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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 March 31, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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
--- ---
All outstanding common equity of Illinois Power Company is held by its parent
Illinova Corporation, an indirect wholly owned subsidiary of Dynegy Inc.
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ILLINOIS POWER COMPANY
TABLE OF CONTENTS
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PAGE
PART I. FINANCIAL INFORMATION
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Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
March 31, 2000 and December 31, 1999................................................................3
Condensed Consolidated Statements of Operations:
For the three months ended March 31, 2000 and 1999..................................................4
Condensed Consolidated Statements of Cash Flows:
For the three months ended March 31, 2000 and 1999..................................................5
Notes to Condensed Consolidated Financial Statements....................................................6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.........................................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................................................18
Item 2. Not Applicable..............................................................................--
Item 3. Not Applicable..............................................................................--
Item 4. Not Applicable..............................................................................--
Item 5. Not Applicable..............................................................................--
Item 6. Exhibits and Reports on Form 8-K............................................................18
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
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MARCH 31, DECEMBER 31,
2000 1999
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(unaudited)
ASSETS
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UTILITY PLANT:
Electric (includes construction work in progress of $81 million and $84
million, respectively) $2,210 $2,189
Gas (includes construction work in progress of $24 million and $17
million, respectively) 723 714
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2,933 2,903
Less: accumulated depreciation 1,155 1,139
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1,778 1,764
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INVESTMENTS AND OTHER ASSETS 13 13
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CURRENT ASSETS:
Cash and cash equivalents 18 24
Accounts receivable, net 117 108
Accounts receivable, affiliates 107 84
Accrued unbilled revenue 66 83
Inventory 26 41
Prepayments and other 47 102
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381 442
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DEFERRED CHARGES AND OTHER:
Transition period cost recovery 308 320
Note receivable, affiliate 2,262 2,598
Other 161 161
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2,731 3,079
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$4,903 $5,298
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CAPITAL AND LIABILITIES
CAPITALIZATION:
Common stock -- no par value, 100,000,000 shares authorized:
75,643,937 shares issued $1,274 $1,274
Retained earnings - accumulated since January 1, 1999 75 55
Less: 12,751,724 shares of common stock in treasury, at cost 287 287
Less: capital stock expense 7 7
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1,055 1,035
Preferred stock 46 46
Mandatorily redeemable preferred stock 193 193
Long-term debt 1,853 1,907
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3,147 3,181
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CURRENT LIABILITIES:
Accounts payable 43 79
Accounts payable, affiliates 18 13
Accrued liabilities 103 110
Notes payable and current portion of long-term debt 228 564
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392 766
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DEFERRED CREDITS:
Deferred income taxes 1,111 1,100
Other 253 251
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1,364 1,351
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$4,903 $5,298
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</TABLE>
See notes to condensed consolidated financial statements.
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN MILLIONS)
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THREE MONTHS ENDED
MARCH 31,
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2000 1999
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OPERATING REVENUES:
Electric $ 268 $ 255
Electric interchange 1 94
Gas 116 123
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385 472
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OPERATING EXPENSES AND TAXES:
Fuel for electric plants --- 51
Power purchased 160 52
Gas purchased for resale 68 73
Other operating expenses 27 110
Retirement and severance expense 38 ---
Maintenance 12 41
Depreciation and amortization 19 44
Amortization of regulatory asset 13 2
General taxes 22 30
Income taxes (5) 14
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354 417
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OPERATING INCOME 31 55
Other income and expenses, net (16) 7
Interest income from affiliate 48 ---
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INCOME BEFORE INTEREST CHARGES 63 62
Interest expense (38) (40)
Allowance for borrowed funds used during construction --- 1
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NET INCOME 25 23
Preferred dividend requirement and other (5) (4)
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NET INCOME APPLICABLE TO SHAREHOLDER $ 20 $ 19
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</TABLE>
See notes to condensed consolidated financial statements.
