UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15d OF THE
SECURITIES EXCHANGE ACT OF 1934
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION I 1(a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Fiscal Year Ended December 31, 1998
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from September 10, 1998 to December 31, 1998.
Registrant, State of
Incorporation, Address
Commission of Principal Executive I.R.S. Employer
File Number Offices and Telephone Number Identification No.
333-63537 Illinois Power Securitization 37-1376566
Limited Liability Company
(a Delaware Limited Liability Company)
c/o Illinois Power Company
500 S. 27th Street
Decatur, IL 62521-2200
(217) 450-2435
Illinois Power Special Purpose Trust
(Issuer of Securities)
c/o Illinois Power Company
500 S. 27th Street
Decatur, IL 62521-2200
(217) 450-2435
<PAGE>
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant: None.
Documents Incorporated by Reference
Not applicable.
2
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ILLINOIS POWER SECURITIZATION LIMITED LIABILITY COMPANY
FORM 10-K
For the Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
Part I Page
Item 1. Business 4
General 4
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of
Security Holders 6
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 9
Item 8. Financial Statements and Supplementary
Data 9
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 9
Part III
Item 10. Directors and Executive Officers of
the Registrant 10
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain
Beneficial Owners and Management 10
Item 13. Certain Relationships and Related
Transactions 10
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 10
Signatures 12
Exhibit Index 14
3
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PART I
ITEM 1. Business
General
Illinois Power Securitization Limited Liability Company (the Grantee),
is a special purpose Delaware limited liability company, whose sole member is
Illinois Power (IP). The Grantee was organized on September 10, 1998, for the
principal purposes of:
a) initially owning the Intangible Transition Property (ITP) established
by the Transitional Funding Orders (TFO), as described below,
b) entering into a Servicing Agreement with Illinois Power Company as the
Servicer in respect of the ITP,
c) assigning all of its right, title and interest in the ITP and the
Servicing Agreement to the Illinois Power Special Purpose Trust (the
Note Issuer), and
d) engaging in only those other activities incidental thereto and
necessary, suitable or convenient thereto.
The Grantee's limited liability company agreement requires it to
operate in a manner such that it should not be consolidated in the bankruptcy
estate of Illinois Power Company in the event that Illinois Power Company
becomes subject to such a proceeding.
The Grantee has no employees and has entered into a servicing agreement
with Illinois Power Company, (the Servicer). Pursuant to the Servicing
Agreement, the Servicer is responsible for servicing, managing, and receiving,
Instrument Funding Charges (IFC). In addition, the Grantee has entered into an
Administration Agreement with Illinois Power Company pursuant to which IP
performs administrative and operational duties for the Grantee.
The Grantee is a recently formed special purpose limited liability
company whose only material business conducted has been the assignment of all of
its right, title, and interest in the ITP, Servicing Agreement and certain other
related assets to the Note Issuer in exchange for the proceeds of the Notes. The
Grantee, in turn distributed the proceeds of the Notes, net of expenses, to
Illinois Power Company, in consideration of the Grantee's receipt of the ITP.
The Note Issuer is a statutory business trust formed under the laws of
the State of Delaware, with First Union Trust Company, N.A. serving as trustee
under a trust agreement. The Trust was created for the specific purpose of:
a) acquiring and owning the ITP and other Note collateral,
4
<PAGE>
b) issuing and registering the Notes,
c) pledging its interest in the ITP and other note collateral pursuant to
the terms of the Indenture,
d) making payments on the Notes,
e) distributing amounts released to the Trust and
f) performing other activities that are necessary, suitable, or
convenient to accomplish these purposes.
The Trust Agreement will not permit the trustees to engage in any
activities not directly related to the Note financing.
The only material business conducted by the Note Issuer has been the
acquisition of ITP and the Issuance on December 22, 1998 of Class A-1 through
Class A-7 (the "Notes"), with scheduled maturities ranging from 18 months to ten
years and final maturities ranging from 3 1/2 to 12 years. The specific interest
rate and maturity of each class of Notes is disclosed herein in Note 4 of the
Notes to Financial Statements attached hereto. The Notes were issued pursuant to
an Indenture between the Note Issuer and Harris Trust and Savings Bank, as
trustee (the "Indenture"). The Note Issuer has no employees.
