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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
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, 2002
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 1-3004
ILLINOIS POWER COMPANY
(Exact name of registrant as specified in its charter)
ILLINOIS 37-0344645
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 S. 27TH STREET
DECATUR, ILLINOIS 62521-2200
(Address of principal executive offices)
(Zip Code)
(217) 424-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Illinova Corporation is the sole holder of the common stock and owns
approximately 73% of the preferred stock of Illinois Power Company. There is no
voting or non-voting common equity held by non-affiliates of Illinois Power
Company. Illinois Power Company is an indirect wholly owned subsidiary of Dynegy
Inc.
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ILLINOIS POWER COMPANY
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets:
March 31, 2002 and December 31, 2001.......................................3
Condensed Consolidated Statements of Income:
For the three months ended March 31, 2002 and 2001.........................4
Condensed Consolidated Statements of Cash Flows:
For the three months ended March 31, 2002 and 2001.........................5
Notes to Condensed Consolidated Financial Statements..........................6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................20
`
Item 4. Submission of Matters to a Vote of Security Holders................20
Item 6. Exhibits and Reports on Form 8-K...................................20
</Table>
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS, EXCEPT SHARE
DATA)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
ASSETS
UTILITY PLANT:
Electric (includes construction work in progress of $110 million and
$114 million, respectively) $ 2,386 $ 2,369
Gas (includes construction work in progress of $19 million and $19
million, respectively) 759 757
------------ ------------
3,145 3,126
Less -- accumulated depreciation 1,234 1,220
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1,911 1,906
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INVESTMENTS AND OTHER ASSETS 10 11
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 47 53
Accounts receivable, net 113 97
Accounts receivable, affiliates 25 7
Accrued unbilled revenue 64 78
Materials and supplies, at average cost 24 45
Prepayments and other 12 24
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285 304
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NOTE RECEIVABLE FROM AFFILIATE 2,271 2,271
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DEFERRED DEBITS:
Transition period cost recovery 214 225
Other 155 144
------------ ------------
369 369
------------ ------------
$ 4,846 $ 4,861
============ ============
CAPITAL AND LIABILITIES
CAPITALIZATION:
Common stock -- no par value, 100,000,000 shares authorized:
75,643,937 shares issued, stated at $ 1,274 $ 1,274
Additional paid-in capital 8 8
Retained earnings - accumulated since 1/1/99 266 234
Less -- Capital stock expense 7 7
Less -- 12,751,724 shares of common stock in treasury, at cost 287 287
------------ ------------
1,254 1,222
Preferred stock 46 46
Long-term debt 1,584 1,605
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2,884 2,873
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CURRENT LIABILITIES:
Accounts payable 66 71
Accounts payable, affiliates 31 15
Notes payable and current portion of long-term debt 422 460
Accrued liabilities 156 160
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675 706
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DEFERRED CREDITS:
Accumulated deferred income taxes 1,097 1,087
Accumulated deferred investment tax credits 22 22
Other 168 173
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1,287 1,282
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$ 4,846 $ 4,861
============ ============
</Table>
See notes to condensed consolidated financial statements.
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
------------ ------------
OPERATING REVENUES:
Electric $ 247 $ 255
Gas 146 274
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Total 393 529
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OPERATING EXPENSES AND TAXES:
Power purchased 152 151
Gas purchased for resale 97 217
Other operating expenses 36 30
Maintenance 13 13
Depreciation and amortization 20 20
Amortization of regulatory assets 13 13
General taxes 20 23
Income taxes 7 22
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Total 358 489
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Operating income 35 40
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OTHER INCOME AND DEDUCTIONS - NET:
Interest income from affiliates 43 42
Miscellaneous - net (16) 9
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Total 27 51
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Income before interest charges 62 91
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INTEREST CHARGES:
Interest expense 27 32
Allowance for borrowed funds used during construction -- (1)
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Total 27 31
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Net income 35 60
Less - Preferred dividend requirements 1 3
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Net income applicable to common shareholder $ 34 $ 57
============ ============
</Table>
See notes to condensed consolidated financial statements.
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35 $ 60
Items not affecting cash flows from operating activities:
Depreciation and amortization 36 33
Deferred income taxes 15 (6)
Changes in assets and liabilities resulting from operating activities:
Accounts receivable (34) (72)
Unbilled revenue 14 45
Materials and supplies 21 24
Prepayments 9 13
Accounts payable 11 (64)
Other deferred credits (9) (8)
Interest accrued and other, net (16) (5)
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Net cash provided by operating activities 82 20
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (29) (27)
Other investing activities 2 2
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Net cash used in investing activities (27) (25)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends on common and preferred stock (1) (101)
Redemptions:
Short-term debt (38) (42)
Long-term debt (21) (22)
Issuances:
Short-term debt -- 169
Other financing activities (1) (1)
------------ ------------
Net cash provided by (used in) financing activities (61) 3
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Net change in cash and cash equivalents (6) (2)
Cash and cash equivalents at beginning of period 53 24
------------ ------------
Cash and cash equivalents at end of period $ 47 $ 22
============ ============
</Table>
See notes to condensed consolidated financial statements.
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ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT 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, 2001, as filed with the SEC.
