-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EX7we6OxvXP5yAdXg8Qi3DX6htrJd5yuF3F4aPOWoR2ne4KKD0fMvnXyJRIQT2RT QJbS7JwQPe7MjQobgYBAmg== 0000912057-01-528420.txt : 20010815 0000912057-01-528420.hdr.sgml : 20010815 ACCESSION NUMBER: 0000912057-01-528420 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS POWER CO CENTRAL INDEX KEY: 0000049816 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370344645 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03004 FILM NUMBER: 1709875 BUSINESS ADDRESS: STREET 1: 500 S 27TH ST STREET 2: C/O HARRIS TRUST & SAVINGS BANK CITY: DECATUR STATE: IL ZIP: 62525-1805 BUSINESS PHONE: 2174246600 FORMER COMPANY: FORMER CONFORMED NAME: ILLINOIS IOWA POWER CO DATE OF NAME CHANGE: 19660822 10-Q 1 a2056748z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 | | 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 No.) 500 S. 27TH STREET DECATUR, ILLINOIS 62521-2200 (Address of principal executive offices) (Zip Code) (217) 424-6600 (Registrant's telephone number, including area code) 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 such filing requirements for the past 90 days. YES [X] NO [ ] Illinova Corporation is the sole holder of the common stock of Illinois Power Company. There is no voting or non-voting common equity held by non-affiliates of Illinois Power Company. Illinois Power Company is an indirect wholly owned subsidiary of Dynegy Inc. 1 ILLINOIS POWER COMPANY TABLE OF CONTENTS ================================================================================ PAGE PART I. FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Condensed Consolidated Balance Sheets: June 30, 2001 and December 31, 2000.................................3 Condensed Consolidated Statements of Income: For the three and six months ended June 30, 2001 and 2000...........4 Condensed Consolidated Statements of Cash Flows: For the six months ended June 30, 2001 and 2000.....................5 Notes to Condensed Consolidated Financial Statements...................6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........................11 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................................19 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................20 Item 6. Exhibits and Reports on Form 8-K..............................20 2 ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA) ================================================================================
JUNE 30, DECEMBER 31, 2001 2000 ---------- ------------- (unaudited) ASSETS UTILITY PLANT: Electric (includes construction work in progress of $106 million and $114 million, respectively) $2,350 $2,301 Gas (includes construction work in progress of $17 million and $19 million, respectively) 747 740 ------ ------ 3,097 3,041 Less: accumulated depreciation 1,222 1,193 ------ ------ 1,875 1,848 ------ ------ INVESTMENTS AND OTHER ASSETS 13 16 ------ ------ CURRENT ASSETS: Cash and cash equivalents 18 24 Accounts receivable, net 146 169 Accounts receivable, affiliates 51 51 Accrued unbilled revenue 65 117 Materials and supplies, at average cost 33 51 Prepayments and other 16 12 ------ ------ 329 424 ------ ------ DEFERRED CHARGES AND OTHER: Note receivable from affiliate 2,262 2,262 Transition period cost recovery 249 273 Other 150 149 ------ ------ 2,661 2,684 ------ ------ $4,878 $4,972 ====== ====== CAPITAL AND LIABILITIES CAPITALIZATION: Common stock - no par value, 100,000,000 shares authorized: 75,643,937 shares issued, stated at $1,274 $1,274 Retained earnings - accumulated since January 1, 1999 165 176 Less: Capital stock expense 7 7 Less: 12,751,724 shares of common stock in treasury, at cost 287 287 ------ ------ 1,145 1,156 Preferred stock 46 46 Mandatorily redeemable preferred stock 100 100 Long-term debt 1,745 1,788 ------ ------ 3,036 3,090 ------ ------ CURRENT LIABILITIES: Accounts payable 68 146 Accounts payable, affiliates 15 5 Notes payable and current portion of long-term debt 284 234 Accrued liabilities 131 153 ------ ------ 498 538 ------ ------ DEFERRED CREDITS: Accumulated deferred income taxes 1,150 1,130 Other 194 214 ------ ------ 1,344 1,344 ------ ------ $4,878 $4,972 ====== ======
See notes to condensed consolidated financial statements. 3 ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS) ================================================================================
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 2001 2000 2001 2000 --------- -------- -------- ------- OPERATING REVENUES: Electric $ 274 $ 281 $ 529 $ 549 Electric interchange 1 3 1 4 Gas 67 55 341 171 ----- ----- ----- ----- 342 339 871 724 ----- ----- ----- ----- OPERATING EXPENSES AND TAXES: Power purchased 158 178 309 338 Gas purchased for resale 39 28 256 96 Other operating expenses 35 35 65 62 Retirement and severance expense -- -- -- 38 Maintenance 13 14 26 26 Depreciation and amortization 20 19 40 38 Amortization of regulatory assets 13 13 26 26 General taxes 16 16 39 38 Income taxes (3) (4) 19 (9) ----- ----- ----- ----- 291 299 780 653 ----- ----- ----- ----- OPERATING INCOME 51 40 91 71 Other income (expenses), net (27) (20) (18) (36) Interest income from affiliates 43 43 85 91 ----- ----- ----- ----- INCOME BEFORE INTEREST CHARGES 67 63 158 126 Interest expense (33) (34) (65) (72) Allowance for borrowed funds used during construction -- 1 1 1 ----- ----- ----- ----- NET INCOME 34 30 94 55 Preferred dividend requirement (2) (4) (5) (9) ----- ----- ----- ----- NET INCOME APPLICABLE TO COMMON SHAREHOLDER $ 32 $ 26 $ 89 $ 46 ===== ===== ===== =====