Intangible Transition Property (ITP)
The Transitional Funding Order (the 1998 TFO) issued by the Illinois
Commerce Commission (ICC) on September 10, 1998, created and established the
1998 ITP in the amount of $1.634 billion, and authorized the imposition and
collection of the IFC charges. IFC charges constitute separate nonbypassable
usage-based charges expressed in cents per kilowatt-hour payable by customers in
an aggregate amount sufficient to repay in full the Notes, fund the
Overcollateralization Subaccount, and pay all related fees and expenses. The
1998 TFO entitles the Trust, as the assignee of the 1998 ITP from the Grantee,
to receive the payments made pursuant to the IFC Charges from all Customers
through December 31, 2008, or, if later, until the Trust has received IFC
Collections sufficient to retire all the outstanding Offered Notes and cover
related fees and expenses. Subsequent TFO's may authorize and create additional
ITP and additions to IFC charges in order to pay interest and principal on other
series of notes to be issued in connection therewith, together with related
fees, expenses and the required overcollateralization level and required capital
level established with respect to that series of notes.
In order to enhance the likelihood that the IFC collections which are
remitted to the collections account will be sufficient to make the specified
payments, the Servicing Agreement and the 1998 TFO require the Servicer to
calculate and implement adjustments to the IFC charges. Such adjustments will be
based on actual collections and updated assumptions by the Servicer as to future
usage of electricity by specified customers, future expenses relating to the
transition property, the notes and the certificates, and the rate of
delinquencies and write-offs. The initial adjustment date for the Notes is July
1, 1999.
5
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Item 2. Properties
The Grantee has no material physical properties. Its primary asset is
its ownership interest in the Trust.
The Note Issuer (the Trust) has no material physical properties. Its
primary asset is the receivable from IP for the ITP.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to Instruction I of Form 10-K.
6
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Sale of Unregistered Securities. There is no established public trading market
for the Grantee's equity securities. All of the grantee's equity is owned by
Illinois Power Company. IP established its membership interest in the grantee in
September 1998 for $1,000. Such a purchase was exempt from registration under
the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The
grantee has made no other sales of unregistered securities. The Grantee is the
sole owner of the Note Issuer.
Restricted Payments. The Indenture prohibits the Note Issuer from making any
distributions to any owner of its beneficial interests unless no default has
occurred and is continuing thereunder and that such distributions would not
cause the book value of the remaining equity of the Note Issuer to decline below
0.50% of the initial principal amount of all series of Notes issued and
outstanding. The Note Issuer will not, except as contemplated by the Basic
Documents, make any loan or advance credit to, or guarantee, endorse, or
otherwise become contingently liable in connection with the obligations, stocks
or dividends of, or own, purchase, repurchase or acquire (or agree contingently
to do so) any stock, obligations, assets or securities of, or any other interest
in, or make any capital contribution to, any other person. The Note Issuer will
not directly, or indirectly make payments to or distributions from the
Collection account except in accordance with the Indenture and Basic Documents.
As of December 31, 1998, the Note Issuer had not made any distributions to its
owner.
Use of Proceeds. The Note Issuer's Registration Statement on Form S-3, as
amended (Registration No. 333-63537), registering $864,000,000 in principal
amount of Notes was filed with the commission on December 9, 1998, and declared
effective on December 9, 1998. All Notes offered in such offering were sold by
the Trust on December 22, 1998. Merrill Lynch and Salomon Smith Barney were the
managing underwriters of the offering.
The amount of each class of Notes issued by the Trust and sold and the
respective sale prices are shown below:
Interest Principal Amount Sale
Rate Registered Price
Class A-1 Notes 5.39% $110,000,000 $109,998,933
Class A-2 Notes 5.26% 100,000,000 99,996,360
Class A-3 Notes 5.31% 80,000,000 79,999,296
Class A-4 Notes 5.34% 85,000,000 84,995,410
Class A-5 Notes 5.38% 175,000,000 174,985,405
Class A-6 Notes 5.54% 175,000,000 174,990,638
Class A-7 Notes 5.65% 139,000,000 138,950,961
----------- -----------
$864,000,000 $863,917,002
7
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From the effective date of the Registration Statement to December 31,
1998, the amount of expenses incurred for the account of the Note Issuer in
connection with the issuance and distribution of the Notes totaled $4,184,498 in
underwriting discounts and commissions, $280,192 for expenses paid to or for
underwriters, and $457,846 for other expenses for a total of $4,922,536 of
expenses. After deducting the foregoing expenses, the net proceeds to the Note
Issuer were $859,077,464. The Note Issuer believes that these are reasonable
estimates of the respective expenses incurred during this time period in
connection with the offer and sale of the Notes. No expenses were paid either
directly or indirectly to managers or affiliates of the Note Issuer during this
period.