The financial statements include all material adjustments, which, in the
opinion of management, are necessary for a fair presentation of the results for
the interim period. Interim period results are not necessarily indicative of the
results for the full year. The preparation of the condensed consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an ongoing basis,
management reviews its estimates, and any changes in facts and circumstances may
result in revised estimates. Actual results could differ materially from those
estimates.
IP is engaged in the transmission, distribution and sale of electric energy
and the distribution, transportation and sale of natural gas in the State of
Illinois. The IP condensed consolidated financial statements include the
accounts of IP; Illinois Power Capital, L. P. (inactive as of May 30, 2000);
Illinois Power Financing I ("IPFI") (inactive as of September 30, 2001);
Illinois Power Financing II ("IPFII") (not currently active); Illinois Power
Securitization Limited Liability Company ("LLC"); Illinois Power Special Purpose
Trust ("IPSPT"); and Illinois Power Transmission Company LLC (not currently
active). 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 "Miscellaneous - net" in
IP's Condensed Consolidated Statements of Income. Certain prior year amounts
have been reclassified to conform to the current year presentation.
Cash and cash equivalents include cash on hand and temporary investments
purchased with an initial maturity of three months or less. At March 31, 2002,
approximately $12 million of such cash and cash equivalents was restricted while
at December 31, 2001, approximately $11 million was restricted. This restricted
cash is reserved for use in paying off the Transitional Funding Trust Notes
issued under the provisions of the Electric Service Customer Choice and Rate
Relief Law of 1997 ("P.A. 90-561").
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("FAS") No. 143, "Accounting for
Asset Retirement Obligations." FAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred with the associated asset retirement costs being
capitalized as a part of the carrying amount of the long-lived asset. FAS 143
also includes disclosure requirements that provide a description of asset
retirement obligations and reconciliation of changes in the components of those
obligations. IP is evaluating the future financial effects of adopting FAS 143
and expects to adopt the standard effective January 1, 2003.
On April 30, 2002 the FASB issued FAS 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
FAS 145 rescinds FAS 4, "Reporting Gains and Losses from Extinguishment of
Debt," the amendment to FAS 4, and FAS 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." Through this rescission, FAS 145 eliminates
the requirement (in both FAS 4 and FAS 64) that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect.
Further, FAS 145 amends FAS 13, "Accounting for Leases", to eliminate an
inconsistency between the accounting for sale-leaseback transactions and certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. FAS 145 also makes several other technical
corrections to existing pronouncements that may change accounting practice. FAS
145 is effective for transactions occurring after May 15, 2002, and IP is
currently evaluating the future financial effects, if any, of adopting FAS 145.
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ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
NOTE 2 - BUSINESS REORGANIZATION
IP implemented a corporate restructuring in November 2001 that affected
departments throughout the organization. As part of the restructuring, severance
and early retirement costs of $15 million ($9 million after-tax) were recorded
in the fourth quarter of 2001. Severance charges represented approximately $5
million ($3 million after-tax) of the total costs incurred, of which $3 million
had been paid by March 31, 2002. As of March 31, 2002, 78 employees were either
severed or have elected early retirement as a result of the restructuring. An
additional 24 employees who have already been notified will be severed or will
retire by the end of 2002. The severance/retirement plan is being executed
pursuant to IP's plan and related actions are expected to be substantially
completed by December 31, 2002.
NOTE 3 - RELATED PARTIES
IP is indirectly owned by Dynegy. Like many companies in the energy merchant
industry, Dynegy has faced a number of challenges since the end of 2001.
Events surrounding the collapse of Enron Corp. have contributed to an
unprecedented business environment fueled by skepticism among regulators and
investors alike. Additionally, certain other issues specific to Dynegy have
negatively impacted its business. Due to IP's relationship with Dynegy,
adverse developments or announcements concerning Dynegy, including actions by
the ratings agencies or the effects of any new investigations, actions or
events that may occur or be announced, could adversely affect IP's cash
flows, financial condition, access to capital and receipt of various
corporate services, even if IP has not suffered any similar development.
The credit ratings of Dynegy and its subsidiaries, including IP, were placed
under review for possible downgrade by Moody's and Standard & Poor's on
April 25 and May 8, 2002, respectively, due to uncertainties regarding the
sustainability of Dynegy's cash flow, the litigation brought against Dynegy
in connection with its recently terminated merger transaction, Dynegy's
ability to access the capital markets and certain other recent developments.
On April 30, 2002, Fitch clarified its position with respect to possible
downgrade to include similar concerns. In addition, the credit rating
agencies have refocused their attention on the credit characteristics and
credit protections measures of industry participants, and in some cases
appear to have tightened the standards for a given rating level.
On April 24, 2002, Standard & Poor's lowered its credit ratings for Dynegy and
its subsidiaries, including IP, following a business risk evaluation of
Dynegy's various operating segments, its overall financial profile, capital
adequacy and liquidity position. On April 30, 2002, Fitch lowered its credit
ratings for Dynegy and its subsidiaries, including IP, due to concern
regarding Dynegy's financial flexibility and its ability to operate its
business recognizing a difficult business and capital environment.