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
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THREE MONTHS ENDED
MARCH 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25 $ 23
Items not affecting cash flows from operating activities:
Depreciation and amortization 34 45
Deferred income taxes 12 12
Changes in assets and liabilities resulting from operating activities:
Accounts receivable (15) 62
Inventories 15 11
Prepayments and other assets 48 (7)
Accounts payable (31) (39)
Accrued liabilities (12) (136)
Other, net 9 2
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Net cash provided by (used in) operating activities 85 (27)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31) (38)
Other, net (2) (2)
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Net cash used in investing activities (33) (40)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Affiliate notes receivable 336 ---
Repayments of long-term borrowings (94) (346)
Net change in commercial paper and money market lines of credit (296) 50
Redemption of preferred stock --- (9)
Other, net (4) (83)
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Net cash used in financing activities (58) (388)
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Net change in cash and cash equivalents (6) (455)
Cash and cash equivalents, beginning of period 24 504
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Cash and cash equivalents, end of period $ 18 $ 49
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</TABLE>
See notes to condensed consolidated financial statements.
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ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2000 AND 1999
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's ("IP")
Annual Report on Form 10-K for the year ended December 31, 1999, filed with the
SEC.
The financial statements include all material adjustments consisting of normal
recurring adjustments, which, in the opinion of management, were 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 consolidated financial statements in conformity with generally accepted
accounting principles requires management to develop estimates and 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 from those estimates.
The condensed consolidated financial statements include the accounts of IP; IP
Gas Supply Company; 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 consolidated financial
statements. All nonutility operating transactions are included in the line
titled "Other Income and Expenses, Net" in IP's Condensed Consolidated
Statements of Operations.
Cash and cash equivalents include cash on hand and temporary investments
purchased with an initial maturity of three months or less. At March 31, 2000
and December 31, 1999, $13 million of such cash and cash equivalents was
restricted. This cash is reserved for use in retiring the Transitional
Funding Trust Notes issued under the provisions of P.A. 90-561 (Illinois
electric utility restructuring legislation enacted in December 1997).
NOTE 2 -- BUSINESS COMBINATION
On February 1, 2000, Dynegy, a Delaware corporation since renamed Dynegy
Holdings Inc. ("Former Dynegy"), and Illinova Corporation ("Illinova") merged in
a transaction (the "Merger") in which Former Dynegy and Illinova became wholly
owned subsidiaries of Dynegy Inc., a newly formed Illinois corporation
("Dynegy"). This Merger, which was approved by shareholders of both Former
Dynegy and Illinova on October 11, 1999, resulted in each share of Illinova
common stock, no par value per share, being converted into one share of New
Dynegy Class A common stock, no par value per share. This Merger was accounted
for under the purchase method of accounting and Former Dynegy was the acquirer
for accounting purposes. IP continues to be a wholly owned subsidiary of
Illinova, but is ultimately subject to control by the Dynegy Board of Directors.
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.
As part of the Merger, severance and retirement costs of $38 million ($23
million after-tax) were recorded in the first quarter 2000. As of March 31,
2000, approximately 134 employees were either severed or have retired as a
result of the Merger. The severance/retirement plan is being executed
pursuant to IP's plan and related actions are expected to be substantially
complete by the end of 2000.
NOTE 3 -- AFFILIATED COMPANIES
Effective October 1, 1999 IP transferred its wholly owned fossil generating
assets and other generation-related assets and liabilities at net book value, to
Illinova, in exchange for an unsecured note receivable of $2.8 billion. Such
assets were subsequently transferred by Illinova to a separate subsidiary, which
was later renamed Dynegy Midwest Generation, Inc. ("DMG"). The note matures on
September 30, 2009 and bears interest at an annual rate of 7.5%, due
semiannually in April and October. At March 31, 2000, principal and accrued
interest outstanding under the note receivable approximated
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$2.3 billion and $99 million, respectively. During 2000, IP has recognized $48
million interest income from Illinova on the note.
