Item 1. BUSINESS
General
The Company is a wholly-owned subsidiary of Holdings, of which 75% is owned indirectly by Southern and 25% is owned indirectly by PP&L Resources. The Company was incorporated as a public limited company under the laws of England and Wales in June 1995 as a vehicle for the acquisition of SWEB, one of the 12 RECs in England and Wales licensed to distribute, supply and, to a limited extent, generate electricity. In September 1995, the Company gained effective control of SWEB. The Company subsequently acquired the remaining outstanding shares of SWEB and replaced SWEB's board of directors and certain senior managers with officers and employees of companies from within the Southern Company system. The Company's sole investment and only significant asset is the entire share capital of SWEB, which is headquartered in Bristol, England. At March 31, 1997 the Company had consolidated assets of (pound)1.721 billion ($2.831 billion).
SWEB's two main business lines are the distribution of electricity and supply of electricity to approximately 1.3 million customers in its Franchise Area in southwest England. The distribution business and the supply business are distinct business segments and produced operating income of (pound)108 million ($178 million) and (pound)12 million ($20 million), respectively, in fiscal year 1997, representing substantially all of the Company's consolidated operating income in that fiscal year.
SWEB's Franchise Area covers approximately 5,560 square miles extending from Bristol and Bath in the northeast, 188 miles southwest along the peninsula to Land's End and 28 miles beyond to the Isles of Scilly, and has a resident population of approximately 2.8 million. The south west of England, of which the Franchise Area forms the greater part, has benefitted from economic growth (as measured by Gross Domestic Product) which exceeded the UK average from 1991 through 1996 and has also benefitted from an average unemployment rate during calendar year 1996 of approximately 6.3% which was below the UK average of 7.5% according to a 1997 study by Cambridge Econometrics. The largest cities and towns in SWEB's Franchise Area are Bath, Bristol, Exeter, Plymouth and Taunton. Business activity is generally concentrated in the population centers around Bristol, Bath and Plymouth. The Bristol and Bath area is served by the M4 and M5 motorways, a strong rail network including a link between Bristol and London, and a commercial port at Avonmouth.
The Company and SWEB have undertaken to make SWEB a more focused and competitive company concentrating on the main electricity businesses of distribution and supply. Several businesses not related to distribution and supply have been sold, and the remaining ancillary businesses have been redirected to focus on support for the main electricity businesses.
The key goals which the Company and SWEB are pursuing include cost savings and improved customer service. The objective of cost savings is to increase profitability. Cost savings have been realized through programs of staff reduction and working with the unions on a program of job redesign leading to changes in work practices. The objective of improved customer service is to prepare for the increasingly competitive aspects of the supply business by building customer loyalty through responsiveness to customers' needs, and to meet and exceed the performance criteria established by the Regulator. Improvements in customer service are also being pursued in part through improvements in system performance, as measured primarily by reductions in customer minutes lost and overall number of outages.
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Change of Government in the UK
A possible significant change that could impact profitability relates to the election of a new Labour government on May 1, 1997. The Labour Party's election manifesto includes the commitment to introduce "a one-off windfall levy on the excess profits of the privatised utilities". The total amount of government revenue to be raised by the tax and the allocation of the tax between utilities is scheduled to be announced as part of the government's budget in early July, 1997. There can be no assurance that the introduction of a windfall tax or other taxes or policies of the new government will not adversely affect the Company.
Overview of the Electric Utility Industry in Great Britain
In 1990, the electric utility industry in Great Britain was privatized, and SWEB was created along with the other 11 RECs. In connection with the privatization, distribution assets in England and Wales, previously owned indirectly by Her Majesty's Government, were allocated among the RECs, licensing requirements were established for the RECs and price controls were implemented in the areas of distribution and supply. In England and Wales, generation assets (other than nuclear facilities) were allocated to two generating companies, and the high voltage transmission assets were allocated to The National Grid Company plc ("NGC", which is wholly owned by NGG).
The high voltage transmission system in England and Wales, which is generally referred to as the "national grid," carries the generated electricity in bulk from the power stations to the regional and local distribution systems. This transmission system is owned and operated by NGC.
