10-Q 1 a2063209z10-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 September 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: September 30, 2001 and December 31, 2000............................. 3 Condensed Consolidated Statements of Income: For the three and nine months ended September 30, 2001 and 2000...... 4 Condensed Consolidated Statements of Cash Flows: For the nine months ended September 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............................ 12 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................................... 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 21 Item 6. Exhibits and Reports on Form 8-K............................... 21
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ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA) ============================================================================================================ SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ (unaudited) ASSETS UTILITY PLANT: Electric (includes construction work in progress of $109 million and $114 million, respectively) $ 2,357 $ 2,301 Gas (includes construction work in progress of $17 million and $19 million, respectively) 752 740 ------------- ------------ 3,109 3,041 Less: accumulated depreciation 1,227 1,193 ------------- ------------ 1,882 1,848 ------------- ------------ INVESTMENTS AND OTHER ASSETS 12 16 ------------- ------------ CURRENT ASSETS: Cash and cash equivalents 21 24 Accounts receivable, net 139 169 Accounts receivable, affiliates 94 51 Accrued unbilled revenue 63 117 Materials and supplies, at average cost 49 51 Prepayments and other 22 12 ------------- ------------ 388 424 ------------- ------------ DEFERRED CHARGES AND OTHER: Note receivable from affiliate 2,271 2,262 Transition period cost recovery 237 273 Other 145 149 ------------- ------------ 2,653 2,684 ------------- ------------ $ 4,935 $ 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 217 176 Less: Capital stock expense 7 7 Less: 12,751,724 shares of common stock in treasury, at cost 287 287 ------------- ------------ 1,197 1,156 Preferred stock 46 46 Mandatorily redeemable preferred stock --- 100 Long-term debt 1,627 1,788 ------------- ------------ 2,870 3,090 ------------- ------------ CURRENT LIABILITIES: Accounts payable 157 146 Accounts payable, affiliates 16 5 Notes payable and current portion of long-term debt 428 234 Accrued liabilities 147 153 ------------- ------------ 748 538 ------------- ------------ DEFERRED CREDITS: Accumulated deferred income taxes 1,137 1,130 Other 180 214 ------------- ------------ 1,317 1,344 ------------- ------------ $ 4,935 $ 4,972 ============= ============
See notes to condensed consolidated financial statements. 3
ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS) ====================================================================================================================== THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------------- ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ OPERATING REVENUES: Electric $ 357 $ 374 $ 886 $ 923 Electric interchange --- 6 1 10 Gas 43 51 384 222 ------------ ------------ ------------ ------------ 400 431 1,271 1,155 ------------ ------------ ------------ ------------ OPERATING EXPENSES AND TAXES: Power purchased 205 226 514 564 Gas purchased for resale 20 28 276 124 Other operating expenses 38 35 103 97 Retirement and severance expense --- --- --- 38 Maintenance 15 17 41 43 Depreciation and amortization 21 20 61 58 Amortization of regulatory assets 12 12 38 38 General taxes 14 16 53 54 Income taxes 19 18 38 9 ------------ ------------ ------------ ------------ 344 372 1,124 1,025 ------------ ------------ ------------ ------------ OPERATING INCOME 56 59 147 130 Other income (expenses), net (15) (15) (33) (51) Interest income from affiliates 42 42 127 133 ------------ ------------ ------------ ------------ INCOME BEFORE INTEREST CHARGES 83 86 241 212 Interest expense (29) (33) (94) (105) Allowance for borrowed funds used during construction 1 --- 2 1 ------------ ------------ ------------ ------------ NET INCOME 55 53 149 108 Preferred dividend requirement (3) (2) (8) (11) ------------ ------------ ------------ ------------ NET INCOME APPLICABLE TO COMMON SHAREHOLDER $ 52 $ 51 $ 141 $ 97 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 4
ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) ================================================================================================================ NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 2001 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 149 $ 108 Items not affecting cash flows from operating activities: Depreciation and amortization 103 101 Deferred income taxes (1) 43 Changes in assets and liabilities resulting from operating activities: Accounts receivable 41 (16) Inventories 2 (10) Prepayments and other assets 2 68 Accounts payable (78) (5) Accrued liabilities 2 (38) Other, net (41) 9 ------------ ------------ Net cash provided by operating activities 179 260 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (105) (99) Proceeds from note receivable, affiliate --- 336 Other, net 2 (3) ------------ ------------ Net cash provided by (used in) investing activities (103) 234 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Dividends on common and preferred stock (102) (1) Repayments of long-term borrowings (390) (247) Issuance of long-term borrowings 325 --- Net change in commercial paper and money market lines of credit 98 (142) Redemption of mandatorily redeemable preferred stock --- (93) Other, net (10) (10) ------------ ------------ Net cash used in financing activities (79) (493) ------------ ------------ Net change in cash and cash equivalents (3) 1 Cash and cash equivalents, beginning of period 24 24 ------------ ------------ Cash and cash equivalents, end of period $ 21 $ 25 ============ ============
