ILLINOIS POWER CO - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 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
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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN MILLIONS, EXCEPT
SHARE DATA)
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See notes to condensed consolidated financial statements.

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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN MILLIONS)
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See notes to condensed consolidated financial statements.

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ILLINOIS POWER COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN MILLIONS)
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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 JUNE 30, 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 that, 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 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 each of June 30,
2002 and December 31, 2001, approximately $11 million of such cash and cash
equivalents 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 July 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 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.

In April 2002, the FASB issued FAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." IP
expects to adopt FAS 145 on January 1, 2003 and does not expect the adoption to
impact IP's financial position or results of operations.

In June 2002, the FASB issued FAS 146, "Accounting for Exit or Disposal
Activities." FAS 146 addresses significant issues regarding the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities that are currently accounted for
pursuant to the guidance that the Emerging Issues Task Force ("EITF" or the
"Task Force") has set forth in EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The scope of FAS 146
also includes (1) costs related to terminating a contract that is not a capital
lease and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred compensation contract.
FAS 146 will be effective for exit or disposal activities that are initiated
after December 31,

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ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

2002. IP is evaluating the future financial effects of adopting FAS 146 and
expects to adopt the standard effective January 1, 2003.

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 $4 million
had been paid by June 30, 2002. As of June 30, 2002, 85 employees were either
severed or have elected early retirement as a result of the restructuring. An
additional 17 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 Inc. Like many companies in the merchant
energy industry, Dynegy has faced a number of challenges since the end of
2001. These challenges include, among others: the effects of contraction in
the trading markets and downgrades in Dynegy's credit ratings affecting its
ability to conduct its customer and risk-management business; a weak
commodity price environment for natural gas and power; the impact of various
legal proceedings and investigations involving Dynegy's failed merger with
Enron Corp., a structured natural gas transaction referred to as Project
Alpha and roundtrip trades; increased collaterization requirements for
Dynegy's commercial obligations resulting from downgrades in its credit
ratings; and the effect of these and other issues on public confidence in
Dynegy's long-term business strategy and its ability to generate sustainable
cash flows. Dynegy has also announced that it expects restatements to its
2001 financial statements as a result of changes in the accounting of the
aforementioned Project Alpha and that it is undergoing a re-audit of its 1999
- - 2001 financial statements.

Due to IP's relationship with Dynegy, adverse developments or announcements
concerning Dynegy, including further 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. For example, in July 2002 IP priced a public
offering of $325 million Mortgage bonds. In late July, following announcement by
Dynegy of a $500 million second quarter charge and lowered operating cash flow
guidance (from up to $1 billion to a range of $600 million to $700 million), all
three major credit rating agencies further downgraded the credit ratings of
Dynegy and its subsidiaries, including IP. These downgrades caused the
termination of IP's $325 million Mortgage bond offering.

Further, in its second quarter 2002 Form 10-Q, filed with the SEC on August
14, 2002, Dynegy provided significant disclosures relating to its $2 billion
capital plan and its current liquidity position. These disclosures included
an indication that if Dynegy were unable to complete the previously announced
sale of Northern Natural Gas Company in the near term or other elements of
its strategy prior to the second quarter 2003, it could be forced to consider
other strategic alternatives or a possible reorganization under the
protection of bankruptcy laws. IP cannot predict with any degree of certainty
the effects that any such alternatives or reorganization would have on its
financial condition or results of operations.

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 June 30, 2002. 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.