Noteholder. As of March 27, 1999, the sole holder of record of the Notes was
Cede & Co., as nominee of the DTC. The Notes are not traded on any established
trading market.
Item 6. Selected Financial Data
Omitted pursuant to Instruction I of Form 10-K.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following analysis of the Grantee's and Note Issuer's consolidated results
of operations is in an abbreviated format pursuant to Instruction I of Form
10-K. Such analysis should be read in conjunction with the financial statements
attached hereto.
As discussed above under Item 1 (Business), the Note Issuer is a newly
organized entity established in December 1998 for limited purposes. As discussed
above under Item 5, on December 22, 1998 the Note Issuer issued Transitional
Funding Notes and transferred the next proceeds in exchange for the assignment
of all rights, title and interest in Transition Property from the Illinois Power
Securitization Limited Liability Company (Grantee), a special purpose Delaware
limited liability company, whose sole member is Illinois Power. As the Note
Issuer is restricted by its organizational documents from engaging in activities
other than those described in Item 1 (Business), income statement effects were
limited primarily to income generated from the Transition Property receivable,
interest expense on the Notes, Transition Property servicing fees and incidental
investment interest income.
In 1998, income generated from the Transition Property receivable was
$1,242,795. The Note Issuer also earned $5,677 in interest from other
investments. Interest expense of $1,185,795 relates to interest on the Notes and
the amortization of debt issuance expenses and the discount on the Notes. The
Note Issuer also incurred servicing fees of $54,000.
The Note Issuer expects to use collections of the Transition Property receivable
to make scheduled principal and interest payments on the Notes. Income earned on
the Transition Property receivable is expected to offset (1) interest expense on
the Notes, (2) amortization of debt issuance expenses and the discount on the
8
<PAGE>
Notes and (3) the fees charged by Illinois Power Company for servicing the
Transition Property receivable and providing administrative services to the Note
Issuer. For each of the years 1999 through 2008, the Note Issuer has annual
long-term debt maturities of $86.4 million.
Collections of IFC charges are currently meeting expectations. For the first
quarter of 1999, collections were sufficient to cover scheduled payments on the
Notes and related expenses. Such collections resulted in a surplus of
approximately $880,600 after deducting scheduled payments on the Notes and
related expenses. The excess collections will be applied toward future payments
on the Notes. Management believes that it is reasonable to expect future
collections of IFC charges to be sufficient to make scheduled payments on the
Notes and pay related expenses on a timely basis.
The Note Issuer does not expect any material adverse impact on the Note Issuer
or its financial position or results of operations as a result of any inability
of the computer systems that it relies on to recognize the year 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Grantee is exposed to non-trading market risk through its ownership interest
in the Trust. Market risk is the risk of loss arising from adverse changes in
market rates and prices, such as interest rates. Market risk is measured through
various means, including VaR models. VaR represents the potential losses for an
instrument or portfolio resulting from hypothetical adverse changes in market
factors for a specified time period and confidence level. It does not represent
the maximum loss that may occur. Future gains and losses will differ from those
estimated, based on actual fluctuations in market rates, operating expenses, and
the timing thereof during the year. The Grantee is exposed to interest rate risk
as a result of the Trust's issuance of fixed-rate debt in December 1998.
Interest rate risk is the exposure of an entity's financial condition to adverse
movements in interest rates. The Trust's debt portfolio VaR was calculated based
on a variance/covariance methodology using the RiskMetrics FourFifteen TM model.
VaR was calculated based on a 95 percent confidence factor and a holding period
of one business day. Interest rate risk as measured by VaR at December 31, 1998
was $4.6 million.
Item 8. Financial Statements and Supplementary Data
The financial statements and related financial information required to be filed
hereunder are indexed on page 10 of this report and are incorporated herein by
reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None.
9
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PART III
Item 10. Directors and Executive Officers of the Registrant
Omitted pursuant to Instruction I of Form 10-K.