See notes to condensed consolidated financial statements. 5 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED SEPTEMBER 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 September 30, 2001, approximately $13 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). In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("Statement No. 143"). Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred with the associated asset retirement costs being capitalized as a part of the carrying amount of the long-lived asset. Statement No. 143 also includes disclosure requirements that provide a description of asset retirement obligations and reconciliation of changes in the components of those obligations. IP is evaluating the future financial effects of adopting Statement No. 143 and expects to adopt the standard effective January 1, 2003. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("Statement No. 144"). Statement No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The objective of Statement No. 144 is to establish one accounting model for long-lived assets to be disposed of by sale as well as resolve implementation issues related to Statement No. 121. IP expects to adopt Statement No. 144 effective January 1, 2002 and does not expect such adoption to have a material impact on its financial condition and results of operations. 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 6 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 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 September 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. 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"). Effective August 31, 2001, approximately $9 million of additional fossil generation-related assets were transferred to Illinova and the unsecured note receivable was adjusted accordingly. The note matures on September 30, 2009 and bears interest at an annual rate of 7.5%, due semiannually in April and October. At September 30, 2001, principal and accrued interest outstanding under the note receivable approximated $2.3 billion and $85 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 $127 million of interest income from Illinova on the note for the first nine months of 2001, including $42 million for the quarter ended September 30, 2001. IP recognized $133 million of interest income from Illinova on the note for the first nine months of 2000, including $42 million for the quarter ended September 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 $27 million for the three and nine months ended September 30, 2001, respectively. Operating revenue derived from transactions with affiliates approximated $14 million and $31 million for the three and nine months ended September 30, 2000, respectively. Aggregate operating expenses charged by affiliates approximated $131 million and $410 million for the three and nine months ended September 30, 2001, respectively, including $122 million and $348 million for power purchased. Aggregate operating expenses charged by affiliates approximated $160 million and $447 million for the three and nine months ended September 30, 2000, respectively, including $143 million and $407 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 7 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 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 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 October 19, 2001, a trial date of February 11, 2003 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. The EPA Administrator 8 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 announced in August 2001 that the review would be completed in September 2001. The events of September 11, 2001 have resulted in further delay of the review, which remains 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 periods extending through 2012 to 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. 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. 9 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 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. On August 21, 2001, IP and seven of the transmission owners that are part of the Alliance RTO entered into a letter of intent with National Grid, USA pursuant to which National Grid would serve as the Alliance RTO's managing member for a period of seven years. Pursuant to the letter of intent, the FERC must determine that National Grid is a non-market participant. On August 27, 2001, IP, in coordination with the other transmission owners comprising the Alliance RTO, filed the terms of the transaction with the FERC as the proposed business and independence plan for the Alliance RTO. On October 31, 2001, IP and the other Alliance Companies completed negotiations with National Grid regarding the definitive agreements necessary to complete the transaction. On November 1, 2001, the Alliance Companies filed the definitive agreements with FERC for approval. The Alliance RTO will own transmission facilities divested by transmission owners in exchange for passive ownership interests in the Alliance RTO or partially for cash. Alternatively, the Alliance RTO will enter into seven-year operating agreements to functionally control the