Dynegy management is engaged in continuing discussions with representatives
of Standard & Poor's, Moody's and Fitch. These discussions are focused on
Dynegy's business strategy, 2002 forecast, business operations and the amount
and sustainability of cash flows. Neither Dynegy nor IP can predict with any
certainty the actions, if any, that may be taken by the rating agencies in
the future.
IP relies on an unsecured note receivable from Illinova Corporation, its
direct parent company and a Dynegy subsidiary, for a substantial portion of
its net cash provided by operating activities. This note receivable
represented approximately 47% of IP's total assets as of March 31, 2002, and
the interest income received on this note receivable after adjustment for
taxes represented approximately 34% of IP's net cash provided by operating
activities during the quarter ended March 31, 2002. Management believes that
the unsecured note receivable is fully collectible based on its assessment of
Dynegy's creditworthiness. In the event that IP does not receive payments on
this note receivable, its financial condition and results of operations would
be materially adversely affected. Following is a description of the unsecured
note receivable and IP's other transactions with Dynegy.
Effective October 1, 1999, IP transferred its wholly owned fossil generating
assets and other generation-related assets and liabilities at net book value to
Illinova in exchange for an unsecured note receivable of approximately $2.8
billion. Such assets were subsequently contributed by Illinova to Illinova Power
Marketing Inc. ("IPMI"), which was later renamed Dynegy Midwest Generation
("DMG"). Effective August 31, 2001, approximately $9 million of additional
fossil generation-related assets were transferred to Illinova and the unsecured
note receivable was adjusted accordingly. The note matures on September 30, 2009
and bears interest at an annual rate of 7.5%, due semiannually in April and
October. In the first quarter of 2002, Illinova accelerated the payment of two
months' accrued interest on the note receivable in the amount of $29 million. At
March 31, 2002, principal outstanding under the note receivable approximated
$2.3 billion and accrued interest approximated $14 million. In the fourth
quarter of 2001, Illinova accelerated the payment of accrued interest on the
note receivable for the three months ended December 31, 2001 in the amount of
$43 million. At December 31, 2001, principal outstanding under the note
receivable approximated $2.3 billion with no accrued interest. IP recognized
approximately $43 million of interest income from Illinova on the note for the
quarter ended March 31, 2002 and approximately $42 million for the quarter ended
March 31, 2001.
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 $7 million for the first
quarter of 2002 and 2001. Aggregate operating expenses charged by affiliates
during the first quarter of 2002 approximated $120 million, including $113
million for power purchased. Aggregate operating expenses charged by affiliates
during the first quarter of 2001 approximated $148 million, including $113
million for power purchased. The change in operating expenses, excluding power
purchased, resulted from a decline in gas purchases. Management believes that
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. This right to purchase power qualifies under the normal purchase and sale
exemption with FAS 133, "Accounting for Derivative Instruments and Hedging
Activities," and, therefore, IP has accounted for the PPA under the accrual
method. 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 power and energy to IP using a tiered pricing structure. With
this arrangement, IP believes it has provided adequate power supply for expected
IP load plus a reserve supply above that expected level. Should power acquired
under this agreement be insufficient to meet IP load requirements, IP will have
to buy power at current market prices. The PPA obligates DMG to provide power up
to the reservation amount even if DMG has individual units unavailable at
various times.
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. Management believes that the allocation method utilized under this
agreement is reasonable and amounts charged under this agreement would result in
costs to IP similar to costs IP would have incurred for these services on a
stand-alone basis.
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ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LEGAL AND ENVIRONMENTAL MATTERS
Please see Note 5, "Commitments and Contingencies," to IP's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001 (the "Form 10-K") for a
description of the material legal and environmental matters affecting IP. No
material developments affecting IP have occurred with respect to such matters
since IP's filing of the Form 10-K.
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 mandatory
transition period ending in 2004. Pursuant to these provisions, IP may request
an increase in its base rates if the two-year average of its earned ROE is below
the two-year average of the monthly average yields of 30-year U.S. Treasury
bonds for the concurrent period ("Treasury Yield"). Conversely, IP is required
to refund amounts to its customers equal to 50% of the value earned above a
defined "ceiling limit." The ceiling limit is exceeded if IP's ROE exceeds the
Treasury Yield, plus 6.5% in 2002 through 2004 (which increases to 8.5% in 2002
through 2004 if IP 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 calculation of ROE for the floor test.
During 2001, IP's two-year average ROE was within the allowable ROE collar,
avoiding adjustments or customer refunds. IP expects to continue to be within
the allowable ROE collar in 2002. The U.S. Treasury recently announced that
30-year U.S. Treasury bonds will no longer be issued and their interest rates
will no longer be published. The Illinois legislature is working on language to
a bill that would revise the yield to the monthly Treasury Long-Term Average
Rate.
P.A. 90-561 - DIRECT ACCESS PROVISIONS Since October 1999, non-residential
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 have
been given the right to choose their electric generation suppliers ("direct
access"). Direct access for remaining non-residential customers began on
December 31, 2000. Direct access became available to all residential customers
effective May 1, 2002. IP remains obligated to provide electricity service to
its customers at tariff rates and to provide delivery service to its customers
at regulated rates. Departing customers must pay transition charges to IP, but
those charges are not designed to compensate IP for all of its lost revenues.