See notes to condensed consolidated financial statements. 4 ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) ================================================================================
SIX MONTHS ENDED JUNE 30, --------------------- 2001 2000 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 94 $ 55 Items not affecting cash flows from operating activities: Depreciation and amortization 69 68 Deferred income taxes 6 18 Changes in assets and liabilities resulting from operating activities: Accounts receivable 75 48 Inventories 18 10 Prepayments and other assets 14 80 Accounts payable (68) (14) Accrued liabilities (19) (33) Other, net (24) 28 ----- ----- Net cash provided by operating activities 165 260 ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (69) (66) Proceeds from note receivable, affiliate -- 336 Other, net 2 (2) ----- ----- Net cash provided by (used in) investing activities (67) 268 ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends on common and preferred stock (101) (1) Repayments of long-term borrowings (251) (225) Issuance of long-term borrowings 208 -- Net change in commercial paper and money market lines of credit 49 (202) Redemption of mandatorily redeemable preferred stock -- (93) Other, net (9) (8) ----- ----- Net cash used in financing activities (104) (529) ----- ----- Net change in cash and cash equivalents (6) (1) Cash and cash equivalents, beginning of period 24 24 ----- ----- Cash and cash equivalents, end of period $ 18 $ 23 ===== =====
See notes to condensed consolidated financial statements. 5 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 NOTE 1 -- ACCOUNTING POLICIES The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to interim financial reporting as prescribed by the Securities and Exchange Commission ("SEC"). These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Illinois Power Company's ("IP" or the "Company") Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the SEC. The financial statements include all material adjustments, which, in the opinion of management, are necessary for a fair presentation of the results for the interim period. Interim period results are not necessarily indicative of the results for the full year. The preparation of the condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to develop estimates and to make assumptions that affect reported financial position and results of operations and that impact the nature and extent of disclosure, if any, of contingent assets and liabilities. Actual results could differ materially from those estimates. 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 condensed consolidated financial statements include the accounts of IP; Illinois Power Capital, L. P.; Illinois Power Financing I ("IPFI"); Illinois Power Securitization Limited Liability Company ("LLC"); and Illinois Power Special Purpose Trust ("IPSPT"). All significant intercompany balances and transactions have been eliminated from the condensed consolidated financial statements. All nonutility operating transactions are included in the line titled "Other income (expenses), net" in IP's Condensed Consolidated Statements of Income. Certain reclassifications have been made to prior year amounts in order to conform to current year presentation. Cash and cash equivalents include cash on hand and temporary investments purchased with an initial maturity of three months or less. At June 30, 2001, approximately $9 million of such cash and cash equivalents was restricted while at December 31, 2000, approximately $12 million was restricted. This cash is reserved for use in retiring the Transitional Funding Trust Notes issued under the provisions of P.A. 90-561 (Illinois electric utility restructuring legislation enacted in December 1997). NOTE 2 -- BUSINESS COMBINATION Dynegy completed its acquisition of Illinova Corporation ("Illinova") on February 1, 2000. The merger of Dynegy and Illinova involved the creation of a new holding company, now known as Dynegy Inc. ("Dynegy"), and two separate but concurrent mergers. In one merger, a wholly owned subsidiary of Dynegy Inc. merged with and into Illinova. In the other merger, a second wholly owned subsidiary of Dynegy Inc. merged with and into former Dynegy. As a result of these two concurrent mergers, Illinova and former Dynegy continue to exist as wholly owned subsidiaries of Dynegy Inc. and are referred to as Illinova Corporation and Dynegy Holdings Inc., respectively. Dynegy accounted for the acquisition as a purchase of Illinova. As a result, the consolidated financial statements of Dynegy after the merger reflect the assets and liabilities of Illinova at allocated fair values. IP continues to be a wholly owned subsidiary of Illinova. For accounting purposes, the effective date of the merger was January 1, 2000. IP's condensed consolidated financial statements were prepared on the historical cost basis and do not reflect an allocation of the purchase price to IP that was recorded by Dynegy as a result of the merger. Push down accounting was not required because IP has publicly held debt and preferred stock outstanding. As part of the merger, estimated severance and retirement costs of $38 million ($23 million after-tax) were recorded in the first quarter of 2000 which were subsequently adjusted to reflect actual costs incurred throughout the year. Severance charges represented approximately $20 million ($12 million after-tax) of the total costs incurred, the majority of which had been paid. As of June 30, 2001, 277 employees were either severed or have retired as a result of the merger. It is expected that an additional 7 employees will be severed or retire by the end of 2002. The severance/retirement plan is being executed pursuant to IP's plan and related actions were substantially complete at December 31, 2000. 