transmission facilities of transmission owners that elect not to divest. Non-divesting transmission owners will maintain the physical operations of their transmission facilities. If approved as managing member, National Grid would be responsible for operating the Alliance RTO's transmission facilities and would operate the Alliance RTO as a for-profit corporation. National Grid would receive a management fee of $14 million, a fixed rate of return on its investment in the Alliance RTO, reimbursement of operating and maintenance expenditures and incentive compensation. In return, National Grid would be required to contribute $1 billion to the Alliance RTO by 2005, $75 million of which would be used to reimburse members for start-up costs and an additional $75 million of which would be used to fund capital expenditures for future system costs. The remaining $850 million would be used to purchase transmission assets and for transmission expansions. OTHER COMMITMENTS AND CONTINGENCIES. NOTICE OF INQUIRY. On January 3, 2001, the Governor of Illinois called upon the ICC to complete a full investigation of the winter natural gas price increases. The ICC subsequently issued a Notice of Inquiry requesting information and other input 10 ILLINOIS POWER COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 from various entities, including Illinois gas public utilities, with respect to the natural gas price increases. The ICC Staff has concluded its investigation and issued a report reflecting its general conclusion that the higher gas prices were due to supply and demand rather than market manipulation. The report presents three recommendations from the ICC Staff, none of which are material to IP's financial condition or results of operations: continuing customer communications, participating in workshop discussions on energy usage estimation and limiting ratepayers' exposure to gas price risk through prudent risk management practices. The ICC has accepted its Staff's report. NOTE 5 -- REDEMPTION OF PREFERRED SECURITIES OF SUBSIDIARY TRUST On September 30, 2001, IP redeemed all $100 million of the Trust Originated Preferred Securities ("TOPrS") issued by IPFI. The redemption was financed with $85 million cash and $15 million in commercial paper. Because September 30, 2001 fell on a Sunday, the actual cash redemption occurred on October 1, 2001. The condensed consolidated financial statements at September 30, 2001 reflect the redemption of the securities with the offset to accounts payable. NOTE 6 -- FINANCIAL AND OTHER DERIVATIVE INSTRUMENTS During the first nine 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." 11 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 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. 12 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 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 September 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 September 30, 2001, IP had $246 million of commercial paper outstanding under a credit agreement with remaining availability of $54 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 $1.1 billion at September 30, 2001, bearing interest ranging from 2.5% to 7.5% per annum. 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. REDEMPTION OF PREFERRED SECURITIES OF SUBSIDIARY TRUST. On September 30, 2001, IP redeemed all $100 million of the Trust Originated Preferred Securities ("TOPrS") issued by IPFI. The redemption was financed with $85 million cash and $15 million in commercial paper. Because September 30, 2001 fell on a Sunday, the actual cash redemption occurred on October 1, 2001. The condensed consolidated financial statements at September 30, 2001 reflect the redemption of the securities with the offset to accounts payable. PROPOSED REDEMPTION OF PREFERRED STOCK AND CONSENT SOLICITATION. At September 30, 2001, IP had the ability under its articles of incorporation to incur additional unsecured debt of up to approximately $218 million. On October 18, 2001, IP made a preliminary filing with the SEC to solicit consents from its preferred stockholders to amend IP's articles of incorporation to eliminate the provision restricting IP's ability to incur unsecured debt. Concurrently, Illinova made a preliminary filing with the SEC to effect a tender offer relating to the shares of IP's preferred stock. Commencement and completion of the tender offer and consent solicitation are conditioned on, among other things, SEC review, market conditions and the approval of the proposed amendment by holders of at least two-thirds of the preferred stock, voting together as one class. The approval of the proposed amendment would provide IP the flexibility to obtain financing on terms more advantageous 13 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 to IP than would otherwise be the case. All fees incurred in connection with the tender offer and consent solicitation would be paid from funds contributed by Dynegy. CAPITAL ASSET PROGRAM. Construction expenditures for the nine months ended September 30, 2001 were approximately $105 million. IP estimates that it will spend approximately $50 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. 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, public debt issuances and debt service, from operating cash flow, supplemented as necessary by borrowings under its various credit facilities and other sources of liquidity. 14 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 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 September 30, 2001 and 2000, respectively.