Although residential rate reductions and the introduction of direct access
have led to lower electric service revenues, P.A. 90-561 is designed to protect
the financial integrity of electric utilities in three principal ways:
1) Departing customers are obligated to pay transition charges based on the
utility's lost revenue from that customer. The transition charges are
applicable through 2006 and can be extended two additional years with
approval 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 trust notes.
3) The ROE of utilities is managed through application of floor and ceiling
test rules contained in P.A. 90-561 as described above in the Utility
Earnings Cap section.
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.
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. Effective on July 1, 2001, the ISO
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ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
requirements of P.A. 90-561 were amended by P.A. 92-12 to provide that a
regional transmission organization ("RTO") created under the Federal Energy
Regulatory Commission's ("FERC") rules shall be considered to be the functional
equivalent of an ISO. An electric utility shall be deemed to meet its obligation
to participate in an ISO through membership in a RTO that fulfills the
requirements of an ISO as set forth 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 October 13, 2000, IP filed a notice of its intent to withdraw from the MISO
with the FERC. On February 23, 2001, IP reached a settlement in principle with
all parties that allowed it to withdraw from the MISO and join the Alliance
Regional Transmission Organization ("Alliance RTO"), effective upon the FERC's
approval of the settlement, which occurred May 8, 2001. IP has fulfilled its
obligations under the MISO settlement.
On August 21, 2001, IP and seven of the transmission owners proposing to form
the Alliance RTO ("Alliance Companies") entered into a letter of intent with
National Grid, USA pursuant to which National Grid would serve as the Alliance
RTO's managing member for a period of seven years. On November 1, 2001, the
Alliance Companies filed the definitive agreements with the FERC for approval.
The proposed business and independence plan and the definitive agreements
provided that the Alliance RTO would own transmission facilities divested by
transmission owners in exchange for passive ownership interests in the Alliance
RTO or partially for cash. Alternatively, the Alliance RTO would enter into
seven-year operating agreements to functionally control the transmission
facilities of transmission owners that elect not to divest. Non-divesting
transmission owners would maintain the physical operations of their transmission
facilities.
As proposed to the FERC by the Alliance Companies, National Grid, as a
non-market participant, would operate the Alliance RTO's transmission facilities
as a for-profit corporation and receive a management fee of $14 million, a fixed
rate of return on its investment in the Alliance RTO, reimbursement of its
operating and maintenance expenditures and an opportunity to earn incentive
compensation. In return, National Grid would be required to contribute $1
billion to the Alliance RTO by 2005, $75 million of which would be used to
reimburse members for start-up costs and an additional $75 million of which
would be used to fund capital expenditures for future system costs. The
remaining $850 million would be used to purchase transmission assets and for
transmission expansions.
In an order issued on December 20, 2001, the FERC reversed its previous
findings and stated that it could not approve the Alliance RTO as a RTO. The
FERC further directed the Alliance Companies to explore how their business plan,
including the participation of National Grid, could be accommodated within the
MISO. In addition, the FERC directed the Alliance Companies to file a statement
of their plans to join a RTO, including the timeframe, within 60 days of
December 20th.
On January 8, 2002, the Alliance Companies and National Grid commenced
substantive discussions with the MISO as directed by the FERC. In addition, the
Alliance Companies continue to consider other opportunities for participation in
a RTO. On February 19, 2002, IP, in conjunction with the Alliance Companies,
filed a report with the FERC stating that the Alliance Companies have been in
discussions with both MISO and PJM Interconnection LLC ("PJM"), but has been
unable to reach agreement. On March 5, 2002, IP, in conjunction with the
Alliance Companies, filed a second report and petition for declaratory order
with the FERC. The Petition requests approval of a structure under which
National Grid would operate a for-profit transmission company consisting of the
Alliance Companies' transmission assets under the oversight of the MISO. On
April 25, 2002, the FERC issued an order granting in part the Alliance
Companies' petition. The order identifies what the FERC believes should be the
split of functions between the MISO, as the RTO for the region, and Alliance
GridCo, as a for-profit transmission company that operates under the MISO. The
FERC also approved the rate design proposed by the Alliance Companies, whether
they join PJM, MISO or another RTO. The FERC clarified that if the Alliance
Companies join MISO, the MISO must return the $60 million paid by the Illinois
utilities to exit the MISO. Finally, the FERC directed the Alliance Companies to
file a compliance filing within 30 days indicating which RTO they will join, and
whether their participation will be collective or individual.
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ILLINOIS POWER COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
NOTE 5 - PREFERRED STOCK
REDEMPTION OF PREFERRED STOCK AND CONSENT SOLICITATION On March 28, 2002, IP
completed a solicitation of consents from its preferred stockholders to amend
its Restated Articles of Incorporation to eliminate a provision that limited the
amount of unsecured indebtedness that IP could issue or assume. Concurrently,
Illinova completed a tender offer pursuant to which it acquired 662,924 shares,
or approximately 73%, of IP preferred stock. The New York Stock Exchange has
taken action to delist each of the series of preferred stock that were subject
to the tender offer and previously listed thereon. On March 29, 2002, IP amended
its Restated Articles of Incorporation to eliminate this provision. Certain
charges incurred in connection with the consent solicitation, approximately $1
million in the aggregate, were paid by IP. These charges are reflected as an
adjustment to Retained Earnings in the accompanying Balance Sheet.