6 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 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 approximately $2.8 billion. Such assets were subsequently contributed by Illinova to Illinova Power Marketing Inc. ("IPMI"), which was later renamed Dynegy Midwest Generation ("DMG"). The note matures on September 30, 2009 and bears interest at an annual rate of 7.5%, due semiannually in April and October. At June 30, 2001, principal and accrued interest outstanding under the note receivable approximated $2.3 billion and $43 million, respectively. At December 31, 2000, principal and accrued interest outstanding under the note receivable approximated $2.3 billion and $42 million, respectively. IP recognized $85 million of interest income from Illinova on the note for the first six months of 2001 and $43 million for the quarter ended June 30, 2001. IP recognized $91 million of interest income from Illinova on the note for the first six months of 2000 and $43 million for the quarter ended June 30, 2000. IP routinely conducts business with subsidiaries of Dynegy. These transactions include the purchase or sale of electricity, natural gas and transmission services as well as certain other services. Operating revenue derived from transactions with affiliates approximated $10 million and $17 million for the three and six months ended June 30, 2001, respectively. Operating revenue derived from transactions with affiliates approximated $11 million and $17 million for the three and six months ended June 30, 2000, respectively. Aggregate operating expenses charged by affiliates approximated $131 million and $279 million for the three and six months ended June 30, 2001, respectively, including $113 million and $226 million for power purchased. Aggregate operating expenses charged by affiliates approximated $152 million and $287 million for the three and six months ended June 30, 2000, respectively, including $138 million and $264 million for power purchased. Related party transactions have been conducted at prices and terms similar to those available to and transacted with unrelated parties. IP has a power purchase agreement ("PPA") with DMG that provides IP the right to purchase power from DMG for a primary term extending through December 31, 2004. The primary term may be extended on an annual basis, subject to concurrence by both parties. The PPA defines the terms and conditions under which DMG provides capacity and energy to IP using a tiered pricing structure. Effective January 1, 2000, the Dynegy consolidated group, which includes IP, began operating under a Services and Facilities Agreement, whereby other Dynegy affiliates exchange services with IP such as financial, legal, information technology and human resources as well as shared facility space. IP services are exchanged at fully distributed costs and revenue is not recorded under this agreement. Management believes that the allocation method utilized under this agreement is reasonable and amounts charged under this agreement would result in costs to IP similar to costs IP would have incurred for these services on a stand-alone basis. NOTE 4 -- COMMITMENTS AND CONTINGENCIES LEGAL AND ENVIRONMENTAL MATTERS. ENVIRONMENTAL PROTECTION AGENCY COMPLAINT. On November 3, 1999, the United States Environmental Protection Agency ("EPA") issued a Notice of Violation ("NOV") against IP and, with the Department of Justice ("DOJ"), filed a complaint against IP in the U.S. District Court for the Southern District of Illinois, No. 99C833. Subsequently, the DOJ and EPA amended the NOV and complaint to include IPMI (now known as DMG) (IP and DMG collectively the "Defendants"). Similar notices and lawsuits have been 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 the Defendants' three Baldwin Station generating units constituted "major modifications" under either or both the Prevention of Significant Deterioration ("PSD") 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 DOJ amended 7 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 its complaint to assert the claims found in the NOV. The Defendants filed an answer denying all claims and asserting various specific defenses. By order dated May 15, 2001, a trial date of June 2002 has been set. The initial trial is limited to liability. 