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. In the first quarter of 2000,
operating revenue derived from transactions with affiliates approximated $6
million and aggregate operating expenses charged by affiliates approximated $138
million. 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, providing IP the right to
purchase power from DMG for a primary term extending through December 31, 2004,
with provisions to extend the PPA thereafter on an annual basis, subject to
concurrence by both parties. The PPA defines the terms and conditions under
which 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 the
affiliates exchange services such as financial, legal, information technology
and human resources as well as shared facility space. IP charges its fully
distributed costs and does not receive revenue from the agreement.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
LEGAL AND ENVIRONMENTAL ISSUES.
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 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 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 April 19,
2000, a trial date of November, 2001 was 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. Management 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, Management 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.
Management 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.
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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" ("BACT") (or
equivalent) at the Baldwin Station and possibly at the other three plants as
well.
Management believes that the EPA's and DOJ's claims are without merit, and that
the ultimate resolution of this lawsuit will not have a material adverse effect
on IP's financial position or results of operations.
MANUFACTURED GAS PLANTS ("MGP"). IP's estimated liability for MGP site
remediation is $57 million. This amount represents IP's current estimate of the
costs it will incur to remediate the 24 MGP sites for which it is responsible.
Because of the unknown and unique characteristics at each site, IP cannot
currently determine its ultimate liability for remediation of the sites. In
October 1995, IP initiated litigation against a number of its insurance
carriers. Settlement proceeds recovered from these carriers offset a 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 percent 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 percent in 2000 through 2004 (which increases to 8.5% in 2000 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 - RATE ADJUSTMENT PROVISIONS. P.A. 90-561 gave IP's residential
customers a 15 percent decrease in base electric rates beginning August 1, 1998,
and an additional 5 percent decrease effective on May 1, 2002. The rate
decreases result in expected revenue reductions of approximately $75 million in
each of the years 2000 and 2001, approximately $92 million in 2002, and
approximately $101 million in 2003 and 2004, based on projected consumption.
P.A. 90-561 - DIRECT ACCESS PROVISIONS. Beginning in October 1999, customers
with demand greater than 4 MW at a single site and customers with at least 10
sites having aggregate total demand of at least 9.5 MW were free to choose their
electric generation suppliers ("direct access"). Direct access for remaining
non-residential customers occurs in two phases: customers representing one-third
of the remaining load in the non-residential class in October 1999 and customers
representing the entire remaining non-residential load on December 31, 2000.
Direct access will be available to all residential customers in May 2002. IP
remains obligated to serve all customers who continue to take service from IP at
tariff rates and remains obligated to provide delivery service to all customers
at regulated rates. The transition charges departing customers must pay to IP
are not designed to hold IP completely harmless from resulting revenue loss
because of the mitigation factor.
Although the specified residential rate reductions and the introduction of
direct access will lead to lower electric service revenues, P.A. 90-561 is
designed to protect the financial integrity of electric utilities in three
principal ways:
1) Departing customers are obligated to pay transition charges, based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years by the
ICC.
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2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments; and
3) The ROE of utilities is managed through application of floor and ceiling
test rules contained in P.A. 90-561 described elsewhere herein.
The extent to which revenues are affected by P.A. 90-561 will depend on a number
of factors including future market prices for wholesale and retail energy, and
load growth and demand levels in the current IP service territory. The impact on
net income will depend on, among other things, the amount of revenues earned and
the cost of doing business.
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 16, 1998, the FERC issued an order
authorizing the creation of a MISO. The goals of this joint undertaking are: 1)
to put in place a tariff allowing easy and nondiscriminatory access to
transmission facilities in a multi-state region, 2) to enhance regional
reliability, and 3) to establish an entity that operates independently of any
transmission owner(s) or other market participants, thus furthering competition
in the wholesale generation market consistent with the objectives of the FERC's
Order No. 888. Since January 1998, five other transmission-owning entities
joined the MISO. The MISO has a stated goal to be fully operational by June 1,
2001.
