<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
Commission file number: 1-3004
ILLINOIS POWER COMPANY
(Exact name of registrant as specified in its charter)
ILLINOIS 37-0344645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 S. 27TH STREET
DECATUR, ILLINOIS 62521-2200
(Address of principal executive offices)
(Zip Code)
(217) 424-6600
(Registrant's telephone number, including area code)
WWW.ILLINOISPOWER.COM
(Registrant's home page)
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. Illinois Power is an indirect wholly owned subsidiary
of Dynegy Inc.
1
<PAGE>
ILLINOIS POWER COMPANY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
September 30, 2000 and December 31, 1999...................................3
Condensed Consolidated Statements of Operations:
For the three and nine months ended September 30, 2000 and 1999............4
Condensed Consolidated Statements of Cash Flows:
For the nine months ended September 30, 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................................13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................21
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...................................21
</TABLE>
2
<PAGE>
ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS, EXCEPT SHARE DATA)
===============================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -------------
(unaudited)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Electric (includes construction work in progress of $89 million and $84
million, respectively) $ 2,257 $ 2,189
Gas (includes construction work in progress of $14 million and $17
million, respectively) 732 714
----------- ------------
2,989 2,903
Less: accumulated depreciation 1,180 1,139
----------- ------------
1,809 1,764
----------- ------------
INVESTMENTS AND OTHER ASSETS 20 13
----------- ------------
CURRENT ASSETS:
Cash and cash equivalents 25 24
Accounts receivable, net 127 108
Accounts receivable, affiliates 94 84
Accrued unbilled revenue 70 83
Inventory 51 41
Prepayments and other 22 102
----------- ------------
389 442
----------- ------------
DEFERRED CHARGES AND OTHER:
Transition period cost recovery 285 320
Note receivable, affiliate 2,262 2,598
Other 140 161
----------- ------------
2,687 3,079
----------- ------------
$ 4,905 $ 5,298
=========== ============
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 152 55
Less: 12,751,724 shares of common stock in treasury, at cost 287 287
Less: capital stock expense 7 7
----------- ------------
1,132 1,035
Preferred stock 46 46
Mandatorily redeemable preferred stock 100 193
Long-term debt 1,809 1,907
----------- ------------
3,087 3,181
----------- ------------
CURRENT LIABILITIES:
Accounts payable 77 79
Accounts payable, affiliates 10 13
Accrued liabilities 93 110
Notes payable and current portion of long-term debt 271 564
----------- ------------
451 766
----------- ------------
DEFERRED CREDITS:
Deferred income taxes 1,116 1,100
Other 251 251
----------- ------------
1,367 1,351
----------- ------------
$ 4,905 $ 5,298
=========== ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN MILLIONS)
===============================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric $ 374 $ 386 $ 923 $ 918
Electric interchange 6 248 10 398
Gas 51 43 222 211
------- ------- ------- -------
431 677 1,155 1,527
------- ------- ------- -------
OPERATING EXPENSES AND TAXES:
Fuel for electric plants -- 78 -- 189
Power purchased 226 200 564 298
Gas purchased for resale 28 20 124 110
Other operating expenses 35 146 97 337
Retirement and severance expense -- -- 38 --
Maintenance 17 25 43 92
Depreciation and amortization 20 44 58 133
Amortization of regulatory assets 12 1 38 9
General taxes 16 25 54 78
Income taxes 18 45 9 82
------- ------- ------- -------
372 584 1,025 1,328
------- ------- ------- -------
OPERATING INCOME 59 93 130 199
Other income (expenses), net (15) 13 (51) 30
Interest income from affiliates 42 1 133 2
------- ------- ------- -------
INCOME BEFORE INTEREST CHARGES 86 107 212 231
Interest expense (33) (48) (105) (132)
Allowance for borrowed funds used
during construction -- 1 1 4
------- ------- ------- -------
NET INCOME 53 60 108 103
Preferred dividend requirement and other (2) (4) (11) (13)
------- ------- ------- -------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDER $ 51 $ 56 $ 97 $ 90
======= ======= ======= =======
Net income applicable to common shareholder $ 51 $ 56 $ 97 $ 90
Unrealized gains (losses) on securities, net
of taxes -- (1) -- 1
------- ------- ------- -------
COMPREHENSIVE INCOME $ 51 $ 55 $ 97 $ 91
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
===============================================================================
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