Distributors transfer electricity over their networks, generally at lower voltage than the national grid, from supply points on the national grid to final consumers. The distribution systems in England and Wales are owned by the 12 RECs. Virtually all customers in England and Wales are connected to the distribution system of the RECs and have no choice as to the distribution system from which they receive their electricity. Distribution prices charged by the RECs are regulated by the Distribution Price Control Formula.
Suppliers sell electricity to end users. Each REC is required to have a PES license which authorizes it to supply electricity to any customers within its Franchise Area. Electricity customers fall into two categories, Franchise Supply Customers and Non-Franchise Supply Customers. Prices for supply of electricity to Franchise Supply Customers are regulated by the Supply Price Control Formula. Such price control is currently scheduled to expire on March 31, 1998, after which some form of price restraint is likely to apply for smaller customers at least for a transitional period. The franchise supply market is expected to be opened progressively over a six month period commencing April 1, 1998 to any competitors who have obtained the necessary license, which is generally referred to as a "second tier license." Non-Franchise Supply Customers may already be supplied by anyone who has obtained a second tier license. Such second tier suppliers, including SWEB, compete for business nationally and at prices determined by competitive bids or negotiation.
At the time of privatization, the "Pool" was established for bulk trading of electricity in England and Wales between generators and suppliers. The Pool reflects two principal characteristics of the physical generation and supply of electricity from a particular generator to a particular supplier. First, it is not possible to trace electricity from a particular generator to a particular supplier. Second, it is not practicable to store electricity in significant quantities, creating the need for a constant matching of supply and demand. Subject to certain exceptions, all electricity generated in England and Wales must be sold and purchased through the Pool. All licensed generators and suppliers must become signatories to a pooling and settlement agreement, which governs the constitution and operation of the Pool and the calculation of payments due to and from generators and suppliers (the "Pooling and Settlement Agreement"). Prices for electricity are set by the Pool daily for each half hour of the following day based on the bids of the generators and a complex set of calculations matching supply and demand and taking account of system stability, security and other costs.
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SWEB's Main Businesses
Distribution Business
SWEB's distribution business is the ownership, management and operation of the electricity distribution network within SWEB's Franchise Area. The primary activity of the distribution business is the receipt of electricity from the national grid transmission system and its distribution to end users of electricity that are connected to SWEB's power lines. Virtually all electricity supplied (whether by SWEB's independent supply business or by other suppliers) to consumers in SWEB's Franchise Area is transported through its distribution network, thus providing SWEB with distribution volume that is stable from year to year. As a holder of a PES license, SWEB is subject to a price cap regulatory framework that provides economic incentives to increase the number of units of electricity distributed and to operate in a more cost-efficient manner.
SWEB's distribution business has grown in both its customer base and in the number of units distributed, primarily reflecting economic growth in the south west of England. At March 31, 1997 SWEB had experienced a 5-year compound annual growth rate of 0.8% in customers and 1.5% in units distributed, respectively.
Strategy
Since being acquired by the Company, SWEB has reviewed and refined its distribution strategy and has established key goals of cost savings and improved customer service.
Staff reductions play a key role in cost savings. SWEB has implemented a plan of voluntary and other staff reductions to reduce the number of employees by 667 (mainly in the distribution business and representing 20% of staff at the time of the acquisition of SWEB by the Company), of which 603 net reductions occurred prior to March 31, 1997. Part of these reductions were made possible due to new work practices which SWEB has developed with the cooperation of SWEB's unions. Team restructuring in the engineering department and the establishment of multi-skilled independent field teams have been achieved. In addition, management restructuring has produced a flatter organizational structure by reducing management levels from seven to three.
Improvements in customer service in the distribution business are part of SWEB's strategy and are expected to enable SWEB to meet or exceed the performance criteria established by the Regulator who is responsible for setting the performance standards of the RECs. SWEB believes that achieving these goals is important both for improving customer satisfaction and for maintaining good relations with the Regulator. Improvements in customer service are being pursued, in part, through improvements in system performance, measured primarily in terms of customer minutes lost and overall number of outages. To that end, several initiatives are being pursued including:
eliminating the backlog of tree-trimming near distribution lines;
implementing a program of network improvements that will create more dual routing;
reordering the priorities of SWEB's capital expenditure program to focus on improving system reliability; and
introducing a single-number telephone call center supported by new computerized information systems which allow employees at the call center (including advisory engineers) to initiate engineering work orders to satisfy customer needs for repairs or maintenance of the distribution network (implemented during 1996).