10
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ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 IP's Annual Report on
Form 10-K for the year ended December 31, 2001, as filed with the SEC.
GENERAL - COMPANY PROFILE IP operates as a regulated utility engaged in the
transmission, distribution and sale of electric energy and the distribution,
transportation and sale of natural gas across a 15,000-square-mile area in the
State of Illinois. Illinova Corporation is the sole holder of the common stock
and owns approximately 73% of the preferred stock of IP. IP is an indirect
wholly owned subsidiary of Dynegy Inc.
The IP 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 (inactive as of May 30, 2000); Illinois Power Financing I, a
statutory business trust in which IP serves as sponsor (inactive as of September
30, 2001); Illinois Power Financing II, a statutory business trust in which IP
serves as sponsor (not currently active); Illinois Power Securitization Limited
Liability Company, a special purpose Delaware LLC whose sole member is IP;
Illinois Power Special Purpose Trust, a special purpose Delaware business trust
whose sole owner is LLC; and Illinois Power Transmission Company LLC, a limited
liability Delaware company (not currently active).
IP was a leader in the development of the comprehensive electric utility
regulatory reform legislation for the State of Illinois, which provided the
foundation for IP's subsequent strategic actions and transformation. Following
the successful execution of its strategy to transfer its wholly owned generating
assets 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
IP's results of operations in the second quarter of 2002 and beyond may be
significantly affected by the following factors:
- - IP's ability to exercise on its business strategy of delivering reliable
transmission and distribution services in a cost-effective manner;
- - the effects of deregulation and, specifically, "direct access" on IP's
electric business;
- - IP's ability to maintain its investment grade credit rating and to
refinance its revolving credit facility;
- - the effects of weather on IP's electric and gas business; and
- - IP's ability to secure power and natural gas for its electric and gas
customers.
References are also made to the section "Uncertainty of Forward-Looking
Statements and Information" below for additional factors that could impact
future operating results.
In addition, on May 15, 2002, our indirect parent company, Dynegy Inc., filed
its Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. Please
read Dynegy's Form 10-Q for a discussion of the issues affecting and that could
affect Dynegy and its subsidiaries, including IP.
LIQUIDITY AND CAPITAL RESOURCES
IP has historically relied upon operating cash flow and borrowings from a
combination of commercial paper issuances, bank lines of credit, corporate
credit agreements and various public debt issuances for its liquidity and
capital resource requirements. IP's operating cash flows are subject to the
various risks described in this quarterly report, including the loss of revenues
due to "direct access" and the seasonality associated with IP's gas and
electricity businesses. IP's other sources of liquidity and the material
associated risks are described below.
11
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
CREDIT RATINGS DISCUSSION Credit ratings impact IP's ability to obtain
short- and long-term financing, the cost of such financing and the execution
of its commercial strategies. In determining credit ratings, the rating
agencies consider a number of factors. Quantitative factors that are given
significant weight include, among other things, earnings before interest,
taxes, and depreciation and amortization ("EBITDA"); operating cash flow;
total debt outstanding; off balance sheet obligations and other commitments;
fixed charges such as interest expense, rent, or lease payments; payments to
preferred stockholders; liquidity needs and availability; and various ratios
calculated from these factors. Qualitative factors include, among other
things, predictability of cash flows, business strategy, industry position
and contingencies. In determining IP's credit ratings, the rating agencies
also consider the liquidity position and credit ratings of Dynegy Inc., IP's
indirect parent company. Although these factors are among those considered by
the rating agencies, each rating agency may calculate and weigh each factor
differently.
The credit ratings of Dynegy and its subsidiaries, including IP, were
placed under review for possible downgrade by Moody's and Standard & Poor's
on April 25 and May 8, 2002, respectively, due to uncertainties regarding the
sustainability of Dynegy's cash flow, the litigation brought against Dynegy
in connection with its recently terminated merger transaction, Dynegy's
ability to access the capital markets and certain other recent developments.
On April 30, 2002, Fitch clarified its position with respect to possible
downgrade to include similar concerns. In addition, the credit rating
agencies have refocused their attention on the credit characteristics and
credit protections measures of industry participants, and in some cases
appear to have tightened the standards for a given rating level.
On April 24, 2002, Standard & Poor's lowered its credit ratings for Dynegy
and its subsidiaries, including IP, following a business risk evaluation of
Dynegy's various operating segments, its overall financial profile, capital
adequacy and liquidity position. On April 30, 2002, Fitch lowered its credit
ratings for Dynegy and its subsidiaries, including IP, due to concern
regarding Dynegy's financial flexibility and its ability to operate its
business recognizing a difficult business and capital environment. The
updated ratings are reflected in the table below.