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. IP has analyzed each of the activities covered by the EPA's allegations and believes each activity represents prudent practice regularly performed throughout the utility industry as necessary to maintain the operational efficiency and safety of equipment. As such, IP believes that each of these activities is covered by the exemption for routine repair, replacement and maintenance and that the EPA is changing, or attempting to change, through enforcement actions, the intent and meaning of its regulations. IP also believes that, even if some of 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 the Defendants' other facilities are covered in the complaint and NOV, the EPA has officially requested information concerning activities at the Defendants' Vermilion, Wood River and Hennepin Plants. It is possible that the EPA will eventually commence enforcement actions against those plants as well. The asset(s) subject to the complaint are part of the consolidated assets of Dynegy. The 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 EPA also will be seeking installation of "best available control technology" (or the equivalent) at the Baldwin Station and possibly at the other three plants. The parties are engaged in discovery and numerous discovery-related disputes have arisen. The United States Magistrate heard arguments on a number of the discovery disputes in December 2000 and issued orders favorable to the Defendants on most of the disputed issues. Notwithstanding the favorable order, discovery disputes continue to arise. The National Energy Policy Report issued in May 2001 by the National Energy Policy Development Group recommended that the EPA Administrator examine the new source review regulations, including the PSD regulations, and report to the President within 90 days on the impact of new source review on investment in new utility and refinery generation capacity, energy efficiency and environmental protection. The report also recommended that the Attorney General review existing enforcement actions regarding new source review to ensure that the enforcement actions are consistent with the Clean Air Act and its regulations. These reviews have been undertaken by the respective agencies and are ongoing. Two utilities, Virginia Power and Cinergy, reached tentative settlements with the United States on several issues in 2000. The tentative settlements would require the utilities to pay civil fines; fund various environmental projects; reduce nitrogen oxides, sulfur oxides, particulate matter and mercury emissions through the installation of pollution control devices over a period extending from 2012 through 2013, and forfeit certain emission credits. These settlements are not expected to be finalized until after the EPA review of the new source review regulations is completed. IP believes the allegations are without merit and will vigorously defend this claim. In the opinion of management, the amount of ultimate liability with respect to this action will not have a material adverse effect on the financial position or results of operations of IP. MANUFACTURED GAS PLANTS ("MGP"). IP's estimated liability for MGP site remediation is $55 million. This amount represents IP's current estimate of the costs it will incur to remediate the remaining 22 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 significant portion of the MGP remediation costs and are credited to customers through the tariff rider mechanism that the Illinois Commerce Commission ("ICC") previously approved. Cleanup costs in excess of insurance proceeds are considered probable of recovery from IP's transmission and distribution customers. 8 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 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 IP's consolidated financial position or results of operations. REGULATORY MATTERS. P.A. 90-561 - UTILITY EARNINGS CAP. P.A. 90-561 contains floor and ceiling provisions applicable to IP's Return on Equity ("ROE") during the transition period ending in 2006 (or 2008 at the option of the utility and with approval by the ICC). Pursuant to these provisions, 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 concurrent period ("Treasury Yield"). Conversely, IP is required to refund amounts to its customers equal to 50% of the value earned above a defined "ceiling limit." The ceiling limit is exceeded if IP's ROE exceeds the Treasury Yield, plus 6.5% in 2001 through 2004 (which increases to 8.5% in 2001 through 2004 if a utility chooses not to implement transition charges after 2006). Regulatory asset amortization is included in the calculation of ROE for the ceiling test, but is not included in the floor test calculation. P.A. 90-561 - DIRECT ACCESS PROVISIONS. Since October 1999, customers with demand greater than 4 megawatts ("MW") at a single site, customers with at least 10 sites having aggregate total demand of at least 9.5 MW and customers representing one-third of the remaining load in the non-residential class have been given the right to choose their electric generation suppliers ("direct access"). Direct access for remaining non-residential customers began 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 that departing customers must pay to IP are not designed to hold IP completely harmless from resulting revenue loss because of the mitigation factor. Although residential rate reductions and the introduction of direct access has led 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. 