As a MISO member, IP provides guarantees of up to $10 million to facilitate MISO
access to bank lines of credit during the MISO startup phase.
OTHER COMMITMENTS AND CONTINGENCIES.
INTERNAL REVENUE SERVICE AUDIT. The Internal Revenue Service is currently
auditing Illinova's federal income tax returns for the years 1994 through 1997.
IP's operations were included in the consolidated federal income tax returns
filed by Illinova during those periods. Management believes that the ultimate
resolution of these proceedings will not have a material adverse effect on IP's
financial position or results of operations.
.
NOTE 5 -- SEGMENT INFORMATION
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. In previous periods, IP was also engaged in the generation of electric
energy. As previously discussed, effective October 1, 1999, IP transferred its
fossil-fueled generating assets to Illinova. Additionally, as a condition
precedent to the Merger, IP sold its interest in the Clinton Nuclear Power
Station to AmerGen. As a result of these enterprise changes, the structure of
IP's internal organization has constricted resulting in a single prospective
reportable segment. For comparability purposes, results for 2000 should be
compared with the Customer Service segment in previous periods.
During the 1999 period, IP's operations were divided into four reportable
segments: Customer Service, Wholesale Energy, Nuclear and Other.
The business groups and their principal services were as follows:
- - Customer Service Business Group - transmission, distribution, and sale of
electric energy; distribution, transportation, and sale of natural gas in
Illinois.
- - Wholesale Energy Business Group - fossil-fueled electric generation in
Illinois, wholesale electricity transactions throughout the United States,
and dispatching activities.
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- - Nuclear Generation Business Group - nuclear-fueled electric generation in
Illinois.
- - Other - This category included the financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services. Also included in this group was specialized support
functions, including information technology, human resources, environmental
resources, purchasing and materials management, and public affairs.
Generally, Illinois Power accounts for intercompany transactions at prevailing
rates or fully distributed costs. Operating segment information for the
three-month period ended March 31, 1999 is presented below.
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ILLINOIS POWER'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 1999
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CUSTOMER WHOLESALE
SERVICE ENERGY NUCLEAR OTHER TOTAL
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(IN MILLIONS)
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Unaffiliated domestic revenues $ 377 $ 94 $ 1 $ --- $ 472
Intersegment domestic revenues (a) --- 136 (1) (135) ---
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Total revenues 377 230 --- (135) 472
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Depreciation and amortization 18 26 2 --- 46
Other operating expenses (a) 275 127 88 (134) 356
Interest expense 19 20 1 --- 40
AFUDC --- (1) --- --- (1)
Interest and other income --- --- (1) (3) (4)
Income tax expense (benefit) 25 22 (36) 1 12
Net income (loss) after taxes $ 40 $ 36 $ (54) $ 1 $ 23
Identifiable assets:
Domestic (b) $ 2,297 $ 3,122 $ 199 $ 34 $ 5,652
Capital expenditures 23 14 --- 1 38
====================================================================================================================================
</TABLE>
(a) Intersegment revenue priced at 2.9 cents per kwh delivered for 1999.
Intersegment expense is reflected in other operating expenses for
Customer Service. Intersegment revenues and expenses are eliminated in
the Other column.
(b) Primary assets for Nuclear include decommissioning assets, shared general
and intangible plant and nuclear fuel.
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ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2000 AND 1999
The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements of IP included elsewhere
herein and with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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; IP Gas Supply, a company involved in acquiring interests in
gas and oil leases; Illinois Power Capital, L.P., a limited partnership in which
IP serves as the general partner; Illinois Power Financing I, a statutory
business trust in which IP serves as sponsor; Illinois Power Securitization
Limited Liability Company ("LLC"), a special purpose Delaware LLC whose sole
member is IP; and Illinois Power Special Purpose Trust, a special purpose
Delaware business trust whose sole owner is Illinois Power Securitization
Limited Liability Company. Effective October 1, 1999, IP's wholly owned fossil
generating assets were transferred to Illinova and Illinova contributed these
assets to Illinois Power Marketing, Inc. ("IPMI"), a wholly owned subsidiary of
Illinova, which was later renamed Dynegy Midwest Generation, Inc. ("DMG")
following the Merger. As a condition precedent to the Merger, IP sold its
interest in the Clinton Power Station to AmerGen in December 1999.