Item 11. Executive Compensation
Omitted pursuant to Instruction I of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted pursuant to Instruction I of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Omitted pursuant to Instruction I of Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as a part of this report:
(1) Financial Statements: The following consolidated financial
statements of the Grantee and report of independent accountants
are included in Item 8, Page 9:
Page
Report of Independent Accountants 15
Consolidated Balance Sheet at
December 31, 1998 16
Consolidated Statements of Income
and Changes in Member's Equity
for the period from September 10,
1999 (date of inception) to
December 31, 1998 17
Consolidated Statements of Cash Flows
for the period from September 10,
1999 (date of inception) to
December 31, 1998 18
Notes to Consolidated Financial Statements 19
(2) Exhibits required to be filed by Item 601 of Regulation S-K:
3.1 Certificate of Formation of the Registrant (1)
3.2 Amended and Restated Limited Liability Agreement
of the Registrant (1)
4.1 Declaration of Trust of the Trust (1)
10
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4.2 Form of Transitional Funding Trust Note (1)
4.3 Indenture (2)
10.1 Sale Agreement (2)
10.2 Grant Agreement (2)
10.3 Servicing Agreement (2)
10.4 Administration Agreement (1)
10.5 Remediation Agreement (2)
23.1 Consent of PricewaterhouseCoopers LLP with respect
to the Registrant
27.1 Financial Data Schedule
(b) Reports during the quarter ended December 31, 1998 on Form 8-K since
September 10, 1998:
Report filed on Form 8-K on December 22, 1998 under Item 5 "Other
Events":
Other Events: Registrant filed corrected Form T-1, Statement of
Eligibility Under the Trust Indenture Act of 1939, of Harris
Trust and Savings Bank as Exhibit 25 to the Registration
Statement on Form S-3, as amended.
Report filed on Form 8-K on January 13, 1999 under Item 5 "Other
Events":
Other Events: Registrant filed certain exhibits in
connection with the public offering and
sale by Illinois Power Special Purpose
Trust of an aggregate principal amount of
$864,000,000 of Transitional Funding
Notes, Series 1998-1, under the
Registration Statement on Form S-3, as
amended.
- - -------------
(1) Incorporated by reference to the exhibit with the same name and
numerical designation included in the Registrant's Registration Statement on
Form S-3 No. 333-63537.
(2) Incorporated by reference to the exhibit with the same name and
numerical designation included in the Registrant's Current Report on Form 8-K
dated December 22, 1998 and filed on January 13, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ILLINOIS POWER SECURITIZATION LIMITED LIABILITY COMPANY
(REGISTRANT)
Date
By /s/Elizabeth S. Eldridge
----------------------------------
Elizabeth S. Eldridge, Manager
By /s/Douglas K. Johnson
----------------------------------
Douglas K. Johnson, Manager
By March 31, 1999
----------------------------------
Daniel L. Mortland, Manager
By ----------------------------------
Cynthia G. Steward, Manager
By ----------------------------------
Eric B. Weekes, Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
By /s/Elizabeth S. Eldridge
----------------------------------
Elizabeth S. Eldridge Manager
By /s/Douglas K. Johnson
----------------------------------
Douglas K. Johnson Manager
By March 31, 1999
----------------------------------
Daniel L. Mortland Manager
By ----------------------------------
Cynthia G. Steward Manager
By ----------------------------------
Eric B. Weekes Manager
12
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ILLINOIS POWER SECURITIZATION LIMITED LIABILITY COMPANY
(REGISTRANT)
Date
By --------------------------------
Elizabeth S. Eldridge, Manager
By --------------------------------
Douglas K. Johnson, Manager
By /s/Daniel L. Mortland March 31, 1999
----------------------------------
Daniel L. Mortland, Manager
By /s/Cynthia G. Steward
----------------------------------
Cynthia G. Steward, Manager
By /s/Eric B. Weekes
-----------------------------------
Eric B. Weekes, Manager
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on the dates indicated.