2) Utilities are provided the opportunity to lower their financing and capital costs through the issuance of "securitized" bonds, also called transitional funding instruments. 3) The ROE of utilities is managed through application of floor and ceiling test rules contained in P.A. 90-561 as described above. 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. P.A. 90-561 - INDEPENDENT SYSTEM OPERATOR ("ISO") PARTICIPATION. Participation in an ISO by utilities serving retail customers in Illinois was one of the requirements included in P.A. 90-561. 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 20, 2000, IP announced its intention to withdraw its participation in the MISO and to become a member of the Alliance Regional Transmission Organization ("Alliance RTO"), pending necessary regulatory approval. On October 13, 2000, IP filed a notice of its intent to withdraw from the MISO with the FERC. On February 23, 2001, IP reached a settlement in principle with all parties that allows it to withdraw from the MISO and join the Alliance RTO, effective upon the FERC's approval of the settlement, which occurred May 8, 2001. IP has fulfilled its obligations under the MISO settlement. 9 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 OTHER COMMITMENTS AND CONTINGENCIES. NOTICE OF INQUIRY. On January 3, 2001, the Governor of Illinois, in conjunction with the creation of the Energy Cabinet, called upon the ICC to complete a full investigation of the recent natural gas price increases which have had a serious impact on Illinois consumers. The ICC subsequently issued a Notice of Inquiry requesting information and other input from various entities, including Illinois gas public utilities, with respect to the natural gas price increases. The outcome of this proceeding is uncertain. NOTE 5 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS During the first six months of 2000 and 2001, IP had no contracts meeting the definition of a derivative instrument as defined by Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." 10 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of IP included elsewhere herein, including the notes relating thereto, and with the Company's Annual Report on Form 10-K for the year ended December 31, 2000, filed with the SEC. 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, the merger of Dynegy and Illinova was completed and involved the creation of a new holding company, now known as Dynegy Inc., and two separate but concurrent mergers. In one merger, a wholly owned subsidiary of Dynegy Inc. merged with and into Illinova. In the other merger, a second wholly owned subsidiary of Dynegy Inc. merged with and into former Dynegy. As a result of these two concurrent mergers, Illinova and the former Dynegy continue to exist as wholly owned subsidiaries of Dynegy Inc. and are referred to as Illinova Corporation and Dynegy Holdings Inc., respectively. IP continues to be a wholly owned subsidiary of Illinova. Since the merger, IP has continued to operate as a regulated regional utility. GENERAL COMPANY PROFILE. 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's condensed 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, 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 LLC. IP was a leader in the development of the comprehensive electric utility regulatory reform legislation for the State of Illinois, which provided the foundation for IP's subsequent strategic actions and transformation. Following the successful execution of its strategy to transfer its fossil-fueled generation to an unregulated status and to exit its nuclear operations, IP is now focused on delivering reliable transmission, transportation and distribution services in a cost-effective manner. IP will also continue its efforts to capitalize on strategic and operational synergies made possible by the merger. COMPETITION. 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. 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. However, the Energy Policy Act currently precludes the FERC from mandating retail wheeling. Retail wheeling involves the transport of electricity to end-use customers. SEASONALITY. IP's revenue and operating margin are impacted by seasonal factors that affect sales volumes of electricity and gas. Typically, revenues from sales of electricity are higher in the summer months resulting from the summer cooling season; whereas, gas revenues are higher in the winter months resulting from the winter heating season. EFFECT OF INFLATION. Although IP's operations are affected by general economic trends, management does not believe inflation has had a material effect on IP's results of operations. 