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Customers
Most of SWEB's distribution customers are Franchise Supply Customers. This customer group consists predominantly of residential and small commercial consumers which provides SWEB a stable customer base. SWEB's fastest growing category of distribution customers, in terms of units distributed and revenues, is large commercial and small industrial customers. Commercial activity of SWEB's customers is mostly service based and includes financial services, electronics and technology-related businesses. SWEB also distributes electricity to industrial concerns in its Franchise Area. The principal activities of SWEB's largest distribution customers include china clay extraction, ship repair, fertilizer production, aerospace, defense engineering, cement and paper manufacturing and water supply. SWEB's 20 largest distribution customers in its Franchise Area accounted for 10.5% of total electricity distributed by SWEB in fiscal year 1997 in terms of units distributed, with no single customer exceeding 2.3% of total electricity distributed. The following table sets out details of SWEB's distribution customers, units distributed and distribution revenues.
Distribution Facilities
Electricity is transported across the national grid transmission system at 400kv or 275kv to eight grid supply points within SWEB's distribution network, where it is transformed to 132kv and enters SWEB's distribution system. Electricity is also transported to two national grid supply points located in neighboring RECs' franchise areas, which are connected to SWEB's distribution system by overhead lines and underground cables. Substantially all electricity which enters SWEB's system is received at these ten grid supply points.
At March 31, 1997, SWEB's electricity distribution network (excluding service connections to consumers) included overhead lines and underground cables at the operating voltage levels indicated in the table below:
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In addition to the circuits referred to above, SWEB's distribution facilities also include approximately:
Substantially all substations are owned in freehold, and most of the balance are held on leases which will not expire within 10 years.
Electricity is received by customers at various voltages depending upon their requirements. At March 31, 1997, SWEB's distribution system was connected to over 1.3 million customers.
Operation and control of SWEB's distribution system is continuously monitored and coordinated from a control center located in Exeter. A telecontrol system has been implemented to provide remote information gathering and to provide remote operation of 132kv and selected 33kv and 11kv switchgear.
Supply Business
SWEB's supply business is selling electricity to end users, purchasing such electricity, primarily from the Pool, and arranging for its distribution to those end users. SWEB's supply business is comprised predominantly of supplying Franchise Supply Customers. In fiscal year 1997, these customers accounted for approximately 67% of all units of electricity supplied by SWEB. SWEB's exclusive right to supply these customers is scheduled to continue, subject to price regulation, until March 31, 1998, at which time competition to supply Franchise Supply Customers is scheduled to commence in phases over a six month period. Supply prices for these customers are currently regulated, and SWEB's costs of purchasing and delivering electricity and hedging the purchase price are collected from them on an actual cost basis.
The market to supply Non-Franchise Supply Customers is fully competitive, principally with other RECs and the major generators. Non-Franchise Supply Customers are typically supplied through individual contracts with a duration of from one to two years with competitively bid or negotiated prices.
Strategy
Since its acquisition by the Company, SWEB has completed a review of the supply market, established new goals for its supply business and adopted new strategies for achieving those goals. The key goals established are the retention of its current Franchise Supply Customers as supply customers after March 31, 1998 and the increase of SWEB's share of electricity supplied to Non-Franchise Supply Customers both inside and outside SWEB's Franchise Area.
SWEB's strategy for retaining its Franchise Supply Customers is to build customer loyalty and to offer competitive prices. SWEB seeks to build customer loyalty by providing superior, responsive service in dealing with billing and other matters and providing other service enhancements. SWEB is revamping its marketing, sales and customer service operations under the direction of the
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Executive Directors of SWEB who transferred from other companies within the Southern Company system, and are experienced in competitive electricity marketing.
Initiatives in relation to the Franchise Supply Customers include:
a single-number, local rate, telephone service call center (which has been in place since April 1996);
improvements and enhancements to the billing and customer service system which will enable employees at the call center to act on or resolve customer billing and account inquiries on line during their calls (which has already begun and should be operational in 1998); and
a restructuring of meter reading operations which should enable almost all meters to be read quarterly, thereby reducing estimated readings (which has already begun and is expected to be completed in 1997). In Great Britain, most meters are located within structures and meter readers are required to obtain access from occupants in order to read meters. As a result, actual readings are often obtained only on an annual or biennial basis.