Signature Title Date
By ---------------------------------
Elizabeth S. Eldridge Manager
By ---------------------------------
Douglas K. Johnson Manager
By /s/Daniel L. Mortland March 31, 1999
----------------------------------
Daniel L. Mortland Manager
By /s/Cynthia G. Steward
----------------------------------
Cynthia G. Steward Manager
By /s/Eric B. Weekes
----------------------------------
Eric B. Weekes Manager
13
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INDEX TO EXHIBITS
Exhibit Number Description
- - -------------- -----------
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
14
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Report of Independent Accountants
February 26, 1999
To the Member of Illinois Power
Securitization Limited Liability Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, of changes in member's equity and of cash
flows present fairly, in all material respects, the financial position of
Illinois Power Securitization Limited Liability Company (the Company) and its
subsidiary at December 31, 1998, and the results of their operations and their
cash flows for the period from September 10, 1998 (date of inception) through
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/PricewaterhouseCoopers LLP
15
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Illinois Power Securitization Limited Liability Company
CONSOLIDATED BALANCE SHEET
December 31, 1998
(in thousands)
- - --------------------------------------------------------------------------------
Assets
Current Assets
- - --------------
Cash and cash equivalents $107
Current portion of receivable from IP
for Intangible Transition Property 86,400
Receivable from IP for Instrument Funding Charges 3,394
-------
Total Current Assets 89,901
Noncurrent Assets
- - -----------------
Restricted funds 4,226
Receivable from IP for Intangible Tranisition Property 775,440
Unamortized debt issuance expenses 4,827
Total Noncurrent Assets 784,493
-------
TOTAL ASSETS $ 874,394
=======
Liabilities and Member's Equity
Current Liabilities
- - -------------------
Accounts payable to IP for servicing fees 54
Accrued interest 1,173
Current portion of long term debt 86,400
-------
Total Current Liabilities 87,627
Long-term Liabilities
- - ---------------------
Accounts payable to IP for overcollateralization 11
Long-term debt 773,884
Deferred credit 4,910
-------
Total Liabilities 866,432
Member's Equity
- - ---------------
Member's equity 4,321
Less: equity contribution due from IP (1)
-------
Subtotal 4,320
Retained earnings 3,642
-------
Total Member's Equity 12,282
-------
TOTAL LIABILITIES AND MEMBER'S EQUITY $878,714
=======
The accompanying notes are an integral part of these financial statements.
16
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Illinois Power Securitization Limited Liability Company
CONSOLIDATED STATEMENT OF INCOME AND CHANGES IN MEMBER'S EQUITY
For the Period from September 10, 1998 (date of inception) to December 31, 1998
(in thousands)
- - --------------------------------------------------------------------------------
Revenues
Interest income $1,179
Miscellaneous income 69
-------
Total Revenues 1,248
Expenses
Amortization of debt discount & expense 12
Interest expense 1,173
Servicing expenses 54
-------
Total Expenses 1,239
-------
Net Income $9
=======
Member's equity at inception (September 10, 1998) -
Net income 9
Adjustment to fair value due to quasi-reorganization 3,633
Contributed equity 4,321
-------
Member's Equity at End of Period 7,963
=======
The accompanying notes are an integral part of these financial statements.
17
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Illinois Power Securitization Limited Liability Company
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period from September 10, 1998 (date of inception) to December 31, 1998
(in thousands)
- - --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $9
Items not requiring (providing) cash:
Amortization of deferred credit (12)
Amortization of debt issuance expenses and
discount on long-term debt 12
Changes in operating assets and liabilities:
Change in accounts receivable (3,395)
Change in accounts payable
Accounts payable to IP for servicing fees 54
Accrued interest 1,173
-------
Net Cash Used in Operating Activities $ (2,159)
-------
Cash Flows from Investing Activities:
Purchase of Intangible Transition Property (861,840)
Increase in deferred debt issuance expenses 4,922
-------
Net Cash Used in Investing Activities $(856,918)
--------
Cash Flows from Financing Activities:
Proceeds from issuance of Transitional Funding Notes 863,917
Debt issuance expenses (4,839)
Increase in restricted funds (4,215)
Equity contribution from IP 4,321
--------
Net Cash Provided by Financing Activities $859,184
--------
Net Increase in Cash $ 107
Cash at Inception -
-------
Cash at End of Period $ 107
=======
Noncash Transaction:
Debt issuance expenses deducted from proceeds received from
the issuance of the Transitional Funding Notes $ 4,185
Cash paid for interest: $ -
The accompanying notes are an integral part of these financial statements.