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ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

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"), an Illinova subsidiary. Following the Dynegy-Illinova
merger, IPMI was renamed Dynegy Midwest Generation, Inc. ("DMG"), and
contributed to Dynegy Inc. Dynegy subsequently contributed DMG to Dynegy
Holdings Inc., a Dynegy subsidiary. Effective August 31, 2001, approximately $9
million of additional fossil generation-related assets were transferred to
Illinova, and concurrently to DMG, 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. At June 30,
2002, principal outstanding under the note receivable approximated $2.3 billion
and accrued interest approximated $43 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 $85 million
of interest income from Illinova on the note for the first six months of 2002
and approximately $42 million for the quarter ended June 30, 2002. IP recognized
approximately $85 million of interest income from Illinova on the note for the
first six months of 2001 and approximately $43 million for the quarter ended
June 30, 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 $8 million and $16 million for the
three and six months ended June 30, 2002, respectively. Operating revenue
derived from transactions with affiliates approximated $11 million and $18
million for the three and six months ended June 30, 2001, respectively.
Aggregate operating expenses charged by affiliates approximated $135 million and
$255 million for the three and six months ended June 30, 2002, respectively,
including $124 million and $237 million, respectively, for power purchased.
Aggregate operating expenses charged by affiliates approximated $131 million and
$279 million for the three and six months ended June 30, 2001, respectively,
including $113 million and $226 million, respectively, 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 and regulatory approvals. 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 an 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. This agreement also includes tax sharing provisions
between IP and its indirect parent, Dynegy.

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 these matters
since IP's filing of the Form 10-K.

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ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

Thirty-four lawsuits are pending against IP for illnesses based on alleged
exposure to asbestos at generation facilities previously owned by IP.
Twenty-eight of these lawsuits were filed during 2002, with 24 of these filed
subsequent to March 31, 2002. IP intends to vigorously defend against these
lawsuits. It is not possible to predict with certainty the extent to which IP
will incur any liability or to estimate the damages, if any, that might be
incurred in connection with these or subsequent similar lawsuits; however,
the company does not expect to incur any material liability with respect to
these thirty-four lawsuits.

REGULATORY MATTERS

P.A. 92-0537 - EXTENSION OF RETAIL ELECTRIC RATE FREEZE On June 6, 2002,
the Governor of Illinois signed a bill that adds two years to the current
retail electric rate freeze in Illinois. The bill extends through 2006 the
mandatory retail electric rate freeze, which was originally required by P.A.
90-561. P.A. 92-0537 freezes IP's rates for full service, or "bundled"
electric service at current levels unless the two-year average of IP's earned
return on equity is below the two-year average of the monthly average yields
of monthly Treasury Long-Term Average Rates for the concurrent period, in
which event IP may request a rate increase from the Illinois Commerce
Commission ("ICC"). The ICC would rule on this request for a rate increase
using traditional ratemaking standards. As a result of the retail rate
freeze, IP's bundled service retail electricity consumers are expected to
continue to pay their current electric rates for the next several years. The
rate freeze does not apply to IP's rates for distribution service to
customers choosing direct access. These rates are currently required to be
based on cost of service and can be raised or lowered by the ICC. Beginning
in 2007, absent further extension of the retail electric rate freeze or other
action, IP expects that the distribution and transmission component of retail
electric rates will continue to be required to be based on costs while the
power and energy component may be required to be based on prices in the
wholesale market.

P.A. 90-561/92-0537 - UTILITY EARNINGS CAP The regulatory reform
legislation contains floor and ceiling provisions applicable to IP's Return
on Equity ("ROE") during the mandatory transition period ending in 2006.
Pursuant to the provisions in the legislation, 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 the monthly Treasury
Long-Term Average Rates 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 two-year average ROE exceeds the Treasury Yield, plus 6.5%
in 2002 through 2006 (which increases to 8.5% in 2002 through 2006 if IP
chooses not to request 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. Prior to 2002,
the ROE test was based on the two-year average of the monthly average yields
of 30-year U.S. Treasury Bonds. During 2001, IP's two-year average ROE was
within the allowable ROE collar.

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.

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ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

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
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 ("National Grid") 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.

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 an 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 an 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 continued to consider other opportunities for
participation in an 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 have 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 stated the position of
the FERC with regard to the split of functions between the MISO, as the RTO
for the region, and Alliance GridCo, as a for-profit independent transmission
company ("ITC") 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 submit a
compliance filing within 30 days indicating which RTO they will join, and
whether their participation will be collective or individual.