On February 1, 2000, Dynegy, a Delaware corporation since renamed Dynegy
Holdings Inc. ("Former Dynegy"), and Illinova merged in a transaction in which
Former Dynegy and Illinova became wholly-owned subsidiaries of Dynegy Inc., a
newly formed Illinois corporation ("Dynegy"). This Merger, which was approved by
shareholders of both Former Dynegy and Illinova on October 11, 1999, resulted in
each share of Illinova common stock, no par value per share, being converted
into one share of Dynegy Class A common stock, no par value per share. This
Merger was accounted for under the purchase method of accounting and Former
Dynegy was the acquirer for accounting purposes. IP continues to be a wholly
owned subsidiary of Illinova, but is ultimately subject to control by the Dynegy
Board of Directors.
IP's condensed consolidated financial statements have been 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.
BUSINESS SEGMENTS. As a result of the enterprise changes impacting IP during the
fourth quarter of 1999, IP's operations now consist of a single reportable
segment. For 2000, this segment includes the transmission, distribution, and
sale of electric energy in Illinois; and the transportation, distribution, and
sale of natural gas in Illinois. Also included in this segment are specialized
support functions, including accounting, legal, performance management,
information technology, human resources, environmental resources, purchasing and
materials management, and public affairs. For comparability purposes, results
for 2000 should be compared with the sum of the Customer Service and Other
segments from the previous period.
IP's operations were divided into four reportable segments in 1999: Customer
Service, Wholesale Energy, Nuclear and Other.
The business groups and their principal services in 1999 were as follows:
- - Customer Service Business Group - transmission, distribution, and sale of
electric energy; distribution, transportation, and sale of natural gas in
Illinois.
- - Wholesale Energy Business Group - fossil-fueled electric generation in
Illinois, wholesale electricity transactions throughout the United States,
and dispatching activities.
- - Nuclear Generation Business Group - nuclear-fueled electric generation in
Illinois.
- - Other - This category included the financial support functions such as
accounting, finance, corporate performance, audit and compliance, investor
relations, legal, corporate development, regulatory, risk management, and
tax services. Also included in this group were specialized support
functions, including information technology, human resources, environmental
resources, purchasing and materials management, and public affairs.
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UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. This Form 10-Q
contains various forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, and information that are based on management's beliefs as well as
assumptions made by and information currently available to management. When used
in this document, words such as "anticipate", "estimate", "project", "forecast"
and "expect" reflect forward-looking statements. Although IP believes that the
expectations reflected in such forward-looking statements are reasonable; it can
give no assurance that such expectations will prove to have been correct. Such
statements are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated, projected, forecasted or expected. Among the key risk
factors that may have a direct bearing on IP's results of operations and
financial condition are:
- - Competitive practices in the industries in which IP competes;
- - Fluctuations in commodity prices for electricity and/or natural gas;
- - Operational and systems risks;
- - Environmental liabilities which are not covered by indemnity or insurance;
- - General economic and capital market conditions, including fluctuations in
interest rates; and
- - The impact of current and future laws and governmental regulations, whether
federally or state imposed (particularly environmental regulations and
further changes to energy deregulation), affecting the energy industry in
general, and IP's operations in particular.
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.
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 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 provide for an obligation by AmerGen to
acquire replacement power for IP in the event of a curtailment or shutdown at
the Clinton Power Station. 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.
12
<PAGE>
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 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.