18
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Illinois Power Securitization Limited Liability Company
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements include the accounts of Illinois Power Securitization
Limited Liability Company (IPS), a special purpose Delaware limited liability
company, whose sole member is Illinois Power Company (IP). The financial
statements also include the accounts of Illinois Power Special Purpose Trust
(Trust), a special purpose Delaware business trust, whose sole owner is IPS. IP,
a subsidiary of Illinova Corporation (Illinova), is engaged in the production,
purchase, transmission, distribution and sale of electricity to a diverse base
of customers. IPS was formed on September 10, 1998, for the exclusive purposes
of (i) initially owning the "intangible transition property" (described below),
(ii) assigning all of its right, title and interest in the intangible transition
property and the Intangible Transition Property Servicing Agreement (Servicing
Agreement) to the Trust, and (iii) entering into the servicing agreement with IP
(the Servicer) in respect to the intangible transition property. The Trust was
formed on December 1, 1998, for the exclusive purpose of issuing Transitional
Funding Trust Notes (Notes) and remitting the proceeds to IPS in consideration
for the transferring of IPS' interest in the intangible transition property
(described below). IPS, in turn, remitted the net proceeds to IP in
consideration for the intangible transition property that will be vested in IPS.
The Trust is a special purpose Delaware business trust which issued Notes
secured by the intangible transition property to investors and remitted the
proceeds to IPS in consideration for the transferring of its interest in the
intangible transition property. IPS, in turn, remitted the net proceeds to IP in
consideration for IP's actions in applying for and obtaining the Transitional
Funding Order from the Illinois Commerce Commission (ICC) creating the
intangible transition property in IPS. The Notes were issued December 22,1998.
IPS was organized solely to acquire, own, hold, administer, service or enter
into agreements regarding the receipt and servicing of intangible transition
property, along with certain other related assets. The Trust was organized with
the sole purpose of limited business activities as are necessary or reasonably
related to the issuance of the Notes. IPS and the Trust are structured and are
to be operated in a manner such that even in the event of bankruptcy proceedings
against IP, the assets of IPS and the Trust will not be consolidated into the
bankruptcy estate of IP.
The intangible transition property is the separate property right, as created
under the Transitional Funding Order issued by the ICC to IP on September 10,
1998, including, without limitation, the right, title and interest to impose and
collect instrument funding charges (IFC). IFC's are non-bypassable, usage-based,
per kilowatt-hour charges to be imposed on designated consumers of electricity.
19
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Illinois Power Securitization Limited Liability Company
NOTES TO FINANCIAL STATEMENTS (Continued)
2. Summary of Accounting Policies
(a) General
IPS follows the accrual method of accounting. IPS and the Trust pays
operating expenses and liabilities from their own separate assets.
Administrative and general expenses incurred by IP on behalf of IPS or
the Trust will be reimbursed by IPS or the Trust in accordance with
the Administration Agreement approved by the ICC.
(b) Cash and Cash Equivalents
Cash and cash equivalents (stated at cost, which approximates market)
include working funds and short-term investments with original
maturities of three months.
(c) Restricted Funds
Certain proceeds derived from the sale of the Notes will be retained
for the benefit of the Trust in a Capital Subaccount. Any interest
earned on said accounts will also be retained. IPS will have the
residual interest in the Trust.
(d) Receivable from IP for Intangible Transition Property
The Trust transferred the proceeds from the sale of the Notes to IP.
IP transfers all IFC's collected to the Trust to pay principal and
interest on the Notes. The receivable will be reduced based on receipt
of IFC's from IP.
(e) Receivable from IP for Instrument Funding Charges
IP collects the IFC charges from customers and submits the charges to
the Trust. The receivable represents amounts to be submitted from IP
for payment of the Note principal, interest, required
overcollateralization, and servicing fees and expenses.
(f) Income Taxes
As a limited liability company, the member intends for IPS to be
treated as a partnership for tax purposes. Income and losses are
passed through to the member and, accordingly, there is no provision
for income taxes.
20
<PAGE>
Illinois Power Securitization Limited Liability Company
NOTES TO FINANCIAL STATEMENTS (Continued)
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(h) Unamortized Issuance Expense in Connection with the Notes
The unamortized issuance expense in connection with the Notes will be
amortized over the life of the Notes.