On May 28, 2002, IP submitted a letter to the FERC indicating that it would
join PJM either as an individual transmission owner or as part of an ITC. On
June 21, 2002, PJM, National Grid, American Electric Power Service Corporation
("AEP"), Commonwealth Edison Company ("ComEd") and IP entered into a Memorandum
of Understanding ("MOU") outlining a 30-day process under which AEP, ComEd and
IP ("ITC Participants") would pursue the formation of an ITC under PJM with
National Grid serving as the independent manager or administrator of the ITC.
The MOU was filed with the FERC on June 25, 2002. An ITC Participant or National
Grid will be excused from its obligations under the MOU if any of such parties
are unable to reach the agreements necessary to participate in PJM through the
ITC. If an ITC Participant is unable to reach such agreements, each party is
committed to join PJM as an individual transmission owner.

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ILLINOIS POWER COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

At this time, IP has elected to join PJM as an individual transmission
owner, and is negotiating the agreements necessary to do so. On July 31,
2002, FERC issued an order approving IP's proposal to join PJM, subject to
certain conditions. These conditions include a requirement that (i) the
parties negotiate and implement a rate design that will eliminate rate
pancaking between PJM and MISO, and (ii) the North American Electric
Reliability Council oversee the reliability plans for MISO and PJM. In
addition, FERC has initiated an investigation under Federal Power Act section
206 of MISO, PJM West and PJM's transmission rates for through and out
service and revenue distribution. Although IP is not currently charging rates
or collecting revenues through these entities, once IP begins operating under
PJM, IP's transmission rates and revenues could be impacted by the outcome of
this proceeding.

NOTE 5 - DEBT

On May 17, 2002, IP exercised the "term-out" provision contained in its $300
million 364-day revolving credit facility, which was scheduled to mature on May
20, 2002. In connection with this conversion, IP borrowed the remaining $60
million available under this facility. The exercise of the "term-out" provision
converted the facility to a one year term loan that matures in May 2003. As
such, the amounts outstanding under this loan are classified as current.
Borrowings of $300 million were outstanding under this loan at June 30, 2002.

IP's $96 million Mortgage bonds, which matured on July 15, 2002, were redeemed
using $85 million of prepaid interest on the Illinova note and $11 million of
working capital.

NOTE 6 - 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.

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ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 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 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.

On June 24th, Dynegy announced that PricewaterhouseCoopers LLP ("PwC") would
re-audit Dynegy's 2001 financial statements as part of the previously announced
2001 restatement process. Dynegy later announced that PwC would expand its
re-audit to include Dynegy's 1999 and 2000 financial statements. PwC will not
reaudit IP's financial results for these periods except to the extent necessary
to support its reaudit of Dynegy's financial statements. IP does not expect
PwC's re-audit of Dynegy's financial statements to affect IP's financial
statements for 1999 through 2001.

FACTORS AFFECTING FUTURE OPERATING RESULTS

IP's results of operations in the third quarter of 2002 and beyond may be
significantly affected by a number of factors, including:

- - IP's ability to execute its business strategy of delivering
reliable transmission and distribution services in a
cost-effective manner;
- - IP's ability to address its significant leverage given its non-investment
grade status and lack of borrowing capacity;
- - the effects of deregulation and, specifically, "direct access" on IP's
electric business;
- - IP's ability to receive payments under its intercompany note receivable
and to otherwise receive continued performance under its arrangements
with Dynegy;
- - IP's ability to restore its credit ratings;
- - 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.

Reference is 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 August 14, 2002, our indirect parent company, Dynegy Inc.,
filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
Please read Dynegy's Form 10-Q for additional discussion of the issues affecting
and that could affect Dynegy and its subsidiaries, including IP.