LIQUIDITY AND CAPITAL RESOURCES
IP has historically emphasized intellectual solutions to solving business
issues. 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 the Company'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 operation, IP is now
focused on delivering reliable transmission 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.
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 the fossil-fueled generating
assets. The note matures on September 30, 2009, and bears interest at an annual
rate of 7.5 percent, due semiannually in April and October. Principal
outstanding under this note totaled $2.3 billion at March 31, 2000. Principal
repayments and interest payments accruing under this arrangement provide IP with
a significant source of liquidity to meet its prospective operating and capital
expenditure requirements.
COMMERCIAL PAPER AND LINES OF CREDITS. At March 31, 2000, IP had commercial
paper outstanding in the amount of $7 million. Remaining availability under
two credit agreements totaled $343 million. IP believes additional financing
arrangements can be obtained at reasonable terms, if required.
MORTGAGE. Aggregate principal outstanding under IP's New Mortgage Bonds
approximated $1.2 billion at March 31, 2000, bearing interest ranging from 5.4
percent to 7.5 percent per annum. At March 31, 2000, IP had unsecured
non-mortgage-borrowing capacity totaling approximately $483 million.
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. 90-651. Per annum interest on these notes averages
approximately 5.4 percent. IP is retiring the principal outstanding under these
notes through quarterly payments of $21.6 million.
DIVIDENDS. Under the Restated Articles of Incorporation, common stock dividends
are subject to the preferential rights of the holders of preferred and
preference stock. IP's retained earnings balance is expected to be sufficient
during 2000 to support payment of all scheduled preferred dividends.
PREFERRED SECURITIES OF SUBSIDIARY TRUST. Wholly owned subsidiaries of IP have
outstanding $193 million aggregate liquidation amount of Subordinated Capital
Income Securities issued in two private transactions. Dynegy has issued a notice
of redemption on May 31, 2000 for $93 million of tax advantaged monthly income
preferred securities issued at 9.45 percent, having a liquidation preference of
$25 per share. The Trust Originated Preferred Securities ("TOPrS") were issued
at 8 percent with a $25 per share liquidation preference. The TOPrS mature on
January 31, 2045 and may be redeemed at IP's option, in whole or in part, from
time to time on or after January 31, 2001.
13
<PAGE>
CAPITAL ASSET PROGRAM. Construction expenditures for the first quarter of
2000 were approximately $31 million. IP estimates that it will spend
approximately $132 million on construction for the remainder of 2000. IP
construction expenditures for 2001 through 2004 are expected to total
approximately $760 million. Additional expenditures may be required during
this period to accommodate the transition to a competitive environment,
environmental compliance, system upgrades, and other costs that cannot be
determined at this time.
YEAR 2000 ISSUES. IP completed all phases of the Year 2000 Program relative to
computer systems and technology infrastructure considered essential to IP's
business prior to the event. The year 2000 event passed without significant
incident. IP's contingency plans are designed to minimize any disruptions or
other adverse effects resulting from unexpected incompatibilities regarding core
systems and business applications and to facilitate the early identification and
remediation of system problems that manifest themselves after December 31, 1999.
To date, no significant items have been identified. IP continues to assess, test
and remediate business applications and technology infrastructure that were
previously determined to be other than essential to core business operations.
The extent of these activities is very insignificant to IP's overall business.
CONCLUSION
The Company continues to believe that it will be able to meet all foreseeable
cash requirements, including working capital, capital expenditures and debt
service, from operating cash flow, supplemented by borrowings under its various
credit facilities and other sources of liquidity.
14
<PAGE>
RESULTS OF OPERATIONS
Provided below is a tabular presentation of certain IP operating and financial
statistics for the three-month periods ended March 31, 2000 and 1999,
respectively.