----- -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 108 $ 103
Items not affecting cash flows from operating activities:
Depreciation and amortization 101 144
Deferred income taxes 43 59
Changes in assets and liabilities resulting from operating activities:
Accounts receivable (16) (69)
Inventories (10) (6)
Prepayments and other assets 68 3
Accounts payable (5) (27)
Accrued liabilities (38) (93)
Other, net 9 (21)
----- -----
Net cash provided by operating activities 260 93
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (99) (163)
Other, net (3) (7)
----- -----
Net cash used in investing activities (102) (170)
----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable, affiliate 336 --
Repayments of long-term borrowings (247) (717)
Issuances of long-term borrowings -- 250
Net change in commercial paper and money market lines of credit (142) 182
Redemption of mandatorily redeemable preferred stock (93) (16)
Other, net (11) (91)
----- -----
Net cash used in financing activities (157) (392)
----- -----
Net change in cash and cash equivalents 1 (469)
Cash and cash equivalents, beginning of period 24 504
----- -----
Cash and cash equivalents, end of period $ 25 $ 35
===== =====
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 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 Company's ("IP" or the "Company") 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 to make assumptions that affect reported financial
position and results of operations and that impact the nature and extent of
disclosure, if any, of contingent assets and liabilities. Actual results
could differ from those estimates.
The condensed consolidated financial statements include the accounts of IP;
Illinois Power Capital, L. P.; Illinois Power Financing I ("IPFI"); Illinois
Power Securitization Limited Liability Company ("LLC"); and Illinois Power
Special Purpose Trust ("IPSPT"). As of May 31, 2000, the Monthly Income
Preferred Securities held by Illinois Power Capital, L.P. were redeemed and
no other debts exist within the limited partnership. All significant
intercompany balances and transactions have been eliminated from the
condensed consolidated financial statements. All nonutility operating
transactions are included in the line titled "Other income (expenses), net"
in IP's Condensed Consolidated Statements of Operations.
Cash and cash equivalents include cash on hand and temporary investments
purchased with an initial maturity of three months or less. At September 30,
2000, $15 million of such cash and cash equivalents was restricted while at
December 31, 1999, $13 million was restricted. This cash is reserved for use
in retiring the Transitional Funding Trust Notes issued under the provisions
of P.A. 90-561 (Illinois electric utility restructuring legislation enacted
in December 1997).
NOTE 2 -- BUSINESS COMBINATION
Dynegy completed its acquisition of Illinova Corporation ("Illinova") on
February 1, 2000. The merger of Dynegy and Illinova involved the creation of
a new holding company, now known as Dynegy Inc. ("Dynegy"), and two separate
but concurrent mergers. In one concurrent merger, a wholly owned subsidiary
of Dynegy Inc. merged with and into Illinova. In the other concurrent merger,
a second wholly owned subsidiary of Dynegy Inc. merged with and into former
Dynegy. As a result of these two concurrent mergers, Illinova and former
Dynegy continue to exist as wholly owned subsidiaries of Dynegy Inc., and are
referred to as Illinova Corporation and Dynegy Holdings Inc., respectively.
This 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. Dynegy accounted for the merger as a purchase of Illinova.
This accounting treatment is based on various factors present in the merger,
including the majority ownership (and voting control) of Dynegy's
shareholders following the merger, the role of Dynegy's management following
the merger and the influence of Chevron U.S.A. Inc., resulting from the size
of its ownership interest and its rights under a shareholder agreement, the
articles of incorporation and bylaws. IP continues to be a wholly owned
subsidiary of Illinova, but is ultimately subject to control by the Dynegy
Board of Directors. For accounting purposes, the effective date of the merger
was January 1, 2000. This date was selected as a result of the following
factors:
> Affirmative consent had been acquired from both shareholder groups prior to
January 1, 2000,
> All regulatory consents had been acquired prior to January 1,
2000,
> Material terms of the purchase and sale agreement for the qualifying
facilities, a condition precedent to the closing, had been negotiated on or
about January 1, 2000, and
> Board, executive, commercial, financial and regulatory oversight of Illinova's
operations had transferred to Dynegy on or about January 1, 2000.