12

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

LIQUIDITY AND CAPITAL RESOURCES

AVAILABLE CREDIT CAPACITY AND INTERCOMPANY NOTE RECEIVABLE IP is currently
satisfying its capital requirements primarily with cash from operations, cash on
hand and interest income under its $2.3 billion intercompany note receivable
from Illinova.

Under current market conditions, IP does not have access to the commercial
paper markets and has limited access to the capital markets due to its
non-investment grade credit ratings and other factors, including its
relationship with Dynegy. Given these facts, IP expects to continue to rely
primarily on cash from operations, cash on hand and interest income under its
intercompany note receivable to meet its short-term obligations.

On May 17, 2002, IP exercised the "term-out" provision contained in its $300
million 364-day revolving credit facility, which was scheduled to mature on May
20, 2002. In connection with this conversion, IP borrowed the remaining $60
million available under this facility. The exercise of the "term-out" provision
converted the facility to a one year term loan that matures in May 2003.
Borrowings of $300 million were outstanding under this loan at June 30, 2002. IP
does not expect to repay this loan prior to its maturity unless a new revolving
credit or other facility is secured on mutually acceptable terms.

IP's $96 million Mortgage bonds, which matured on July 15, 2002, were redeemed
using $85 million of prepaid interest on the Illinova note and $11 million of
working capital.

On July 19, 2002, IP announced that it had priced a $325 million public
offering of Mortgage bonds. On July 23, 2002, IP terminated the previously
announced $325 million Mortgage bond offering because of credit downgrades.
IP will seek to complete a Mortgage bond sale later in the third quarter.
However, IP cannot guarantee that this planned offering will be successfully
completed or that if completed it will occur on terms that the Company
currently anticipates.

In addition, IP is developing alternative financing plans, including the
potential utilization of additional securitization financing. As provided under
Illinois' electric restructuring legislation, IP has the capacity to issue up to
$864 million of additional securitized debt. IP cannot guarantee that any of the
financings contemplated in these plans will occur.

Because IP has no borrowing capacity currently available, its future
operations could be adversely affected. For example, a significant portion of
IP's operating cash flows will be dedicated to the payment of principal and
interest on indebtedness and will not be available for other purposes. Further,
because of IP's non-investment grade credit rating and other factors, its
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate and other purposes could be
limited. Please read "Credit Ratings Discussion" for additional factors
impacting IP's financial flexibility. IP's ability to meet debt service
obligations and reduce total indebtedness will be dependent upon future
performance and the other factors described herein, many of which are beyond its
control.

IP had one standby bond purchase facility in the aggregate principal amount of
$152 million that 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.

13

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

AFFILIATE TRANSACTION IP maintains an unsecured note receivable due from
its parent relating to the October 1999 and August 2001 transfers 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. At June 30, 2002, principal outstanding under the note receivable
approximated $2.3 billion and accrued interest approximated $43 million. In
July 2002, Illinova prepaid the three months accrued interest of
approximately $43 million and accelerated the payment of the interest on the
note for the three months ending September 30, 2002 in the amount of
approximately $42 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. The interest income
received on this note receivable after adjustment for taxes represent
approximately 35% of IP's annual net cash provided by operating activities.
Please see "Note 3 - Related Parties" in the accompanying financial
statements for a discussion of issues currently facing Dynegy and the related
effects on IP's ability to continue receiving payments under its intercompany
note receivable.

In July 2002, Dynegy provided IP a letter that authorized IP to withhold
payments due to Dynegy under the Services and Facilities Agreement in the
event Dynegy failed to make interest payments on the note when due.

CREDIT RATINGS DISCUSSION Credit ratings impact IP's ability to obtain
short-term 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,
IP's indirect parent company. Although these factors are among those
considered by the rating agencies, each rating agency may utilize different
factors and may calculate and weigh each factor differently.