======================================================================================================= THREE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 2001 2000 ----------------- ---------------- (IN MILLIONS) ELECTRIC SALES REVENUES - Residential $ 151 $ 144 Commercial 102 106 Commercial-distribution* --- --- Industrial 81 100 Industrial-distribution* --- --- Other 12 11 --------------- --------------- Revenues from ultimate consumers 346 361 Interchange --- 6 Transmission/Wheeling 11 13 --------------- --------------- Total Electric Revenues $ 357 $ 380 =============== =============== ELECTRIC SALES IN KWH - Residential 1,681 1,593 Commercial 1,194 1,204 Commercial-distribution* 5 --- Industrial 1,645 2,119 Industrial-distribution* 677 313 Other 96 94 ---------------- --------------- Sales to ultimate consumers 5,298 5,323 Interchange 1 1 --------------- --------------- Total Electric Sales 5,299 5,324 =============== =============== GAS SALES REVENUES - Residential $ 23 $ 26 Commercial 9 11 Industrial 6 9 Other 1 --- ---------------- ---------------- Revenues from ultimate consumers 39 46 Transportation of customer-owned gas --- 1 Miscellaneous 4 4 --------------- --------------- Total Gas Revenues $ 43 $ 51 =============== =============== GAS SALES IN THERMS - Residential 20 21 Commercial 12 12 Industrial 13 13 ---------------- ---------------- Sales to ultimate consumers 45 46 Transportation of customer-owned gas 49 56 --------------- --------------- Total gas sold and transported 94 102 Interdepartmental sales 11 5 --------------- --------------- Total Gas Delivered 105 107 =============== =============== *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 SEPTEMBER 30, 2001 AND 2000 Provided below is an unaudited tabular presentation of certain IP operating and financial statistics for the nine-month periods ended September 30, 2001 and 2000, respectively.
======================================================================================================= NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 2001 2000 ----------------- ---------------- (IN MILLIONS) ELECTRIC SALES REVENUES - Residential $ 346 $ 327 Commercial 257 260 Commercial-distribution* 1 --- Industrial 217 277 Industrial-distribution* 2 --- Other 30 28 --------------- --------------- Revenues from ultimate consumers 853 892 Interchange 1 10 Transmission/Wheeling 33 31 --------------- --------------- Total Electric Revenues $ 887 $ 933 =============== =============== ELECTRIC SALES IN KWH - Residential 4,160 3,870 Commercial 3,308 3,257 Commercial-distribution* 39 --- Industrial 4,754 6,439 Industrial-distribution* 1,937 405 Other 285 274 ---------------- --------------- Sales to ultimate consumers 14,483 14,245 Interchange 2 51 --------------- --------------- Total Electric Sales 14,485 14,296 =============== =============== GAS SALES REVENUES - Residential $ 237 $ 134 Commercial 91 49 Industrial 38 24 Other 4 2 ---------------- ---------------- Revenues from ultimate consumers 370 209 Transportation of customer-owned gas 5 4 Miscellaneous 9 9 --------------- --------------- Total Gas Revenues $ 384 $ 222 =============== =============== GAS SALES IN THERMS - Residential 225 204 Commercial 99 88 Industrial 52 54 ---------------- ---------------- Sales to ultimate consumers 376 346 Transportation of customer-owned gas 185 195 --------------- --------------- Total gas sold and transported 561 541 Interdepartmental sales 17 18 --------------- --------------- Total Gas Delivered 578 559 =============== =============== *Distribution of customer-owned energy =======================================================================================================
16 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 For the quarter ended September 30, 2001, IP reported net income of $55 million, compared with third quarter 2000 net income of $53 million. Operating revenues in 2001 decreased $31 million primarily due to a decrease in electric and industrial sales resulting from customers purchasing energy from alternative resale electric suppliers and a downturn in industrial economic conditions. Additionally, interchange sales were lower. Operating expenses, excluding income taxes, decreased $29 million in 2001 compared to 2000 primarily due to lower power purchased costs due to reduced sales and lower market prices for natural gas purchases. Other income in 2001 and 2000 includes interest income of $42 million associated with the affiliate note receivable arising from the October 1999 asset transfer. Interest expense period-to-period decreased $4 million reflecting refinancing and additional short-term debt at lower rates. IP reported an income tax provision of $36 million for each of the three months ended September 30, 2001 and 2000. The effective tax rates approximated 40% for each of the three months ended September 30, 2001 and 2000. 