11 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 LIQUIDITY AND CAPITAL RESOURCES IP has historically relied upon operating cash flow and borrowings from a combination of commercial paper issuances, bank lines of credit, corporate credit agreements and various public debt issuances for its liquidity and capital resource requirements. The following briefly describes the terms of these arrangements. AFFILIATE TRANSACTION. IP maintains an unsecured note receivable due from its parent relating to the October 1999 transfer of its fossil-fueled generating assets. The note matures on September 30, 2009 and bears interest at an annual rate of 7.5%, due semiannually in April and October. Principal outstanding under this note totaled approximately $2.3 billion at June 30, 2001. Principal repayments and interest payments accruing under this arrangement provide IP with a source of liquidity for its prospective operating and capital expenditure requirements. COMMERCIAL PAPER AND LINES OF CREDIT. At June 30, 2001, IP had commercial paper outstanding in the amount of $197 million. Remaining availability under a credit agreement totaled $103 million. IP believes additional financing arrangements can be obtained at reasonable terms, if required. MORTGAGE. Aggregate principal outstanding under IP's New Mortgage Bonds approximated $1.2 billion at June 30, 2001, bearing interest ranging from 2.5% to 7.5% per annum. At June 30, 2001, IP had unsecured non-mortgage-borrowing capacity totaling approximately $296 million. REFINANCING. On May 1, 2001, $187 million variable rate Pollution Control Bonds Series W and X were issued as replacements for $187 million in aggregate principal of Pollution Control Bonds Series M, N and O and variable rate long-term debt due 2017, which were retired on June 1, 2001. SECURITIZATION. In December 1998, IPSPT issued $864 million of Transitional Funding Trust Notes as allowed under the Illinois Electric Utility Transition Funding Law in P.A. 90-561. IP has used proceeds from this offering to fund open-market purchases, maturities, defeasance of debt and repurchases of various preferred stock series. Per annum interest on these notes averages approximately 5.4%. IP is retiring the principal outstanding under these notes through quarterly payments of $21.6 million. DIVIDENDS. Under IP's 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." IP's retained earnings balance is expected to be sufficient during the remainder of 2001 to support payment of all scheduled preferred dividends. On March 2, 2001, IP declared and paid common stock dividends of $100 million to Illinova. PREFERRED SECURITIES OF SUBSIDIARY TRUST. IPFI, a wholly owned subsidiary of IP, has $100 million aggregate liquidation amount of Subordinated Capital Income Securities outstanding at June 30, 2001, which were issued in a private transaction. These Trust Originated Preferred Securities ("TOPrS") were issued at 8% with a $25 per share liquidation preference. The TOPrS mature on January 31, 2045 and may be redeemed at IP's option, in whole or in part, at any time. CAPITAL ASSET PROGRAM. Construction expenditures for the six months ended June 30, 2001 were approximately $69 million. IP estimates that it will spend approximately $77 million on construction for the remainder of 2001. IP construction expenditures for 2001 through 2005 are expected to total approximately $819 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. 12 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 P.A. 90-561 - RATE ADJUSTMENT PROVISIONS. P.A. 90-561 gave IP's residential customers a 15% decrease in base electric rates beginning August 1, 1998, and an additional 5% decrease effective on May 1, 2002. The rate decreases result in expected revenue reductions of approximately $75 million in the year 2001, approximately $92 million in 2002, approximately $100 million in 2003, and approximately $102 million in 2004, based on projected consumption. CONCLUSION. IP continues to believe that it will be able to meet all foreseeable cash requirements, including working capital, capital expenditures and debt service, from operating cash flow, supplemented as necessary by borrowings under its various credit facilities and other sources of liquidity. 13 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 RESULTS OF OPERATIONS Provided below is an unaudited tabular presentation of certain IP operating and financial statistics for the three-month periods ended June 30, 2001 and 2000, respectively.
THREE MONTHS ENDED JUNE 30, ---------------------- 2001 2000 ------ ------ (IN MILLIONS) ELECTRIC SALES REVENUES - Residential $ 95 $ 90 Commercial 82 79 Commercial-distribution* -- -- Industrial 73 93 Industrial-distribution* 2 -- Other 9 9 ------ ------ Revenues from ultimate consumers 261 271 Interchange 1 3 Transmission/Wheeling 13 10 ------ ------ Total Electric Revenues $ 275 $ 284 ====== ====== ELECTRIC SALES IN KWH - Residential 1,097 1,041 Commercial 1,060 1,012 Commercial-distribution* 11 -- Industrial 1,674 2,266 Industrial-distribution* 674 48 Other 90 88 ------ ------ Sales to ultimate consumers 4,606 4,455 Interchange -- 3 ------ ------ Total Electric Sales 4,606 4,458 ====== ====== GAS SALES REVENUES - Residential $ 36 $ 32 Commercial 13 10 Industrial 10 7 Other 1 1 ------ ------ Revenues from ultimate consumers 60 50 Transportation of customer-owned gas 3 2 Miscellaneous 4 3 ------ ------ Total Gas Revenues $ 67 $ 55 ====== ====== GAS SALES IN THERMS - Residential 32 38 Commercial 13 15 Industrial 14 17 ------ ------ Sales to ultimate consumers 59 70 Transportation of customer-owned gas 64 64 ------ ------ Total gas sold and transported 123 134 Interdepartmental sales 5 7 ------ ------ Total Gas Delivered 128 141 ====== ======
*Distribution of customer-owned energy 14 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 Provided below is an unaudited tabular presentation of certain IP operating and financial statistics for the six-month periods ended June 30, 2001 and 2000, respectively.