6
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
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 of 2000. Severance
charges represented approximately $20 million ($12 million after-tax) of the
total costs incurred, of which $17 million had been paid by the end of the
third quarter. As of September 30, 2000, approximately 262 employees were
either severed or have retired as a result of the Merger. It is expected that
an additional 24 employees will be severed or retire by the end of the year.
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 contributed 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 September 30, 2000,
principal and accrued interest outstanding under the note receivable
approximated $2.3 billion and $85 million, respectively. IP has recognized
$133 million interest income from Illinova on the note in 2000, $42 million
of which was recognized for the three months ended September 30, 2000.
IP routinely conducts business with subsidiaries of Dynegy. These
transactions include the purchase or sale of electricity, natural gas and
transmission services as well as certain other services. Operating revenue
derived from transactions with affiliates approximated $14 million and $31
million for the three and nine months ended September 30, 2000, respectively.
Aggregate operating expenses charged by affiliates approximated $163 million
and $456 million for the three and nine months ended September 30, 2000,
respectively. Related party transactions have been conducted at prices and
terms similar to those available to and transacted with unrelated parties.
IP has a power purchase agreement ("PPA") with DMG that provides IP the right
to purchase power from DMG for a primary term extending through December 31,
2004. The primary term may be extended on an annual basis, subject to
concurrence by both parties. The PPA defines the terms and conditions under
which DMG provides capacity and energy to IP using a tiered pricing structure.
Effective January 1, 2000, the Dynegy consolidated group, which includes IP,
began operating under a Services and Facilities Agreement, whereby other
Dynegy affiliates exchange services with IP such as financial, legal,
information technology and human resources as well as shared facility space.
IP services are exchanged at fully distributed costs and revenue is not
recorded under this agreement.
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
7
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
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. The Company 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, the Company 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. The Company also believes
that, even if some of the activities in question were found not to qualify
for the routine exemption, there were no increases either in annual emissions
or in the maximum hourly emissions achievable at any of the units caused by
any of the activities. The regulations provide an exemption for increased
hours of operation or production rate and for increases in emissions
resulting from demand growth. Although none of the Defendants' other
facilities are covered in the Complaint and NOV, the EPA has officially
requested information concerning activities at the Defendants' Vermilion,
Wood River and Hennepin Plants. It is possible that the EPA will eventually
commence enforcement actions against those plants as well.
The EPA has the authority to seek penalties for the alleged violations in
question at the rate of up to $27,500 per day for each violation. The EPA
also will be seeking installation of "best available control technology" (or
equivalent) at the Baldwin Station and possibly at the other three plants as
well. The Company 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 the Company's financial position or results of operations.
MANUFACTURED GAS PLANTS ("MGP"). IP's estimated liability for MGP site
remediation is $56 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.
8
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
P.A. 90-561 - DIRECT ACCESS PROVISIONS. Beginning in October 1999, customers
with demand greater than 4 MW at a single site, customers with at least 10
sites having aggregate total demand of at least 9.5 MW, and customers
representing one-third of the remaining load in the non-residential class
were given the right to choose their electric generation suppliers ("direct
access"). Direct access for remaining non-residential customers occurs
December 31, 2000. Direct access will be available to all residential
customers in May 2002. IP remains obligated to serve all customers who
continue to take service from IP at tariff rates and remains obligated to
provide delivery service to all customers at regulated rates. The transition
charges that departing customers must pay to IP are not designed to hold IP
completely harmless from resulting revenue loss because of the mitigation
factor.
Although 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.
2) Utilities are provided the opportunity to lower their financing and capital
costs through the issuance of "securitized" bonds, also called transitional
funding instruments.
3) The ROE of utilities is managed through application of floor and ceiling
test rules contained in P.A. 90-561 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.
During the quarter ended September 30, 2000, some of IP's customers began
taking power and energy requirements from alternate energy suppliers.
Although there is a reduction in revenue related to this activity, there is a
corresponding reduction in purchase power costs to serve these customers.
P.A. 90-561 - INDEPENDENT SYSTEM OPERATOR ("ISO") PARTICIPATION.
