------------------------------------------------------------------------------------------------------
ELECTRIC REVENUES (MILLIONS OF DOLLARS)
Residential $418 $469 $489 $483
Commercial 331 329 325 318
Industrial 370 374 376 360
Other 38 39 40 38
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from ultimate consumers 1,157 1,211 1,230 1,199
Interchange 420 557 176 138
Wheeling 22 13 14 4
- -----------------------------------------------------------------------------------------------------------------------------
Total electric revenues $ 1,599 $ 1,781 $1,420 $1,341
- -----------------------------------------------------------------------------------------------------------------------------
GAS SALES IN THERMS (MILLIONS)
Residential 323 305 343 427
Commercial 134 131 147 177
Industrial 71 67 47 99
- -----------------------------------------------------------------------------------------------------------------------------
Sales to ultimate consumers 528 503 537 703
Transportation of customer-owned gas 270 267 309 251
- -----------------------------------------------------------------------------------------------------------------------------
Total gas sold and transported 798 770 846 954
Interdepartmental sales 25 26 19 9
- -----------------------------------------------------------------------------------------------------------------------------
Total gas delivered 823 796 865 963
- -----------------------------------------------------------------------------------------------------------------------------
GAS REVENUES (MILLIONS OF DOLLARS)
Residential $ 194 $ 183 $238 $216
Commercial 68 65 77 79
Industrial 26 24 20 40
- -----------------------------------------------------------------------------------------------------------------------------
Revenues from ultimate consumers 288 272 335 335
Transportation of customer-owned gas 5 7 9 7
Miscellaneous 11 9 10 6
- -----------------------------------------------------------------------------------------------------------------------------
Total gas revenues $ 304 $ 288 $354 $348
- -----------------------------------------------------------------------------------------------------------------------------
System peak demand (native load) in kw (thousands) 3,888 3,694 3,532 3,492
Firm peak demand (native load) in kw (thousands) 3,850 3,617 3,469 3,381
Net generating capability in kw (thousands) N/A* 3,838 3,289 4,148
- -----------------------------------------------------------------------------------------------------------------------------
Electric customers (end of year) 588,603 580,356 580,257 549,957
Gas customers (end of year) 410,882 408,428 405,710 389,223
Employees (end of year) 2,397 3,965 3,655 3,635
- -----------------------------------------------------------------------------------------------------------------------------
1995 1989
- ------------------------------------------------------------------------------------------
ELECTRIC SALES IN KWH (MILLIONS)
Residential 4,754 4,283
Commercial 3,804 2,962
Industrial 8,670 7,653
Other 367 333
- ------------------------------------------------------------------------------------------
Sales to ultimate consumers 17,595 15,231
Interchange 4,444 3,913
Wheeling 642 -
- ------------------------------------------------------------------------------------------
Total electric sales 22,681 19,144
- ------------------------------------------------------------------------------------------
ELECTRIC REVENUES (MILLIONS OF DOLLARS)
Residential $500 $ 373
Commercial 321 225
Industrial 392 339
Other 37 28
- ------------------------------------------------------------------------------------------
Revenues from ultimate consumers 1,250 965
Interchange 116 104
Wheeling 3 -
- ------------------------------------------------------------------------------------------
Total electric revenues $ 1,369 $ 1,069
- ------------------------------------------------------------------------------------------
GAS SALES IN THERMS (MILLIONS)
Residential 356 379
Commercial 144 149
Industrial 88 114
- ------------------------------------------------------------------------------------------
Sales to ultimate consumers 588 642
Transportation of customer-owned gas 273 265
- ------------------------------------------------------------------------------------------
Total gas sold and transported 861 907
Interdepartmental sales 21 10
- ------------------------------------------------------------------------------------------
Total gas delivered 882 917
- ------------------------------------------------------------------------------------------
GAS REVENUES (MILLIONS OF DOLLARS)
Residential $ 173 $ 201
Commercial 60 68
Industrial 24 46
- ------------------------------------------------------------------------------------------
Revenues from ultimate consumers 257 315
Transportation of customer-owned gas 8 11
Miscellaneous 7 (1)
- ------------------------------------------------------------------------------------------
Total gas revenues $ 272 $325
- ------------------------------------------------------------------------------------------
System peak demand (native load) in kw (thousands) 3,667 3,245
Firm peak demand (native load) in kw (thousands) 3,576 3,009
Net generating capability in kw (thousands) 3,862 3,885
- ------------------------------------------------------------------------------------------
Electric customers (end of year) 529,966 548,738
Gas customers (end of year) 374,299 386,960
Employees (end of year) 3,559 4,242
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* Wholly owned fossil generating assets transferred to Illinova
effective October 1, 1999.