3. Quasi-Reorganization
In December 1998, IP's Board of Directors voted to exit Clinton Power Station
(Clinton) operation, resulting in an impairment of Clinton-related assets and
accrual of exit-related costs. Concurrent with the decision to exit Clinton,
IP's Board of Directors also voted to effect a quasi-reorganization, in which
IP's consolidated accumulated deficit in retained earnings was eliminated. A
quasi-reorganization is an accounting procedure whereby a company adjusts its
accounts to obtain a "fresh start." In a quasi-reorganization, a company
restates its assets and liabilities to their fair value, adopts accounting
pronouncements issued but not yet adopted, and eliminates any remaining deficit
in retained earnings by a transfer from other paid-in capital.
Due to the quasi-reorganization, the long-term debt liability was adjusted to
reflect fair value. This required a write-down to the book value of the
liability of approximately $3.6 million. This write-down resulted in a direct
increase to retained earnings of the Trust.
4. Long Term Debt
In December 1998, the Trust issued $864 million of notes to outside investors.
The Trust used the proceeds from the Notes to purchase the Transition Property
from IPS. The Notes are secured solely by the Transition Property. Scheduled
maturities and interest rates for the Notes at December 31, 1998 are:
21
<PAGE>
Illinois Power Securitization Limited Liability Company
NOTES TO FINANCIAL STATEMENTS (Continued)
Scheduled
Maturity Interest Amount
Class Date Rate (in thousands)
- - --------------------------------------------------------------------------------
A-1 June 2000 5.39% $110,000
A-2 June 2001 5.26% 100,000
A-3 June 2002 5.31% 80,000
A-4 June 2003 5.34% 85,000
A-5 June 2005 5.38% 175,000
A-6 June 2007 5.54% 175,000
A-7 June 2008 5.65% 139,000
$864,000
Less: Current Maturities (86,400)
Unamortized discount (83)
Write-down due to quasi-reorganization (3,633)
---------
Long-term debt $773,884
=======
The estimated fair value of the Notes was approximately $858.6 million at
December 31, 1998. The difference between the estimated fair value, and the
value after the write-down is an adjustment to long-term debt to reflect the
change in fair value that relates to the generation portion of the business. The
estimated fair value of the Notes was based on quoted market prices.
The source of repayment will be an IFC charge that has been authorized by the
ICC. This non-bypassable charge will be collected from Illinois Power Company's
residential, commercial, and industrial customers by IP, as Servicer.
Collections of the IFCs are deposited on a daily basis with the Trust in an
account maintained by a trustee of the Trust. Each quarter such monies are used
to make principal and interest payments on the Notes. The debt service agreement
includes a reserve amount that is retained for the purpose of paying principal
and interest in the event that IFC collections are insufficient. The debt
service agreement also includes an overcollaterazation account that will be used
for the purpose of retaining IFCs collected in excess of currently scheduled
principal and interest payments. Any amounts not required for debt service will
be returned to IP.
5. Significant Agreements and Related Party Transactions
Notwithstanding the non-recourse nature of the transactions, IP (individually,
as Servicer or otherwise) will be required under the transaction documents (i)
to make certain representations and warranties with respect to, among other
things, the validity of IPS' and its assignees' title to the intangible
transition property and (ii) to observe certain
22
<PAGE>
Illinois Power Securitization Limited Liability Company
NOTES TO FINANCIAL STATEMENTS (Concluded)
covenants for the benefit of IPS and its assignees. IP will also be required to
indemnify IPS and its assignees against any breaches of such representations,
warranties and covenants and to protect such parties against certain other
losses, which result from actions or inactions of IP.
IP will act as the initial servicer (in such capacity, together with any
successor-in-interest, the "Servicer") for IPS under the transaction documents.
IPS' rights under the Servicing Agreement will be assigned to the Trust. The
transaction documents will contain provisions allowing the Servicer to be
replaced under limited circumstances. The Servicer will be paid a servicing fee
in consideration for billing and collecting the IFCs on behalf of the Trust,
calculating the reconciliation and true-up adjustments and performing related
services. Such servicing fees shall be paid to the Servicer from the IFC
collections.
23
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-63537) of
our report dated February 26, 1999 appearing on page 15 of the Illinois Power
Securitization Limited Liability Company's Annual Report on Form 10-K for the
period from September 10, 1998 (date of inception) through December 31, 1998.
PricewaterhouseCoopers LLP
St. Louis, Missouri
March 29, 1999
24
<PAGE>
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