Participation in an ISO by utilities serving retail customers in Illinois was
one of the requirements included in P.A. 90-561. In January 1998, IP, in
conjunction with eight other transmission-owning entities, filed with the
FERC for all approvals necessary to create and to implement the Midwest
Independent Transmission System Operator, Inc. ("MISO"). On September 20,
2000, IP announced its intention to withdraw its participation in the MISO
and to become a member of the Alliance Regional Transmission Organization
("Alliance RTO"), pending approval from necessary regulatory bodies including
FERC. On October 13, 2000, IP filed a notice of its intent to withdraw from
the MISO with FERC. If approved, IP's withdrawal from MISO would be effective
no later than December 2001. While there will be costs associated with IP's
withdrawal from the MISO, IP does not expect those costs to be material.
Being part of the Alliance RTO will provide IP greater flexibility and cost
savings while maintaining reliability in moving large amounts of electricity
across the nation's transmission grid.
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,
9
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
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 into a single
prospective 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 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.
> 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.
10
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Generally, IP accounts for intercompany transactions at prevailing rates or
fully distributed costs. Operating segment information for the three-month
period ended September 30, 1999 is presented below.
================================================================================
ILLINOIS POWER'S SEGMENT DATA FOR THE QUARTER ENDED SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
CUSTOMER WHOLESALE
SERVICE ENERGY NUCLEAR OTHER TOTAL
----------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Unaffiliated domestic revenues $ 427 $ 235 $ 15 $ -- $ 677
Intersegment domestic revenues (a) -- 98 61 (159) --
----------------------------------------------------------
Total revenues 427 333 76 (159) 677
----------------------------------------------------------
Depreciation and amortization 17 26 2 -- 45
Other operating expenses (a) 251 287 110 (154) 494
Interest expense 22 24 2 -- 48
AFUDC -- (1) -- -- (1)
Interest and miscellaneous-net -- 2 (2) (6) (6)
Income tax expense (benefit) 54 (3) (15) 1 37
Net income (loss) after taxes $ 83 $ (2) $ (21) -- $ 60
Identifiable assets:
Domestic (b) $ 2,391 $ 3,092 $ 183 $ 48 $ 5,714
Capital expenditures (c) $ 29 $ (22) $ -- $ 2 $ 9
=================================================================================================
</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.
(c) Wholesale Energy recorded a sale and lease-back of approximately $80
million of gas turbines at the Tilton Energy Center. This transaction
caused the capital expenditures to be negative for the quarter.
11
<PAGE>
ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Operating segment information for the nine months ended September 30, 1999 is
presented below.
================================================================================
ILLINOIS POWER'S SEGMENT DATA FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
CUSTOMER WHOLESALE
SERVICE ENERGY NUCLEAR OTHER TOTAL
-----------------------------------------------------------------------------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Unaffiliated domestic revenues $ 1,125 $ 380 $ 22 $ -- $ 1,527
Intersegment domestic revenues (a) -- 353 98 (451) --
-----------------------------------------------------------------------------------
Total revenues 1,125 733 120 (451) 1,527
-----------------------------------------------------------------------------------
Depreciation and amortization 60 77 5 -- 142
Other operating expenses (a) 736 549 259 (440) 1,104
Interest expense 61 65 6 -- 132
AFUDC (1) (3) -- -- (4)
Interest and miscellaneous-net -- -- (6) (9) (15)
Income tax expense (benefit) 104 15 (57) 3 65
Net income (loss) after taxes $ 165 $ 30 $ (87) $ (5) $ 103
Identifiable assets:
Domestic (b) $ 2,391 $ 3,092 $ 183 $ 48 $ 5,714
Capital expenditures $ 79 $ 79 $ -- $ 5 $ 163
===========================================================================================================================
</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.
12
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 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, including the notes relating thereto, 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; Illinois Power Capital, L.P., a limited
partnership in which IP serves as the general partner; Illinois Power
Financing I, a statutory business trust in which IP serves as sponsor;
Illinois Power Securitization Limited Liability Company, a special purpose
Delaware LLC whose sole member is IP; and Illinois Power Special Purpose
Trust, a special purpose Delaware business trust whose sole owner is Illinois
Power Securitization LLC. 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.
following the Merger. As a condition precedent to the Merger, IP sold its
interest in the Clinton Power Station to AmerGen in December 1999. As of May
31, 2000, the Monthly Income Preferred Securities held by Illinois Power
Capital, L.P. were redeemed and no other debts exist within the limited
partnership.