Since IP filed its first quarter 2002 Form 10-Q on May 15, 2002, all three
major credit rating agencies have downgraded Dynegy's and IP's credit
ratings. On June 24, 2002, following the announcement of Dynegy's new capital
plan, Fitch, Inc. lowered its credit ratings for, and maintained its Ratings
Watch Negative status on Dynegy and its subsidiaries, including IP. The
Senior unsecured debt of Dynegy and Dynegy Holdings was downgraded to "BB+,"
which is below investment grade. Fitch downgraded the secured debt of IP from
"BBB+" to "BBB," an investment grade rating, citing IP's low risk
distribution and transmission operations and IP's status as a regulated
public utility. On July 22, 2002, Fitch, Inc. again lowered its credit
ratings on Dynegy's Senior unsecured debt from "BB+" to "BB-". In addition,
Fitch, Inc. lowered the credit ratings on Dynegy's subsidiaries to below
investment grade, including IP. IP's Senior secured debt was lowered from
"BBB" to "BB"; its Senior unsecured debt was lowered from "BBB-" to "BB-";
its preferred stock was lowered to "B-" from "BB"; and its Short-term debt
was lowered from "F3" to "B". On July 25, 2002, Fitch further lowered
Dynegy's Senior unsecured debt from "BB-" to "B." IP's Senior secured debt
ratings were lowered from "BB" to "BB-" and its Preferred stock was lowered
from "B-" to "CCC".

On June 25, 2002, Standard & Poor's lowered its ratings on Dynegy and its
subsidiaries, including IP, and stated that these ratings remain on
CreditWatch with negative implications. Standard & Poor's lowered the
corporate credit ratings of Dynegy and its subsidiaries, including IP and its
Mortgage bonds, to "BBB-," an investment grade credit rating. On July 22,
2002, Standard & Poor's lowered the corporate credit ratings on Dynegy and
its subsidiaries, including IP. The Mortgage bonds were lowered from "BBB-"
to "BB," which is two notches below investment grade. On July 25, 2002,
Standard & Poor's again lowered Dynegy's credit rating, including IP. IP's
Senior secured debt rating was lowered from "BB" to "B+," which is four
notches below investment grade. According to Standard & Poor's, these ratings
actions reflect its analysis of Dynegy's new capital plan and its related
effect on credit. The CreditWatch with negative implications reflects
concerns regarding Dynegy's ability to generate sustainable cash flow under
the new capital plan, as well as a number of events such as the formal SEC
investigation into Project Alpha and uncertainty in the capital and energy
markets. Standard & Poor's indicated that it intends to resolve the
CreditWatch by the third quarter of 2002.

On June 28, 2002, Moody's lowered its ratings on Dynegy and its
subsidiaries, including IP, but removed the ratings from negative watch
status. Dynegy's Senior unsecured debt was lowered from "Ba1" to "Ba2," while
IP's Senior unsecured debt was lowered from "Baa3" to "Ba1." IP's Senior
secured debt ratings were lowered from "Baa2" to "Baa3," an investment grade
credit rating. On July 24, 2002, Moody's

14

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

lowered its ratings on Dynegy and its subsidiaries, due to the change in
Dynegy's revised cash flow estimate. Dynegy's Senior implied rating was lowered
from "Ba1" to "Ba3". IP's Senior secured rating was lowered from "Baa3" to "Ba2"
and the Senior unsecured rating was lowered from "Ba1" to "Ba3," both
non-investment grade ratings.

As of August 8, 2002, IP's credit ratings, as assessed by the three major
credit rating agencies, were as follows:

IP's non-investment grade status has limited its ability to refinance its
debt obligations as they mature and limits its access to the capital markets.
Non-investment grade status will also likely increase the borrowing costs
incurred in connection with any such actions. IP's financial flexibility has
likewise been reduced as a result of, among other things, restrictive covenants
and other terms typically imposed on non-investment grade borrowers. In
addition, IP has been requested to provide letters of credit or other credit
security to support certain business transactions, including IP's purchase of
natural gas and natural gas transportation. Because of the effect of Dynegy's
credit ratings on IP's credit ratings, IP cannot guarantee that its current
credit ratings will be significantly improved.