As of May 9, 2002, IP's credit ratings, as assessed by the three major credit
rating agencies, were as follows:
<Table>
<Caption>
Standard &
Poor's Moody's Fitch
------------ --------- --------
Mortgage bonds BBB Baa2 BBB+
Senior unsecured debt BBB- Baa3 BBB
Preferred stock BB+ Ba2 BBB-
Commercial paper A-3 P-3 F2
Transitional funding trust notes AAA Aaa AAA
</Table>
A downgrade in IP's credit rating to below investment grade could increase
the risk that IP would be unable to refinance its debt obligations as they
come due, including $96 million of mortgage bonds due in July 2002, and could
increase the borrowing costs incurred by IP in connection with any such
refinancings. IP's financial flexibility could likewise be reduced as a
result of restrictive covenants and other terms that are typically imposed on
non-investment grade borrowers.
Dynegy management is scheduled to meet with representatives of Standard &
Poor's, Moody's, and Fitch in the near future. These meetings are expected to
focus on Dynegy's business strategy, 2002 forecast, business operations and
the amount and sustainability of cash flows. Neither Dynegy nor IP can
predict with any certainty the actions, if any, that may be taken by the
rating agencies subsequent to these meetings.
12
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
AVAILABLE CREDIT CAPACITY The following table provides the components of IP's
available credit capacity at quarter end:
AVAILABLE CREDIT CAPACITY
<Table>
<Caption>
MARCH 31, 2002
--------------
Outstanding Revolving Credit Agreement(1) $ 240
Unused Borrowing Capacity 60
--------------
Total Credit Capacity $ 300
--------------
</Table>
(1) The 364-day $300 million revolving credit agreement matures on May 20,
2002. This bank commitment supports the amount of commercial paper
outstanding at any time and provides funds for working capital needs and
other general corporate purposes. IP is seeking to replace the maturing
facility with a new facility of at least $200 million. IP can provide no
assurance that it will be able to refinance this bank credit facility on
terms comparable to its existing facility. The existing 364-day revolver
includes a "term-out" provision which would permit IP to convert outstanding
borrowings under the current revolver to a one-year term-loan in the event a
new facility cannot be placed.
Under current market conditions, IP does not have access to the commercial
paper markets and has relied on its bank credit facility, operating cash
flows, cash balances on hand and other sources of liquidity for its
short-term liquidity requirements. Management believes this level of
liquidity is adequate to allow IP to operate its business, even in the event
of a downgrade in credit rating.
As of March 31, 2002, IP had one standby bond purchase facility in the
aggregate principal amount of $152 million which provided credit enhancement for
$150 million of Illinois Development Finance Authority ("IDFA") 1997 Series A, B
and C bonds (the "Pollution Control Bonds"), along with one month's interest of
approximately $2 million, for which IP's Pollution Control Series P, Q and R
mortgage bonds were issued without coupon and pledged to secure payment on the
Pollution Control Bonds. On April 9, 2002, the indenture was amended to
incorporate an additional interest rate setting mechanism, the auction rate
mode. After the indenture was amended, the Pollution Control Bonds were reissued
without further change. The auction rate mode does not require the use of a
standby purchase facility, allowing the standby bond purchase facility to expire
without consequence.
On March 28, 2002, IP completed a solicitation of consents from its preferred
stockholders to amend its Restated Articles of Incorporation to eliminate a
provision that limited the amount of unsecured indebtedness that IP could issue
or assume. In addition, Illinova completed a tender offer pursuant to which it
acquired 662,924 shares, or approximately 73%, of IP preferred stock. The New
York Stock Exchange has taken action to delist each of the series of preferred
stock that were subject to the tender offer and previously listed thereon. On
March 29, 2002, IP amended its Restated Articles of Incorporation to eliminate
this provision. Certain charges incurred in connection with the consent
solicitation, approximately $1 million in the aggregate, were paid by IP. These
charges are reflected as an adjustment to Retained Earnings in the accompanying
Balance Sheet.
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%, due semiannually in April and October. In the first quarter of
2002, Illinova accelerated the payment of two months' accrued interest on the
note receivable in the amount of $29 million. At March 31, 2002, principal
outstanding under the note receivable approximated $2.3 billion and accrued
interest approximated $14 million. In the fourth quarter of 2001, Illinova
accelerated the payment of accrued interest on the note receivable for the three
months ended December 31, 2001 in the amount of $43 million. At December 31,
2001, principal outstanding under the note receivable approximated $2.3 billion
with no accrued interest. Optional principal repayments and periodic interest
payments accruing under this arrangement are available from the parent to
provide IP with a source of liquidity for its required expenditures.
DIVIDENDS Under IP's Restated Articles of Incorporation, common stock
dividends are subject to the preferential rights of the holders of preferred and
preference stock. IP is also limited in its payment of dividends by the Illinois
Public Utilities Act, which requires retained earnings equal to or greater than
the amount of any proposed dividend declaration or payment. The Federal Power
Act precludes declaration or payment of dividends by electric utilities "out of
money properly stated in a capital account." IP's retained earnings balance is
expected to be sufficient during 2002 to support payment of all scheduled
preferred
13
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
dividends. On February 1, 2002, IP paid preferred stock dividends of $.6
million. On March 28, 2002, IP declared and paid common stock dividends of $.5
million to Illinova.