SWEB's strategy for expanding its market share of electricity sold to Non-Franchise Supply Customers both inside and outside its Franchise Area is to offer competitive pricing and, with respect to its Non-Franchise Supply Customers inside its Franchise Area, to build customer loyalty through the measures described above. Additional initiatives to support growth in market share in the Non-Franchise Supply Customer market include:
the expanded use of account managers for Non-Franchise Supply Customers;
increasing the number of proposals and bids made to customers and potential customers;
development of an integrated contract customer sales, electronic registration and marketing system with full customer life-cycle management and tracking facilities (which was brought into service during February 1997); and
further enhancement of a competitive price setting system used to determine appropriate contract supply prices (which was completed in March 1997).
Franchise Supply Market
Under the terms of its PES license, SWEB currently holds the right to supply approximately 1.3 million Franchise Supply Customers within its Franchise Area. See "Business-General." During fiscal year 1997, sales to Franchise Supply Customers represented 67% of total units supplied by SWEB and produced 76% of SWEB's total supply revenues.
The exclusive right to supply Franchise Supply Customers is scheduled to be phased out over a six month period commencing April 1, 1998, after which all supply customers will have the ability to choose their electricity supplier. SWEB intends to maintain its market share of these customers by providing superior customer service and competitive pricing. In fiscal year 1997, SWEB met or exceeded the Regulator's standards of performance targets for all of the services measured by the Regulator.
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Non-Franchise Supply Market
In addition to competing for Non-Franchise Supply Customers in its Franchise Area, SWEB holds a second tier license to compete with the RECs and other suppliers to provide electricity to Non-Franchise Supply Customers outside its Franchise Area. At the end of fiscal year 1997, SWEB had approximately 2,700 Non-Franchise Supply Customers, consisting primarily of large commercial and industrial accounts. Revenue from these customers during fiscal year 1997 accounted for 24% of total supply revenues. SWEB has achieved a significant increase in the number of Non-Franchise Supply Customers since the Company acquired SWEB.
SWEB's Other Business Activities
SWEB also has ancillary business activities that support its main electricity distribution and supply businesses, including electricity generation and gas supply. SWEB owns generating assets with 24 MW of capacity used to back up the distribution network as well as minority investments in windfarms and a 7.7% interest in Teesside Power Limited, owner of a 1,875 MW combined cycle plant. SWEB has a 75% joint venture interest in a supplier of gas and derives small amounts of revenue from the lease of fibers within the fiber optic cables carried on its distribution network. SWEB also markets and develops property no longer used in the main electricity businesses.
Risk Management
Because SWEB's distribution business does not involve the purchase and sale of electricity, SWEB's risk management efforts are focused on the supply business which is exposed to Pool price volatility.
Regulations governing the franchise supply market permit the pass-through to customers of prudent costs which include the cost of arrangements such as contracts for differences ("CFDs") to hedge against Pool price volatility. CFDs are contracts predominantly between generators and suppliers which fix the price of electricity for a contracted quantity of electricity over a specific time period. Differences between the actual price set by the Pool and the agreed prices give rise to difference payments between the parties to the particular CFD. At the present time, SWEB's forecast franchise supply market demand for fiscal year 1998 is substantially hedged through various types of agreements including CFDs.
The most common contracts for supply to Non-Franchise Supply Customers are for a twelve-month term and contain fixed rates. SWEB is exposed to two principal risks associated with such contracts: load shape risk (the risk associated with a shift in the customer's usage pattern, including absolute amounts demanded and timing of amounts demanded) and purchasing price risk (the cost of purchased electricity relative to the price received from the supply customer). SWEB employs risk management methods to maximize its return consistent with an acceptable level of risk. Generally load shape risk decreases as SWEB's portfolio of supply customers in the non-franchise supply market increases. SWEB hedges purchasing price risk by employing a variety of risk management tools, including management of its supply contract portfolio, hedging contracts and other means which mitigate risk of future Pool price volatility.
SWEB's ability to manage its purchasing price risk depends, in part, on the future availability of properly priced risk management mechanisms such as CFDs. No assurance can be given that an adequate, transparent market for such products will in fact be available.
SWEB is also investigating whether owning its own source of generation or contracting for such source or sources would be an appropriate method for partially managing purchase price risk, but no assurance can be given that such methods would be available to, or economically appropriate for, SWEB.