FINANCIAL OBLIGATIONS AND COMMERCIAL COMMITMENTS IP has entered into
various financial obligations and commitments in the course of its ongoing
operations and financing strategies. Financial obligations are considered to
represent known future cash payments that the enterprise is required to make
under existing contractual arrangements, such as debt and lease agreements.
These obligations may result from both general financing activities as well
as from commercial arrangements that are directly supported by related
revenue-producing activities. Financial commitments represent contingent
obligations of the enterprise, which become payable only if certain
pre-defined events were to occur, such as funding financial guarantees.
Please see IP's Annual Report on Form 10-K for the year ended December 31,
2001, for a complete listing of obligations and commitments.

IP's contracts on six interstate pipeline companies for firm transportation
and storage services for natural gas have changed since the filing of the
Form 10-K. These contracts now have varying expiration dates ranging from
2003 to 2012, for a total cost of $116 million, up from $82 million noted in
the Form 10-K. The costs associated with these contracts are a component of
IP's revenue requirements under its rate-making process.

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 require 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." In addition,
the ICC may prevent IP from paying dividends if it determines that IP's
capital is or would be impaired. IP's retained earnings balance is expected
to be sufficient during 2002 to support payment of all scheduled preferred
dividends. For the six months ended June 30, 2002, IP has paid preferred
stock dividends of $1.1 million. On March 28, 2002, IP declared and paid
common stock dividends of $.5 million to Illinova.

CAPITAL ASSET PROGRAM Construction expenditures for the six months ended
June 30, 2002 were approximately $68 million. IP estimates that it will spend
approximately $69 million on construction for the remainder of 2002.
Construction expenditures for the six months ended June 30, 2001, were $69
million, and for the year ended December 31, 2001, were $149 million.
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 $600 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.

15

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

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 investments 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 also 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 and amended in
2002.

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 December 31, 2006, due to recently
passed legislation. The combined impact of these rate decreases is expected
to result in a total annual revenue reduction of approximately $91 million in
2002, $101 million in 2003, $103 million in 2004, $105 million in 2005 and
$107 million in 2006, relative to rate levels in effect prior to August 1,
1998.

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.

BUSINESS RISK-MANAGEMENT ASSESSMENT

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 that expire at the end of 2004. 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. Such purchases
would expose IP to commodity price risk. As discussed above, PA 90-561 was
amended to extend the retail electric rate freeze for two additional years,
through 2006. IP has begun discussions to establish PPAs to cover this period,
including the possible modification or extension of its existing PPAs.

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. 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 June
30, 2002 and December 31, 2001, there were no interest rate derivatives
outstanding.

16

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

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.

17

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 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 June 30, 2002 and
2001, respectively.

*Distribution of customer-owned energy

18

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

Provided below is an unaudited tabular presentation of certain IP operating
and financial statistics for the six-month periods ended June 30, 2002 and 2001,
respectively.

*Distribution of customer-owned energy

19

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

THREE-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001

For the quarter ended June 30, 2002, IP reported net income of $46 million,
compared with second quarter 2001 net income of $34 million.

Operating revenues in 2002 increased $2 million. Electric revenue reflected a
slight increase in sales volume and resolution of a contingent liability for a
bulk power billing dispute partially offset by a 5% residential rate reduction
effective May 1, 2002. Gas revenues decreased due to the effect of significantly
lower gas prices offset by an increase in gas sales.

Operating expenses, exclusive of income taxes discussed below, decreased $9
million in 2002 compared to 2001. Electric power purchases were up due to a
slight increase in usage. Gas costs were down due to significantly lower prices,
while other operating expenses decreased slightly.

Other income includes interest income associated with the affiliate note
receivable of $42 million in 2002 as compared to $43 million in 2001 arising
from the fossil asset transfer. In addition, miscellaneous - net in 2002
includes a favorable litigation settlement. Interest expense period-to-period
decreased $4 million reflecting lower average long-term debt balances coupled
with lower interest charges on short-term debt.