Dynegy completed its acquisition of Illinova Corporation ("Illinova") on
February 1, 2000. The merger of Dynegy and Illinova involved the creation of
a new holding company, now known as Dynegy Inc. ("Dynegy"), and two separate
but concurrent mergers. In one concurrent merger, a wholly owned subsidiary
of Dynegy Inc. merged with and into Illinova. In the other concurrent merger,
a second wholly owned subsidiary of Dynegy Inc. merged with and into former
Dynegy. As a result of these two concurrent mergers, Illinova and former
Dynegy continue to exist as wholly owned subsidiaries of Dynegy Inc., and are
referred to as Illinova Corporation and Dynegy Holdings Inc., respectively.
This 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. Dynegy accounted for the merger as a purchase of Illinova.
This accounting treatment is based on various factors present in the merger,
including the majority ownership (and voting control) of Dynegy's
shareholders following the merger, the role of Dynegy's management following
the merger and the influence of Chevron U.S.A. Inc., resulting from the size
of its ownership interest and its rights under a shareholder agreement, the
articles of incorporation and bylaws. 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
prospective 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 Customer Service segment 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.
13
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION. IP's reports,
filings and other public announcements often include statements reflecting
assumptions, expectations, projections, intentions or beliefs about future
events. These statements are intended as "forward-looking statements" under
the Private Securities Litigation Reform Act of 1995. You can identify these
statements by the fact that they do not relate strictly to historical or
current facts. They use words such as "anticipate," "estimate," "project,"
"forecast," "may," "should," "expect" and other words of similar meaning. In
particular, these include, but are not limited to, statements relating to
projected operating or financial results.
Any or all of IP's forward-looking statements may turn out to be wrong. They
can be affected by inaccurate assumptions or by known or unknown risks and
uncertainties, including the following:
> the timing and extent of changes in commodity prices for natural gas and
electricity;
> competitive practices in the industries where IP competes;
> the effects of deregulation of the energy industry and the rules and
regulations adopted in connection therewith;
> general United States and Illinois economic conditions, including
fluctuations in interest rates;
> operational factors affecting the ongoing commercial operations of IP's
transmission, transportation and distribution facilities, including
catastrophic weather related damage, unscheduled repairs or workforce
issues;
> cost and other effects of legal and administrative proceedings,
settlements, investigations or claims, including environmental liabilities
that may not be covered by indemnity or insurance; and
> other regulatory or legislative developments that affect the energy
industry in general and IP's operations in particular.
Many of these factors will be important in determining IP's actual future
results. Consequently, no forward-looking statement can be guaranteed. IP's
actual future results may vary materially from those expressed or implied in
any forward-looking statements.
All of IP's forward-looking statements, whether written or oral, are
expressly qualified by these cautionary statements and any other cautionary
statements that may accompany such forward-looking statements. In addition,
IP disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date of this report.
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 obligate AmerGen to
acquire replacement power for IP in the event of a curtailment or
14
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
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.
SEASONALITY. IP's revenue and operating margin are impacted by seasonal
factors that affect sales volumes of electricity and gas. Typically, revenues
from sales of electricity are higher in the summer months resulting from the
summer cooling season; whereas, gas revenues are higher in the winter months
resulting from the winter heating season.
EFFECT OF INFLATION. Although IP's operations are affected by general
economic trends, management does not believe inflation has had a material
effect on IP's results of operations.
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 September 30, 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 September 30, 2000, IP had
commercial paper outstanding in the amount of $185 million. Remaining
availability under a credit agreement totaled $115 million. IP believes
additional financing arrangements can be obtained at reasonable terms, if
required.
MORTGAGE. Aggregate principal outstanding under IP's New Mortgage Bonds
approximated $1.1 billion at September 30, 2000, bearing interest ranging
from 5.4 percent to 7.5 percent per annum. At September 30, 2000, IP had
unsecured non-mortgage-borrowing capacity totaling approximately $305 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 IP's 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.
