-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hy1aoL/K61IvY7y/Doitr1mg+VUf83N07QXixATM5bKYu3nyHFdzvX81d8gZKUU3 5C0PVrchMiV3dJ82L2VrXw== 0000912057-00-024672.txt : 20000516 0000912057-00-024672.hdr.sgml : 20000516 ACCESSION NUMBER: 0000912057-00-024672 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ILLINOIS POWER CO CENTRAL INDEX KEY: 0000049816 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 370344645 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03004 FILM NUMBER: 633935 BUSINESS ADDRESS: STREET 1: 500 S 27TH ST STREET 2: C/O HARRIS TRUST & SAVINGS BANK CITY: DECATUR STATE: IL ZIP: 62525-1805 BUSINESS PHONE: 2174246600 FORMER COMPANY: FORMER CONFORMED NAME: ILLINOIS IOWA POWER CO DATE OF NAME CHANGE: 19660822 10-Q 1 10-Q 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 -------------- ------------- 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. 1 ILLINOIS POWER COMPANY TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE PART I. FINANCIAL INFORMATION 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
2 ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (IN MILLIONS) - --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31, 2000 1999 ------------- ---------- (unaudited) ASSETS 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 ------ ------ 2,933 2,903 Less: accumulated depreciation 1,155 1,139 ------ ------ 1,778 1,764 ------ ------ INVESTMENTS AND OTHER ASSETS 13 13 ------ ------ 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 ------ ------ 381 442 ------ ------ DEFERRED CHARGES AND OTHER: Transition period cost recovery 308 320 Note receivable, affiliate 2,262 2,598 Other 161 161 ------ ------ 2,731 3,079 ------ ------ $4,903 $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 75 55 Less: 12,751,724 shares of common stock in treasury, at cost 287 287 Less: capital stock expense 7 7 ------ ------ 1,055 1,035 Preferred stock 46 46 Mandatorily redeemable preferred stock 193 193 Long-term debt 1,853 1,907 ------ ------ 3,147 3,181 ------ ------ 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 ------ ------ 392 766 ------ ------ DEFERRED CREDITS: Deferred income taxes 1,111 1,100 Other 253 251 ------ ------ 1,364 1,351 ------ ------ $4,903 $5,298 ====== ======
See notes to condensed consolidated financial statements. 3 ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN MILLIONS) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, --------------------- 2000 1999 ----- ----- OPERATING REVENUES: Electric $ 268 $ 255 Electric interchange 1 94 Gas 116 123 ----- ----- 385 472 ----- ----- 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 ----- ----- 354 417 ----- ----- OPERATING INCOME 31 55 Other income and expenses, net (16) 7 Interest income from affiliate 48 --- ----- ----- INCOME BEFORE INTEREST CHARGES 63 62 Interest expense (38) (40) Allowance for borrowed funds used during construction --- 1 ----- ----- NET INCOME 25 23 Preferred dividend requirement and other (5) (4) ----- ----- NET INCOME APPLICABLE TO SHAREHOLDER $ 20 $ 19 ===== =====
See notes to condensed consolidated financial statements. 4 ILLINOIS POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS) - --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, ------------------------------- 2000 1999 --------------- ----------- 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 ----- ----- Net cash provided by (used in) operating activities 85 (27) ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (31) (38) Other, net (2) (2) ----- ----- Net cash used in investing activities (33) (40) ----- ----- 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) ----- ----- Net cash used in financing activities (58) (388) ----- ----- Net change in cash and cash equivalents (6) (455) Cash and cash equivalents, beginning of period 24 504 ----- ----- Cash and cash equivalents, end of period $ 18 $ 49 ===== =====
See notes to condensed consolidated financial statements. 5 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 6 $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. 7 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. 8 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. 9 - - 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.
==================================================================================================================================== ILLINOIS POWER'S SEGMENT DATA FOR THE QUARTER ENDED MARCH 31, 1999 ==================================================================================================================================== CUSTOMER WHOLESALE SERVICE ENERGY NUCLEAR OTHER TOTAL ------------------------------------------------------------------------------------------ (IN MILLIONS) Unaffiliated domestic revenues $ 377 $ 94 $ 1 $ --- $ 472 Intersegment domestic revenues (a) --- 136 (1) (135) --- ------------------------------------------------------------------------------------------ Total revenues 377 230 --- (135) 472 ------------------------------------------------------------------------------------------ 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 ====================================================================================================================================
(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. 10 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. 11 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 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 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 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.
======================================================================================================= THREE MONTHS ENDED MARCH 31, ----------------------------------- 2000 1999 ----------------- ---------------- (IN MILLIONS) 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 =============== =============== =======================================================================================================
15 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 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 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.
Exhibit Number Description -------------- ----------- 12 Computation of ratio of earnings to fixed charges 27 Financial Data Schedule UT (filed only electronically with the SEC)
(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 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 EX-12 2 EXHIBIT 12 EXHIBIT 12 ILLINOIS POWER COMPANY STATEMENT OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Twelve Three Months Ended Months Ended (Millions of Dollars) March March 2000 2000 ---------------- ----------------- 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 ================ =================
EX-27 3 EX-27
UT 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. 1,000,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 PER-BOOK 1,778 13 381 2570 161 4903 980 0 75 1055 193 46 1853 25 0 7 196 0 0 0 1,528 4,903 385 (5) 359 354 31 32 63 38 25 5 20 0 30 85 0 0
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