IP reported an income tax provision of $32 million for the three-month period
ended June 30, 2002, compared to an income tax provision of $23 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.

SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001

For the six months ended June 30, 2002, IP reported net income of $81 million,
compared with net income of $94 million for the first six months of 2001. Net
income for 2002 reflected the effect of unseasonably mild heating season
weather, a general economic downturn and a 5% residential rate reduction
effective May 1, 2002 partially offset by favorable litigation and billing
settlement. Net income for 2001 reflected the effect of higher gas sales and a
favorable insurance settlement.

Operating revenues in 2002 decreased $134 million primarily due to decreased
gas sales resulting from unseasonably mild weather coupled with lower market
prices for natural gas. Electric revenue reflected slightly reduced sales volume
offset by resolution of a contingent liability for a bulk power billing dispute.

Operating expenses, excluding income taxes, decreased $125 million in 2002
compared to 2001 primarily due to significantly lower market prices for natural
gas purchases.

Other income includes interest income of $85 million in 2002 and 2001.
Miscellaneous - net in 2001 included favorable insurance and litigation
settlements while 2002 also included a favorable litigation settlement. Interest
expense period-to-period decreased $9 million reflecting lower average long-term
debt balances coupled with lower interest charges on short-term debt.

IP reported an income tax provision of $56 million for the six-month period
ended June 30, 2002, compared to an income tax provision of $61 million for the
2001 period. The effective tax rates approximated 41% and 39% in 2002 and 2001,
respectively.

20

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

OPERATING CASH FLOW

Cash flow from operating activities totaled $66 million for the six-month period
ended June 30, 2002, compared to $165 million reported in the 2001 period.
Changes in operating cash flow reflect the operating results previously
discussed herein. Additional cash flow changes for 2002 resulted from higher
collection on customer accounts and lower natural gas prices offset by receipt
of the accelerated interest income payment from Illinova in the fourth quarter
of 2001 and the timing of income tax payments. 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.

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;
- - the effects of deregulation in Illinois and federally and the rules and
regulations adopted in connection therewith;
- - competition from alternate retail electric providers;
- - general economic and capital market conditions, including overall economic
growth, demand for power and natural gas, and interest rates;
- - the effects of the issues currently facing Dynegy Inc., our indirect parent
company, including its ability to successfully complete a $2 billion
capital plan and to maintain adequate liquidity to transact business with
couterparties and the ultimate impact of the legal and administrative
proceedings to which it is currently subject, including legal proceedings
relating to its terminated merger with Enron Corp., the California power
market, shareholder claims, the various investigations surrounding Project
Alpha, including the related restatement of Dynegy's financial statements,
the California power market and "round-trip" trades, and the ongoing
re-audit of Dynegy financial statements for the three-year period ended
December 31, 2001;
- - Dynegy's financial condition, including its ability to maintain its
credit ratings and to continue to pay principal and interest on IP's
intercompany note receivable;
- - the cost of borrowing, access to capital markets and other factors
affecting Dynegy's and IP's financing activities;
- - 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;
- - the 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.

21

ILLINOIS POWER COMPANY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FOR THE INTERIM PERIODS ENDED JUNE 30, 2002 AND 2001

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.

22

ILLINOIS POWER COMPANY

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOR THE INTERIM PERIODS ENDED JUNE 30, 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.

23

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 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) The following document is included as an exhibit to this Form 10-Q.

(b) Reports on Form 8-K of Illinois Power Company filed during the second
quarter of 2002:

- Current Report on Form 8-K dated April 3, 2002. Items 5 and 7 were
reported and no financial statements were filed.
- Current Report on Form 8-K dated April 4, 2002. Items 4 and 7 were
reported and no financial statements were filed.

24

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: August 14, 2002 By: /s/ Peggy E. Carter
-----------------------------------

Peggy E. Carter, Vice President
and Controller
(Duly Authorized Officer and
Principal Accounting Officer)

25