15
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
PREFERRED SECURITIES OF SUBSIDIARY TRUST. IPFI, a wholly owned subsidiary of
IP, has $100 million aggregate liquidation amount of Subordinated Capital
Income Securities outstanding at September 30, 2000, which were issued in a
private transaction. These 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. IP redeemed all
$93 million of the tax advantaged Monthly Income Preferred Securities held by
Illinois Power Capital, L.P. on May 31, 2000.
CAPITAL ASSET PROGRAM. Construction expenditures for the nine months ended
September 2000 were approximately $99 million. IP estimates that it will
spend approximately $65 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.
REGULATORY MATTERS - 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.
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.
16
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
RESULTS OF OPERATIONS
Provided below is an unaudited tabular presentation of certain IP operating
and financial statistics for the three month periods ended September 30, 2000
and 1999, respectively.
================================================================================
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
----------------- ----------------
(IN MILLIONS)
<S> <C> <C>
ELECTRIC SALES REVENUES -
Residential $ 144 $ 152
Commercial 106 107
Industrial 100 107
Other 11 11
--------------- ---------------
Revenues from ultimate consumers 361 377
Interchange 6 248
Transmission/Wheeling 13 9
--------------- ---------------
Total Electric Revenues $ 380 $ 634
============== ==============
ELECTRIC SALES IN KWH (MILLIONS) -
Residential 1,593 1,666
Commercial 1,204 1,185
Industrial 2,432 2,260
Other 94 98
--------------- ---------------
Sales to ultimate consumers 5,323 5,209
Interchange 1 3,162
--------------- ---------------
Total Electric Sales 5,324 8,371
=============== ===============
GAS SALES REVENUES -
Residential $ 26 $ 22
Commercial 11 8
Industrial 9 6
Other - 1
--------------- ---------------
Revenues from ultimate consumers 46 37
Transportation of customer-owned gas 1 1
Interdepartmental sales 4 5
--------------- ---------------
Total Gas Revenues $ 51 $ 43
============== ==============
GAS SALES IN THERMS (MILLIONS) -
Residential 21 19
Commercial 12 11
Industrial 13 16
--------------- ---------------
Sales to ultimate consumers 46 46
Transportation of customer-owned gas 56 58
--------------- ---------------
Total gas sold and transported 102 104
Interdepartmental sales 5 17
--------------- ---------------
Total Gas Sales 107 121
=============== ===============
================================================================================
</TABLE>
17
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Provided below is an unaudited tabular presentation of certain IP operating and
financial statistics for the nine month periods ended September 30, 2000 and
1999, respectively.
================================================================================
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
----------------- ----------------
(IN MILLIONS)
<S> <C> <C>
ELECTRIC SALES REVENUES -
Residential $ 327 $ 337
Commercial 260 259
Industrial 277 279
Other 28 28
--------------- ---------------
Revenues from ultimate consumers 892 903
Interchange 10 398
Transmission/Wheeling 31 15
--------------- ---------------
Total Electric Revenues $ 933 $ 1,316
============== ==============
ELECTRIC SALES IN KWH (MILLIONS) -
Residential 3,870 3,972
Commercial 3,257 3,201
Industrial 6,844 6,550
Other 274 286
--------------- ---------------
Sales to ultimate consumers 14,245 14,009
Interchange 51 5,815
--------------- ---------------
Total Electric Sales 14,296 19,824
=============== ===============
GAS SALES REVENUES -
Residential $ 134 $ 133
Commercial 49 47
Industrial 24 18
Other 2 2
--------------- ---------------
Revenues from ultimate consumers 209 200
Transportation of customer-owned gas 4 4
Miscellaneous 9 7
--------------- ---------------
Total Gas Revenues $ 222 $ 211
============== ==============
GAS SALES IN THERMS (MILLIONS) -
Residential 204 222
Commercial 88 94
Industrial 54 53
--------------- ---------------
Sales to ultimate consumers 346 369
Transportation of customer-owned gas 195 203
--------------- ---------------
Total gas sold and transported 541 572
Interdepartmental sales 18 25
--------------- ---------------
Total Gas Sales 559 597
=============== ===============
================================================================================
</TABLE>
18
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
THREE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
For the quarter ended September 30, 2000, IP reported net income of $53
million, compared with third quarter 1999 net income of $60 million.