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 $3 million in cash dividends and distributions during the three months ended September 30, 2001, of which approximately $1 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 dividends paid on MIPS and TOPrS were approximately $2 million. NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 For the nine months ended September 30, 2001, IP reported net income of $149 million, compared with net income of $108 million for the first nine months of 2000. Due to the merger, estimated severance and retirement costs of $38 million ($23 million after-tax) were recorded during the first nine months of 2000 which were subsequently adjusted to reflect actual costs incurred throughout the year. Operating revenues in 2001 increased $116 million primarily due to increased market prices for natural gas coupled with an increase in gas sales. Electric revenues decreased due to industrial customers purchasing energy from alternate retail electric suppliers and a downturn in industrial economic conditions, partially offset by an increase in residential sales. Operating expenses, excluding income taxes and the 2000 retirement and severance expense, increased $108 million in 2001 compared to 2000 primarily due to significantly higher market prices for natural gas purchases partially offset by a decrease in power purchased. Other income includes interest income of $127 million in 2001 associated with the affiliate note receivable arising from the October 1999 asset transfer as compared to $133 million in 2000. In addition, other income in 2001 includes favorable insurance and litigation settlements offset by reduced revenues from non-utility support services. Interest expense period-to-period decreased $11 million reflecting lower average principal balances and variable rate debt at lower rates. 17 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2001 AND 2000 IP reported an income tax provision of $97 million for the nine-month period ended September 30, 2001, compared to an income tax provision of $69 million for the 2000 period. The effective tax rates approximated 40% and 39% in 2001 and 2000, respectively. OPERATING CASH FLOW Cash flow from operating activities totaled $179 million for the nine-month period ended September 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 nine months of 2001, IP spent approximately $105 million on electric and gas construction as compared to $99 million in the first nine months of 2000. IP expects expenditures for the remainder of 2001 to approximate $50 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 $8 million in cash dividends and distributions during the nine months ended September 30, 2001, of which approximately $2 million was on its Serial Preferred Stock and approximately $6 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 dividends paid on MIPS and TOPrS were approximately $10 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 political, economic and financial market conditions; - any extended period of war or conflict involving the United States or Europe; 18 ILLINOIS POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED SEPTEMBER 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. 19 ILLINOIS POWER COMPANY QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FOR THE INTERIM PERIODS ENDED SEPTEMBER 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. 20 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 third quarter of 2001. 21 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: November 14, 2001 By: /s/ Peggy E. Carter ----------------- ---------------------------------------------- Peggy E. Carter, Vice President and Controller (Duly Authorized Officer and Principal Accounting Officer)
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