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The Company and SWEB utilize certain financial derivative contracts for the sole purpose of hedging business exposure in connection with fluctuations in interest rates and currency rates. Interest rate swaps are used to assure the stability of future interest charges, by effectively converting a portion of outstanding variable-rate debt into fixed rates. In addition, the US dollar liabilities associated with certain of the Company's and SWEB's debt are converted into pounds sterling by entering into foreign currency hedging contracts.
UK Environmental Regulation
SWEB's businesses are subject to numerous regulatory requirements with respect to the protection of the environment. The Electricity Act obligates the President of the Board of Trade and Secretary of State for Trade and Industry to take into account the effect of electricity generation, transmission and supply activities upon the physical environment in approving applications for the construction of generating facilities and the location of overhead power lines. The Electricity Act requires SWEB to have regard to the desirability of preserving natural beauty and the conservation of natural and man-made features of particular interest, when it formulates proposals for development in connection with certain of its activities. The Company mitigates the effects its proposals have on natural and man-made features and is required to carry out an environmental assessment when it intends to lay cables, construct overhead lines or carry out any other development in connection with its licensed activities. SWEB also has produced an Environmental Policy Statement which sets out the manner in which it intends to comply with its obligations under the Electricity Act.
The Environmental Protection Act 1990 addresses waste management issues and imposes certain obligations and duties on companies which handle and dispose of waste. Some of SWEB's distribution activities produce waste, but SWEB believes that it is in compliance with the applicable standards in such regard.
Possible adverse health effects of EMFs from various sources, including transmission and distribution lines, have been the subject of a number of studies and increasing public discussion. The scientific research is currently inconclusive as to whether EMFs may cause adverse health effects. The only UK standards for exposure to power frequency EMFs are those promulgated by the National Radiological Protection Board and relate to the levels above which non-reversible physiological effects may be observed. SWEB fully complies with these standards. However, there is the possibility that the introduction and passage of legislation and change of regulatory standards would require measures to mitigate EMFs, with resulting increases in capital and operating costs. In addition, the potential exists for public liability with respect to lawsuits brought by plaintiffs claiming damages for adverse health effects caused by EMFs.
SWEB believes that it has taken and continues to take measures to comply with the applicable laws and governmental regulations for the protection of the environment. There are no material legal or administrative proceedings pending against SWEB or the Company with respect to any environmental matter.
Employees
At March 31, 1997, SWEB had 2,737 employees (2,647 full time equivalent) and the Company had no employees. Of SWEB's employees, 96% are represented by labor unions. All SWEB employees who are not party to a personal employment contract are subject to one of two collective bargaining agreements. One is called The Electricity Business Agreement, which covered 2,581 employees at March 31, 1997 (2,492 full time equivalent); it may be amended by agreement between SWEB and the unions and is terminable with 12 months notice by either side. The other is called the SWEB Data Collection Services Agreement, which covered 56 employees at March 31, 1997 (55 full time equivalent); it may be amended by agreement between SWEB and the unions and is terminable by written notice (with no period specified) by either side. SWEB believes that its relations with its employees are favorable. Legal proceedings concerning the
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Electricity Supply Pension Scheme involving a company other than SWEB were taken. These proceedings may affect SWEB in the future. See "Item 3 - Legal Proceedings".
Item 2.
Item 2. PROPERTIES
The Company through a subsidiary of SWEB owns the freehold of its principal executive offices in Bristol. SWEB has both network and non-network land and buildings.
Network Land and Buildings
At March 31, 1997 SWEB had freehold and leasehold interests in approximately 12,000 network properties, comprising principally substation sites. The recorded cost of total network land and buildings at March 31, 1997 was (pound)67 million.
Non-Network Land and Buildings
At March 31, 1997 SWEB had freehold and leasehold interests in non-network properties comprising chiefly offices, former retail outlets, depots, warehouses and workshops. The recorded cost of total non-network land and buildings at March 31, 1997 was (pound)36 million.
The number of properties in each category is:
Freehold or Long Leasehold Leasehold -------------- --------- Depots.................................. 35 1 Offices................................. 8 - Surplus property(1)..................... 83 19 - - --------- (1) Largely unused retail sites. The number of freeholds is approximated.