CAPITAL ASSET PROGRAM Construction expenditures for the three months ended
March 31, 2002 were approximately $29 million. IP estimates that it will spend
approximately $126 million on construction for the remainder of 2002.
Construction expenditures consist of numerous projects to upgrade and maintain
the reliability of IP's electric and gas distribution and transmission systems,
add new customers to the system and prepare for a competitive environment. IP
construction expenditures for 2003 through 2006 are expected to total
approximately $610 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.
CONCLUSION IP believes that it will be able to meet all foreseeable cash
requirements, including working capital, capital expenditures and debt service,
from operating cash flow, supplemented as necessary by borrowings under its
credit facility, public debt issuances and other sources of liquidity.
OTHER MATTERS
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. The
enactment of the Energy Policy Act of 1992 authorized the FERC to mandate
wholesale wheeling of electricity by utilities at the request of certain
authorized generating entities and electric service providers. Wheeling is the
transport of electricity generated by one entity over transmission and
distribution lines belonging to another entity. Retail wheeling involves the
transport of electricity to end-use customers. The Energy Policy Act currently
precludes the FERC from mandating retail wheeling.
Competition arises 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. P.A. 90-561, Illinois electric
utility restructuring legislation, was enacted in December 1997.
REGULATORY MATTERS - P.A. 90-561 - RATE ADJUSTMENT PROVISIONS P.A. 90-561 gave
IP's residential customers a 15% decrease in base electric rates beginning
August 1, 1998. An additional 5% decrease went into effect on May 1, 2002 and is
to remain effective through January 1, 2005. Legislation has recently been
introduced that would extend this rate freeze through December 31, 2006. The
current rate decreases result in expected revenue reductions of approximately
$93 million in 2002, approximately $101 million in 2003 and approximately $103
million in 2004, based on projected consumption.
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.
14
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
BUSINESS RISK-MANAGEMENT ASSESSMENT
IP's operating results may be impacted by commodity price fluctuations resulting
from purchases of electricity used in supplying service to its customers. IP has
contracted for volumes from several suppliers under contracts having various
commercial terms. Certain of these contracts do not obligate the supplier to
provide replacement power to IP in the event of a curtailment or shutdown of
operating facilities. If the commodity volumes supplied from these agreements
are inadequate to cover IP's native load, IP will be required to purchase its
supply needs in open-market purchases at prevailing market prices. Such
purchases would expose IP to commodity price risk. Price risk associated with
IP's gas operations is mitigated through contractual terms applicable to the
business, as allowed by the ICC. IP applies prudent risk-management practices in
order to minimize these market risks. Such risk management practices may not
fully mitigate these exposures.
Prior to the Dynegy-Illinova merger in February 2000, IP periodically
utilized interest rate derivatives (principally interest rate swaps and caps) to
adjust the portion of its overall borrowings subject to interest rate risk. As
of March 31, 2002 and December 31, 2001, there were no interest rate derivatives
outstanding.
IP's market risk is considered as a component of the entity-wide risk
management polices of its parent company, Dynegy. Dynegy measures entity-wide
market risk in its financial trading and risk management portfolios using Value
at Risk. Additional measures are used to determine the treatment of risks
outside the Value at Risk methodologies, such as market volatility, liquidity,
event and correlation risk.
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 PPAs.
Should power acquired under these agreements be insufficient to meet IP load
requirements, IP will have to buy power at current market prices. The PPA with
DMG obligates DMG to provide power up to the reservation amount even if DMG has
individual units unavailable at various times. The PPA with AmerGen does not
obligate AmerGen to acquire replacement power for IP in the event of a
curtailment or shutdown at the Clinton Power Station ("Clinton"). 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 delivery 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. The gas commodity is a pass through cost to
the end-use customer and is subject to an annual ICC prudence review. 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.
15
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
RESULTS OF OPERATIONS
Provided below is an unaudited tabular presentation of certain IP operating and
financial statistics for the three-month periods ended March 31, 2002 and 2001,
respectively.
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ -------------
(IN MILLIONS)
ELECTRIC SALES REVENUES -
Residential $ 96 $ 100
Commercial 72 73
Commercial-distribution* -- 1
Industrial 60 63
Industrial-distribution* 2 --
Other 8 9
------------ ------------
Revenues from ultimate consumers 238 246
Interchange -- --
Transmission/Wheeling 9 9
------------ ------------
Total Electric Revenues $ 247 $ 255
============ ============
ELECTRIC SALES IN KWH -
Residential 1,304 1,382
Commercial 1,022 1,054
Commercial-distribution* 1 23
Industrial 1,376 1,435
Industrial-distribution* 707 586
Other 93 99
------------ ------------
Sales to ultimate consumers 4,503 4,579
Interchange -- 1
------------ ------------
Total Electric Sales 4,503 4,580
============ ============
GAS SALES REVENUES -
Residential $ 101 $ 178
Commercial 36 69
Industrial 6 22
Other 1 2
------------ ------------
Revenues from ultimate consumers 144 271
Transportation of customer-owned gas 1 2
Sales to affiliates 1 1
------------ ------------
Total Gas Revenues $ 146 $ 274
============ ============
GAS SALES IN THERMS -
Residential 153 173
Commercial 62 74
Industrial 15 25
------------ ------------
Sales to ultimate consumers 230 272
Transportation of customer-owned gas 72 72
------------ ------------
Total gas sold and transported 302 344
Sales to affiliates 3 1
------------ ------------
Total Gas Delivered 305 345
============ ============
</Table>
*Distribution of customer-owned energy
16
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
THREE-MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
For the quarter ended March 31, 2002, IP reported net income of $35 million,
compared with first quarter 2001 net income of $60 million. Net income for 2002
reflected the effect of unseasonably mild weather and the general economic
downturn. Net income for 2001 reflected the effect of much stronger gas sales.