SIX MONTHS ENDED JUNE 30, --------------------------- 2001 2000 ---------- ----------- (IN MILLIONS) ELECTRIC SALES REVENUES - Residential $ 195 $ 183 Commercial 155 154 Commercial-distribution* 1 -- Industrial 136 177 Industrial-distribution* 2 -- Other 18 17 ------ ------ Revenues from ultimate consumers 507 531 Interchange 1 4 Transmission/Wheeling 22 18 ------ ------ Total Electric Revenues $ 530 $ 553 ====== ====== ELECTRIC SALES IN KWH - Residential 2,479 2,277 Commercial 2,114 2,053 Commercial-distribution* 34 -- Industrial 3,109 4,320 Industrial-distribution* 1,260 92 Other 189 180 ------ ------ Sales to ultimate consumers 9,185 8,922 Interchange 1 50 ------ ------ Total Electric Sales 9,186 8,972 ====== ====== GAS SALES REVENUES - Residential $ 214 $ 108 Commercial 82 38 Industrial 32 15 Other 3 2 ------ ------ Revenues from ultimate consumers 331 163 Transportation of customer-owned gas 5 3 Miscellaneous 5 5 ------ ------ Total Gas Revenues $ 341 $ 171 ====== ====== GAS SALES IN THERMS - Residential 205 183 Commercial 87 76 Industrial 39 41 ------ ------ Sales to ultimate consumers 331 300 Transportation of customer-owned gas 136 139 ------ ------ Total gas sold and transported 467 439 Interdepartmental sales 6 13 ------ ------ Total Gas Delivered 473 452 ====== ======
*Distribution of customer-owned energy 15 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 THREE-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 For the quarter ended June 30, 2001, IP reported net income of $34 million, compared with second quarter 2000 net income of $30 million. Operating revenues in 2001 increased $3 million primarily due to increases in market prices for natural gas partially offset by a decrease in electric sales due to industrial customers purchasing energy from alternate retail electric suppliers and a down turn in industrial economic conditions. Operating expenses, excluding income taxes, decreased $9 million in 2001 compared to 2000 primarily due to lower power purchased costs partially offset by higher market prices for natural gas purchases. Other income in 2001 and 2000 includes interest income of $43 million associated with the affiliate note receivable arising from the October 1999 asset transfer. In addition, other income in 2001 was offset by reduced revenues from non-utility support services. Interest expense period-to-period decreased $1 million reflecting refinancing and additional short-term debt at lower rates. IP reported an income tax provision of $23 million for the three-month period ended June 30, 2001, compared to an income tax provision of $21 million for the 2000 period. The effective tax rates approximated 39% and 41% in 2001 and 2000, respectively. DIVIDEND REQUIREMENTS The holders of the IP Serial Preferred Stock are entitled to receive dividends if, when and as declared by IP's Board of Directors out of funds legally available therefore. IP paid approximately $2 million in cash dividends and distributions during the three months ended June 30, 2001, of which approximately $.5 million was on its Serial Preferred Stock and approximately $2 million was on its TOPrS. Dividends on Monthly Income Preferred Securities (MIPS) are no longer paid due to their redemption in 2000. During the same quarter in 2000, dividends paid on Serial Preferred Stock were approximately $.5 million and aggregate dividends paid on MIPS and TOPrS were approximately $4 million. SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 For the six months ended June 30, 2001, IP reported net income of $94 million, compared with net income of $55 million for the first six months of 2000. Due to the merger, estimated severance and retirement costs of $38 million ($23 million after-tax) were recorded during the first six months of 2000 which were subsequently adjusted to reflect actual costs incurred throughout the year. Operating revenues in 2001 increased $147 million primarily due to increased market prices for natural gas coupled with an increase in gas sales. Electric revenues decreased slightly due to industrial customers purchasing energy from alternate retail electric suppliers, offset by an increase in residential and commercial sales. Operating expenses, excluding income taxes and the 2000 retirement and severance expense, increased $137 million in 2001 compared to 2000 primarily due to significantly higher market prices for natural gas purchases. Other income includes interest income of $85 million in 2001 associated with the affiliate note receivable arising from the October 1999 asset transfer as compared to $91 million in 2000. In addition, other income in 2001 includes favorable insurance and litigation settlements. Interest expense period-to-period decreased $7 million reflecting lower average principal balances and variable rate debt at lower rates. 