For a discussion of other properties and other assets of SWEB, see Item 1 - "Business-SWEB's Main Businesses-Distribution Facilities."
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company and SWEB are routinely party to legal proceedings arising in the ordinary course of business which are not material, either individually or in the aggregate. The Company is not a party to any material legal proceedings nor is it currently aware of any threatened material legal proceedings, except as described below.
The Pensions Ombudsman (a UK statutorily appointed independent arbitrator) has issued a determination in favor of complaints made by members of the Electricity Supply Pension Scheme ("ESPS") relating to another employer's use of ESPS surplus to offset the employer's costs of providing early pensions on redundancies and certain other items. Under that determination the Pensions Ombudsman directed the employer to pay into ESPS the amount of that use of the surplus plus interest. The determination was challenged in the High Court by the employer, and the High Court upheld the employer's appeal in a judgment delivered on June 10, 1997. The High Court also granted the complainants leave to appeal to a higher court. No date has yet been set for any hearing in the higher court. If the complainants' appeal is successful either at the higher court or on a subsequent appeal to the House of Lords, it will have an adverse effect on SWEB. No payments are required until such challenge has been heard. It is not practical to make an estimate of the exposure at the present time.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
Item 5.
Item 5. COMMON EQUITY MARKET
There is no established public trading market for the Company's common stock, all of which is owned indirectly by Southern and PP&L Resources.
Item 6.
Item 6. SELECTED FINANCIAL DATA
(In Millions)
- - ------------- (1) Operating revenues and net income for Fiscal Year 1993 have been determined under UK GAAP.
(2) Company Obligated Mandatorily Redeemable Preferred Securities of Southern Investments UK Capital Trust I Holding Company Junior Subordinated Debentures. See Note 10 in the "Notes to the Financial Statements".
(3) Successor periods are not comparable to predecessor periods due to acquisition related adjustments (including the revaluation of assets and liabilities) and to increases in debt as a result of the acquisition.
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Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto. The consolidated financial statements discussed in this Section are presented in accordance with US GAAP. Solely for the convenience of the reader, pounds sterling amounts have been translated into US dollars at the Noon Buying Rate on March 31, 1997 of $1.6448 = (pound)1.00; see Note 1 in the "Notes to the Financial Statements".
INTRODUCTION
Background
The Company was incorporated as a public limited company under the laws of England and Wales in June 1995, as a vehicle for the acquisition of SWEB. In September 1995, the Company gained effective control of SWEB. The Company subsequently replaced SWEB's board of directors and certain senior managers with officers and employees of companies from within the Southern Company system. Total consideration for the acquisition was (pound)1.065 billion ($1.752 billion) excluding a special dividend of (pound)52 million ($85 million) paid by SWEB to its former shareholders (other than those whose shares the Company had purchased in the open market). Such dividend, when considered in aggregate with the final dividend of (pound)23 million ($38 million) paid in October 1995 in respect of fiscal year 1995, yields the (pound)75 million ($123 million) payment of pre-acquisition dividends disclosed in the financial statements located elsewhere in this document.
Accounting for the Acquisition
The recorded assets and liabilities of SWEB immediately prior to the time the Company gained effective control of SWEB were (pound)855 million ($1,406 million) and (pound)515 million ($847 million), respectively. As a result of the purchase method of accounting, the amount of SWEB's assets recorded on the books of the Company was increased by (pound)927 million ($1,525 million) to their fair value of (pound)1.782 billion ($2.931 billion), and the amount of SWEB's liabilities recorded on the books of the Company was increased by (pound)385 million ($633 million) to their fair value of (pound)900 million ($1.480 billion). The increase in liabilities included the establishment of reserves totalling (pound)44 million ($72 million) related principally to staff reductions and the disposition of ancillary businesses. The resulting difference between the purchase price of (pound)1.065 billion ($1.752 billion) and the difference between the fair value of the assets acquired and the fair value of the liabilities assumed as well as the reserves established resulted in goodwill of (pound)183 million ($301 million).