<TABLE>
<CAPTION>
=======================================================================================================
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2000 1999
----------------- ----------------
(IN MILLIONS)
<S> <C> <C>
ELECTRIC SALES REVENUES -
Residential $ 93 $ 95
Commercial 75 72
Industrial 84 77
Other 8 8
-------------- --------------
Revenues from ultimate consumers 260 252
Interchange 1 94
Transmission/Wheeling 8 3
-------------- --------------
Total Electric Revenues $ 269 $ 349
============== ==============
ELECTRIC SALES IN KWH (MILLIONS) -
Residential 1,236 1,288
Commercial 1,041 1,017
Industrial 2,098 1,969
Other 92 98
--------------- ---------------
Sales to ultimate consumers 4,467 4,372
Interchange 47 1,304
--------------- ---------------
Total Electric Sales 4,514 5,676
=============== ===============
GAS SALES REVENUES -
Residential $ 76 $ 85
Commercial 28 30
Industrial 8 5
Other 1 1
--------------- ---------------
Revenues from ultimate consumers 113 121
Transportation of customer-owned gas 1 1
Miscellaneous 2 1
--------------- ---------------
Total Gas Revenues $ 116 $ 123
============== ==============
GAS SALES IN THERMS (MILLIONS) -
Residential 145 169
Commercial 61 68
Industrial 24 14
--------------- ---------------
Sales to ultimate consumers 230 251
Transportation of customer-owned gas 75 78
--------------- ---------------
Total gas sold and transported 305 329
Interdepartmental sales 6 4
--------------- ---------------
Total Gas Delivered 311 333
=============== ===============
=======================================================================================================
</TABLE>
15
<PAGE>
THREE-MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
For the first quarter ended March 31, 2000, IP reported net income of $25
million, compared with first quarter 1999 net income of $23 million.
Non-recurring charges totaling $38 million ($23 million after-tax) relating
to retirement and severance costs associated with the Merger impacted the
2000 results. The 1999 quarterly results include Clinton operations and
maintenance expenses of $64 million ($38 million after-tax) and a
non-recurring contract pre-settlement gain of $61 million ($37 million
after-tax). After adjusting for these non-recurring charges and gains, and
deleting the effect of 1999 Clinton operation and maintenance expenses,
recurring net income for the first quarter of 2000 totaled approximately $48
million, compared to approximately $24 million in the same prior year
quarter. Other operational factors impacting comparability of results
period-to-period include:
- - market purchases of power during the 1999 period as a result of the
extended Clinton outage during that period,
- - recognition of operational expenses in the 1999 period associated with
the fossil generation assets, and
- - contractual terms associated with the purchased power from AmerGen and DMG
in the 2000 period.
Operating income, excluding income taxes, and the adjustments for the items
identified above was $64 million for the first quarter ended March 31, 2000
compared to $72 million for first quarter of 1999. The difference is primarily
due to decreases in fuel, operation and maintenance expenses, and depreciation
as a result of the transfer of the fossil generating assets, offset by an
increase in purchased power expense.
Other income includes interest income associated with the affiliate note
receivable of $48 million in 2000 arising from the October 1999 asset transfer.
Interest expense period-to-period decreased $2 million reflecting lower average
principal balances, partially offset by higher average rates.
IP reported an income tax provision of $13 million for the three-month period
ended March 31, 2000, compared to an income tax provision of $12 million for the
1999 period. The effective tax rates approximated 35 and 34 percent in 2000 and
1999, respectively. The differences between the aforementioned effective tax
rates and the statutory tax rate of 40 percent for both periods result
principally from the tax deductibility of the dividends on company obligated
mandatorily redeemable preferred securities.
OPERATING CASH FLOW
Cash flow from operating activities totaled $85 million for the three-month
period ended March 31, 2000, compared to a use of cash of ($27) million reported
in the 1999 period. Changes in operating cash flow reflect the operating results
previously discussed herein. Also affecting cash flow for 2000 was a decrease in
prepayments attributable to an income tax refund and 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 quarter of 2000, IP spent approximately $31 million on electric
and gas construction as compared to $38 million in the same quarter of 1999. IP
expects expenditures for the remainder of the current year to approximate $132
million.