16 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 IP reported an income tax provision of $61 million for the six-month period ended June 30, 2001, compared to an income tax provision of $34 million for the 2000 period. The effective tax rates approximated 39% and 38% in 2001 and 2000, respectively. OPERATING CASH FLOW Cash flow from operating activities totaled $165 million for the six-month period ended June 30, 2001, compared to $260 million reported in the 2000 period. Changes in operating cash flow reflect the operating results discussed above. Cash flow in 2001 was also affected by higher priced natural gas, estimated income tax payments and the settlement obligation to exit the MISO. Cash flow in 2000 was affected by the receipt of an income tax refund, reduction of prepaid gas purchases in underground storage and a decrease in accrued liabilities attributable to interest accrued for federal and state taxes. CAPITAL EXPENDITURES AND INVESTING ACTIVITIES During the first six months of 2001, IP spent approximately $69 million on electric and gas construction as compared to $66 million in the first six months of 2000. IP expects expenditures for the remainder of 2001 to approximate $77 million. DIVIDEND REQUIREMENTS The holders of the IP Serial Preferred Stock are entitled to receive dividends if, when and as declared by IP's Board of Directors out of funds legally available therefore. IP paid approximately $5 million in cash dividends and distributions during the six months ended June 30, 2001, of which approximately $1 million was on its Serial Preferred Stock and approximately $4 million was on its TOPrS. Dividends on Monthly Income Preferred Securities (MIPS) are no longer paid due to their redemption in 2000. During the same period in 2000, dividends paid on Serial Preferred Stock were approximately $1 million and aggregrate dividends paid on MIPS and TOPrS were approximately $8 million. IP also declared and paid common stock dividends of $100 million to Illinova effective March 2, 2001. UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. IP's reports, filings and other public announcements often include statements reflecting assumptions, expectations, projections, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "project," "forecast," "may," "should," "expect," "will" and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following: >> projected operating or financial results; >> expectations regarding capital expenditures, preferred dividends and other payments; >> beliefs about the financial impact of deregulation; >> assumptions regarding the outcomes of legal and administrative proceedings; >> intentions with respect to future energy supplies; >> anticipated costs associated with legal and regulatory compliance; and >> expectations regarding cost savings or synergies relating to the Dynegy-Illinova merger. Any or all of IP's forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties, including the following: >> the timing and extent of changes in commodity prices for natural gas and electricity; >> competitive practices in the industries where IP competes; >> the effects of deregulation of the energy industry and the rules and regulations adopted in connection therewith; >> general United States and Illinois economic conditions, including fluctuations in interest rates; 17 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 >> operational factors affecting the ongoing commercial operations of IP's transmission, transportation and distribution facilities, including catastrophic weather-related damage, unscheduled repairs or workforce issues; >> cost and other effects of legal and administrative proceedings, settlements, investigations or claims, including environmental liabilities that may not be covered by indemnity or insurance; and >> other regulatory or legislative developments that affect the energy industry in general and IP's operations in particular. Many of these factors will be important in determining IP's actual future results. Consequently, no forward-looking statement can be guaranteed. IP's actual future results may vary materially from those expressed or implied in any forward-looking statements. All of IP's forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements. In addition, IP disclaims any obligation to update any forward-looking statements to reflect events or circumstances after the date of this report. 18 ILLINOIS POWER COMPANY QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOR THE INTERIM PERIODS ENDED JUNE 30, 2001 AND 2000 IMPACT OF PRICE FLUCTUATIONS. IP's operating results may be impacted by commodity price fluctuations for electricity used in supplying service to its customers. IP has contracted with AmerGen and DMG to supply power via power purchase agreements. With these arrangements, IP believes it has provided adequate power supply for expected IP load plus a reserve supply above that expected level. Should power acquired under these agreements be insufficient to meet IP load requirements, IP will have to buy power at current market prices. The power purchase agreement with DMG obligates DMG to provide power up to the reservation amount even if DMG has individual units unavailable at various times. The power purchase agreement with AmerGen does not obligate AmerGen to acquire replacement power for IP in the event of a curtailment or shutdown at the Clinton Power Station, a nuclear-fueled generating facility which IP sold to AmerGen in December 1999. Under a Clinton shutdown scenario, to the extent IP exceeds its capacity reservation with DMG, IP will have to buy power at current market prices. 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. Future 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. 19 ILLINOIS POWER COMPANY PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS See "Note 4 -- Commitments and Contingencies" in the Notes to Condensed Consolidated Financial Statements for an update on legal proceedings. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) There are no instruments or documents required to be included as exhibits to this Form 10-Q. (b) No Form 8-Ks, Commission File No. 1-3004, were filed during the second quarter of 2001. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Illinois Power Company Date: AUGUST 14, 2001 By: /s/ PEGGY E. CARTER ---------------- ---------------------------------------------- Peggy E. Carter, Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer) 21 -----END PRIVACY-ENHANCED MESSAGE-----