The unaudited pro forma information presented for fiscal year 1996 ("Pro Forma Fiscal Year 1996") consists of the historical results of operations of the Predecessor Company prior to the acquisition and the results of operations of the Successor Company subsequent to the acquisition, both of which have been adjusted for the effects of the acquisition as though it had taken place on April 1, 1995. The effects of the acquisition that are reflected in Pro Forma Fiscal Year 1996 include: (i) depreciation expense based on property, plant and equipment valued according to the purchase method of accounting as if the acquisition had occurred on April 1, 1995, (ii) amortization of goodwill valued according to the purchase method of accounting as if the acquisition had occurred on April 1, 1995, (iii) fair valuation of existing liabilities and the related interest expense as if the acquisition had occurred on April 1, 1995, (iv) debt issued to finance the acquisition and the related interest expense as if the acquisition had occurred on April 1, 1995 and (v) recognition of pension fund surplus and the reduction of pension expense in the accounts of the Company.
The information for Pro Forma Fiscal Year 1996 has been prepared for illustrative purposes only and, because of its nature, cannot give a complete picture of the Company's results of operations for that year had the transactions been consummated on the date assumed and does not project the
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Company's financial position or results of operations for any future date or period. Unaudited amounts have been prepared based upon the audited consolidated financial statements of the Company, which have been prepared in accordance with US GAAP.
Significant Events
During fiscal year 1996, the sale by SWEB of its shares in NGG and related actions produced a nonrecurring pre-tax gain of (pound)14 million over the fair value established at the time of the Company's acquisition of effective control of SWEB and resulted in net pre-tax cash flow of (pound)241 million. This followed a listing for the NGG shares on the London Stock Exchange. The listing was conditional upon the prior demerger of NGG's pumped storage electricity generation business ("PSB") in order for NGG to sell that business. PSB was sold in December 1995. SWEB had received (pound)36 million of its share of the total proceeds from that sale by the end of fiscal year 1996 and a further (pound)7 million by the end of fiscal year 1997. The fair value of this asset at acquisition was assessed at (pound)39 million. In fiscal year 1996 SWEB paid to the Company and the Company paid to Holdings a dividend of (pound)191 million which was made possible because of the proceeds from the sale of SWEB's interest in NGG. See Note 11 in the "Notes to the Financial Statements".
SWEB has progressively withdrawn from its involvement in non-core businesses. Neither the contribution to SWEB's or the Company's operating income from the disposed businesses nor the effect of the dispositions on SWEB's or the Company's net income was material after taking into account the reserves established in connection with the acquisition. SWEB sold its appliance retailing business in June 1995; its appliance servicing business in February 1996; its creditor and warranty insurance business and electrical installation and contracting business in March 1996; and its interest in a cable television and telecommunications company in July 1996.
RESULTS OF OPERATIONS
SWEB was acquired on September 18, 1995. Since that time the new management has undertaken certain restructuring and the level and cost of financing has changed significantly. The results for fiscal year 1996 have been presented on a pro forma basis to provide a comparison with fiscal year 1997.
Fiscal Year 1997 Compared with Pro Forma Fiscal Year 1996 Compared with Fiscal Year 1995
Earnings
Operating income decreased by (pound)4 million (3%) from (pound)129 million in the Pro Forma Fiscal Year 1996 to (pound)125 million in the fiscal year 1997. This decrease was due to a (pound)4 million decrease in operating income from the distribution business, a (pound)3 million decrease in operating income from the supply business, partly offset by a (pound)3 million increase in operating income from the ancillary businesses. Operating income decreased by (pound)10 million (7%) from (pound)139 million in fiscal year 1995 to (pound)129 million in Pro Forma Fiscal Year 1996. This decrease was due to a (pound)24 million increase in cost of sales, partially offset by a (pound)4 million increase in operating revenues and a (pound)10 million decrease in operating expenses.
Net income increased by (pound)6 million (12%) from (pound)49 million in the Pro Forma Fiscal Year 1996 to (pound)55 million in the fiscal year 1997. This increase was primarily attributable to reduced after-tax interest expense of (pound)9 million resulting from the repayment during the second half of fiscal year 1996 of debt issued to finance the acquisition and increased gains on the sale of investments, offset by decreased operating income as described above. Net income decreased by (pound)45 million (48%) from (pound)94 million in fiscal year 1995 to (pound)49 million in Pro Forma Fiscal Year 1996. In addition to the factors discussed in the previous paragraph which reduced operating income, the decrease in net income was primarily due to increased after-tax interest expense of (pound)37 million principally due to debt issued for acquisition.