Operating revenues in 2002 decreased $136 million primarily due to the
general economic downturn and decreased demand resulting from unusually mild
weather coupled with lower gas prices. Electric revenues decreased due to lower
usage from residential and commercial customers, partially offset by an increase
in delivery service usage. Gas revenues decreased due to much lower usage
coupled with significantly lower prices.
Operating expenses, exclusive of income taxes discussed below, decreased
$116 million in 2002 compared to 2001. Electric power purchases were down due
to a decrease in usage caused by warm weather which was offset by higher
prices. Gas costs were down due to warm weather and significantly lower
prices while other operating expenses increased slightly. General taxes were
down due to lower gas revenue taxes.
Other income includes interest income associated with the affiliate note
receivable of $43 million in 2002 as compared to $42 million in 2001 arising
from the fossil asset transfer. In addition, other income in 2001 includes
favorable insurance and litigation settlements. Interest expense
period-to-period decreased $4 million reflecting lower average principal
balances and lower borrowing rates.
IP reported an income tax provision of $24 million for the three-month period
ended March 31, 2002, compared to an income tax provision of $39 million for the
2001 period. The effective tax rates approximated 41% and 39% in 2002 and 2001,
respectively. The differences between the aforementioned effective tax rates and
the statutory tax rate of 40% for both periods result principally from the tax
deductibility of the dividends on company obligated mandatorily redeemable
preferred securities. The last of the mandatorily redeemable preferred
securities, TOPrS, were redeemed as of September 30, 2001. The effective tax
rate for 2002 reflects the loss of this deduction as compared with the 2001
rate.
OPERATING CASH FLOW
Cash flow from operating activities totaled $82 million for the three-month
period ended March 31, 2002, compared to $20 million reported in the 2001
period. Changes in operating cash flow reflect the operating results previously
discussed herein. Also affecting cash flow for 2002 were decreases in unbilled
revenue, increases in accounts payable, lower inventory levels from underground
gas storage withdrawals and an increase in accounts receivable offset by the
accelerated interest payments on the Illinova note. Cash flow in 2001 was
affected by higher priced natural gas purchases and income taxes paid.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION This Quarterly Report
includes statements reflecting assumptions, expectations, projections,
intentions or beliefs about future events. These statements are intended as
"forward-looking statements" under the Private Securities Litigation Reform Act
of 1995. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They use words such as "anticipate,"
"estimate," "project," "forecast," "may," "should," "expect," "will" and other
words of similar meaning. In particular, these include, but are not limited to,
statements relating to the following:
- - projected operating or financial results;
- - expectations regarding capital expenditures, preferred dividends and other
matters;
- - beliefs about the financial impact of deregulation;
- - assumptions regarding the outcomes of legal and administrative proceedings;
- - estimations relating to the potential impact of new accounting standards;
- - intentions with respect to future energy supplies; and
- - anticipated costs associated with legal and regulatory compliance.
17
<Page>
ILLINOIS POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
Any or all of IP's forward-looking statements may turn out to be wrong. They
can be affected by inaccurate assumptions or by known or unknown risks and
uncertainties, including the following:
- - the timing and extent of changes in commodity prices for natural gas and
electricity;
- - competitive practices in the industries where IP competes;
- - the effects of deregulation of the energy industry and the rules and
regulations adopted in connection therewith;
- - general political, economic and financial market conditions;
- - any extended period of war or conflict involving the United States or
Europe;
- - 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 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.
18
<Page>
ILLINOIS POWER COMPANY
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOR THE INTERIM PERIODS ENDED MARCH 31, 2002 AND 2001
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Quantitative and Qualitative Disclosures About Market Risk are set forth in
"Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Business Risk-Management Assessment" herein.
19
<Page>
ILLINOIS POWER COMPANY
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There have been no material developments affecting IP with respect to IP's legal
proceedings since the filing of the Form 10-K.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 28, 2002, IP completed a solicitation of consents from its preferred
shareholders to amend its Restated Articles of Incorporation to eliminate a
provision that limited the amount of unsecured indebtedness that IP could issue
or assume. Please read "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" for a
discussion of this consent solicitation.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no instruments or documents required to be included as exhibits
to this Form 10-Q.
(b) Reports on Form 8-K of Illinois Power Company filed during the first
quarter of 2002:
- Current Report on Form 8-K dated February 26, 2002. Items 5 and 7 were
reported and no financial statements were filed.
20
<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: June 25, 2002 By: /s/ Peggy E. Carter
-------------------------------------
Peggy E. Carter, Vice President
and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
21