DIVIDEND REQUIREMENTS
The holders of the IP Serial Preferred Stock are entitled to receive dividends
if, when and as declared by the Board of Directors of the Company out of funds
legally available therefore. The Company paid approximately $5 million in cash
16
<PAGE>
dividends and distributions during the three-months ended March 31, 2000, of
which approximately $1 million was on its Preferred Stock. In addition, IP paid
dividends on its Monthly Income Preferred Securities (MIPS) and Trust Originated
Preferred Securities (TOPrS) of approximately $4 million. During the same
quarter of 1999, dividends paid on MIPS and TOPrS approximated $4 million.
17
<PAGE>
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) The following instruments and documents are included as exhibits to this
Form 10-Q.
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
12 Computation of ratio of earnings to fixed charges
27 Financial Data Schedule UT (filed only electronically with the SEC)
</TABLE>
(b) Current Report on Form 8-K/A, Commission File No. 1-3004, dated April 6,
2000, relating to a change in independent accountants from
PricewaterhouseCoopers LLP to Arthur Andersen LLP.
18
<PAGE>
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 and thereunto duly authorized.
Illinois Power Company
Date: May 15, 2000 By: /s/ Peggy E. Carter
------------- ---------------------------
Peggy E. Carter, Controller
(Principal Accounting Officer)
19
<PAGE>
EXHIBIT 12
ILLINOIS POWER COMPANY
STATEMENT OF COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
<TABLE>
<CAPTION>
Twelve Three
Months Ended Months Ended
(Millions of Dollars) March March
2000 2000
---------------- -----------------
<S> <C> <C>
Earnings Available for Fixed Charges:
Net Income $115 $25
Add:
Income Taxes:
Current 48 ---
Deferred - Net (11) (5)
Allocated income taxes 37 18
Investment tax credit - deferred (1) ---
Interest on long-term debt 126 30
Amortization of debt expense and
premium-net, and other interest charges 22 9
One-third of all rentals (Estimated to be
representative of the interest component) 4 1
Interest on in-core fuel 3 ---
---------------- -----------------
Earnings available for fixed charges $343 $78
================ =================
Fixed charges:
Interest on long-term debt $126 $30
Amortization of debt expense and
premium-net, and other interest charges 25 9
One-third of all rentals (Estimated to be
representative of the interest component) 4 1
---------------- -----------------
Total Fixed Charges $155 $40
================ =================
Ratio of earnings to fixed charges 2.21 1.95
================ =================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet, income statement, and cash flow statement of Illinois Power Company and
is qualified in its entirety by reference to the balance sheet, income
statement, and cash flow statement of Illinois Power Company.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,778
<OTHER-PROPERTY-AND-INVEST> 13
<TOTAL-CURRENT-ASSETS> 381
<TOTAL-DEFERRED-CHARGES> 2570
<OTHER-ASSETS> 161
<TOTAL-ASSETS> 4903
<COMMON> 980
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 75
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1055
193
46
<LONG-TERM-DEBT-NET> 1853
<SHORT-TERM-NOTES> 25
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 7
<LONG-TERM-DEBT-CURRENT-PORT> 196
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,528
<TOT-CAPITALIZATION-AND-LIAB> 4,903
<GROSS-OPERATING-REVENUE> 385
<INCOME-TAX-EXPENSE> (5)
<OTHER-OPERATING-EXPENSES> 359
<TOTAL-OPERATING-EXPENSES> 354
<OPERATING-INCOME-LOSS> 31
<OTHER-INCOME-NET> 32
<INCOME-BEFORE-INTEREST-EXPEN> 63
<TOTAL-INTEREST-EXPENSE> 38
<NET-INCOME> 25
5
<EARNINGS-AVAILABLE-FOR-COMM> 20
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 30
<CASH-FLOW-OPERATIONS> 85
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