Operational factors impacting comparability of results period-to-period
include:
> 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 revenues in 2000 decreased $246 million primarily due to decreased
electric interchange sales. Although gas sales were down from 1999, gas
revenues were slightly higher due to the increased market price of gas.
Operating expenses excluding income taxes decreased $185 million in 2000
compared to 1999 due to reductions in production, operating, maintenance,
depreciation and amortization, and general taxes as a result of the transfer
of fossil assets in October 1999. This decrease is partially offset by
increases in purchased power, gas purchases, and regulatory asset
amortization.
Other income includes $42 million of interest income associated with the
affiliate note receivable in 2000 arising from the October 1999 asset
transfer. Interest expense period-to-period decreased $15 million reflecting
lower average principal balances, partially offset by higher average rates.
IP reported an income tax provision of $36 million for the three-month period
ended September 30, 2000, compared to an income tax provision of $37 million
for the 1999 period. The effective tax rates approximated 40 and 38 percent
in 2000 and 1999, respectively.
DIVIDEND REQUIREMENTS
The holders of the IP Serial Preferred Stock are entitled to receive
dividends if and when, as declared by the Board of Directors of the Company
out of funds legally available therefore. The Company paid approximately $2
million in cash dividends and distributions during the three-months ended
September 30, 2000, of which approximately $.5 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 $1.5 million. During the same quarter of 1999, dividends paid
on MIPS and TOPrS approximated $4 million.
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
For the nine months ended September 30, 2000, IP reported net income of $108
million, compared with net income of $103 million during the first nine
months of 1999. 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 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 nine months of 2000 totaled approximately
$131 million, compared to approximately $104 million in the same prior year
period. 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 revenues in 2000 excluding the contract settlement adjustment
identified above decreased $311 million primarily due to decreased electric
interchange sales. Although gas sales were down from 1999, gas revenues were
slightly higher due to the increased market price of gas.
19
<PAGE>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Operating expenses in 2000 excluding income taxes and the expense adjustments
identified above decreased $204 million. The increase in power purchased was
offset by reductions in production, operating, maintenance, depreciation and
amortization, and general taxes due to the transfer of fossil assets in
October 1999.
Other income includes $133 million of interest income associated with the
affiliate note receivable in 2000 arising from the October 1999 asset
transfer. Interest expense period-to-period decreased $27 million reflecting
lower average principal balances, partially offset by higher average rates.
IP reported an income tax provision of $69 million for the nine-month period
ended September 30, 2000, compared to an income tax provision of $65 million
for the 1999 period. The effective tax rates approximated 39 percent in 2000
and 1999. The differences between the aforementioned effective tax rate 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 and depreciation not normalized.
OPERATING CASH FLOW
Cash flow from operating activities totaled $260 million for the nine-month
period ended September 30, 2000, compared to $93 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 an income
tax refund and cash received from associated companies resulting in a
decrease in receivables. Affecting cash flow for 1999 was cash paid to
decrease miscellaneous payables and accrued liabilities and reductions in
deferred revenue.
CAPITAL EXPENDITURES AND INVESTING ACTIVITIES
During the nine-months ended September 30, 2000, IP spent approximately $99
million on electric and gas construction compared to $163 million in the same
period of 1999. IP expects expenditures for the remainder of the current year
to approximate $65 million.
DIVIDEND REQUIREMENTS
The holders of the IP Serial Preferred Stock are entitled to receive
dividends if and when, as declared by the Board of Directors of the Company
out of funds legally available therefore. The Company paid approximately $11
million in cash dividends and distributions during the nine-months ended
September 30, 2000, of which approximately $1 million was on its Preferred
Stock. In addition, IP paid dividends on its MIPS and TOPrS of approximately
$10 million. During the same period of 1999, dividends paid on MIPS and TOPrS
approximated $13 million.
20
<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>
27 Financial Data Schedule-Schedule UT (filed only electronically with the SEC)
</TABLE>
(b) No Form 8-Ks, Commission File No. 1-3004, were filed during the third
quarter of 2000.
21
<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 thereunto duly authorized.
Illinois Power Company
Date: November 14, 2000 By: /s/ Peggy E. Carter
----------------- -------------------------------
Peggy E. Carter, Controller
(Duly Authorized Officer and
Principal Accounting Officer)
22