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Revenues
Operating revenues increased by (pound)68 million (9%) from (pound)780 million in Pro Forma Fiscal Year 1996 to (pound)848 million in the fiscal year 1997 and increased by (pound)4 million (1%) from (pound)776 million in fiscal year 1995 as follows:
- - ------------- (1) Intra-business revenues relate to the elimination of intra-business revenues in consolidation, principally distribution sales to the supply business.
Two factors determine the amount of revenues produced by the main electricity distribution business: the unit price of the electricity distributed (which is controlled by the Distribution Price Control Formula) and the number of electricity units distributed. Following the Regulator's distribution price review in 1994, the Regulator reduced SWEB's allowable expected distribution revenues, effective beginning fiscal year 1996, by 14%, before an allowed increase for inflation. Subsequently, the Regulator announced a further distribution price reduction which has had and will continue to have the effect of reducing SWEB's allowable expected distribution revenues, effective beginning fiscal year 1997, by a further 11%, before an allowed increase for inflation. In the fiscal year 1997, application of the Distribution Price Control Formula resulted in a reduction in SWEB's distribution revenues as compared to the Pro Forma Fiscal Year 1996. The number of units distributed depends on the demands of SWEB's customers for electricity. That demand varies based in part upon weather conditions and economic activity. Revenues from the distribution business decreased by (pound)21 million (8%) from (pound)252 million for the Pro Forma Fiscal Year 1996 to (pound)231 million for the fiscal year 1997 and also decreased by (pound)22 million (8%) from fiscal year 1995 as a result of the following factors:
Two factors determine the amount of revenues produced by the supply business: the unit price of the electricity supplied (which, in the case of the Franchise Supply Customers, is controlled by the Supply Price Control Formula)
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and the number of electricity units supplied. Until April 1998, SWEB is expected to have the exclusive right to supply all Franchise Supply Customers in its Franchise Area.
Franchise Supply Customers are generally residential/domestic and small commercial customers. The volume of unit sales of electricity for Franchise Supply Customers is influenced largely by the number of customers in the Franchise Area, weather conditions and prevailing economic conditions. Unit sales to Non-Franchise Supply Customers are determined primarily by the success of the supply business in entering into contracts to supply customers with electricity.
Revenues from the supply business increased by (pound)62 million (9%) from (pound)726 million for the Pro Forma Fiscal Year 1996 to (pound)788 million for the fiscal year 1997. In the fiscal year 1997, the number of electricity units supplied increased by 23% but total revenues produced by the supply business increased by only 9%, because a majority of the increase in total units supplied was to Non-Franchise Supply Customers, who are the larger energy users charged at generally lower average unit prices than those charged to Franchise Supply Customers. Within the franchise market, the number of electricity units increased by 1%, offset by a reduction in allowable income as set by the Supply Price Control Formula. Revenues from the supply business increased by (pound)1 million from (pound)725 million in fiscal year 1995 to (pound)726 million in Pro Forma Fiscal Year 1996. This increase reflects an increase of (pound)11 million in revenues from the franchise supply market which offset a (pound)10 million reduction in revenues from the non-franchise supply market which was primarily due to lower unit sales. The (pound)11 million increase was the result of an overall increase in unit sales to supply customers and application of the Supply Price Control Formula which resulted in an upward inflation adjustment that exceeded the downward regulatory factor adjustment.
Intra-business eliminations for fiscal year 1997 decreased by (pound)18 million (7%) from Pro Forma Fiscal Year 1996 which decreased by (pound)28 million (10%) from fiscal year 1995 primarily as the result of the decrease in revenues from the distribution business described above.
Cost of Sales
Cost of sales increased by (pound)90 million (18%) from (pound)504 million in the Pro Forma Fiscal Year 1996 to (pound)594 million in the fiscal year 1997. This increase was principally the result of an increase in the supply business cost of sales of (pound)68 million reflecting an increase in purchases of electricity to supply the increase in unit sales as discussed above. Cost of sales increased by (pound)24 million (5%) from (pound)480 million in fiscal year 1995 to (pound)504 million in Pro Forma Fiscal Year 1996. This increase is principally the result of an increase in the supply business energy purchase costs of (pound)20 million.
Operating Expenses
Operating expenses decreased by (pound)18 million (12%) from (pound)147 million in the Pro Forma Fiscal Year 1996 to (pound)129 million in the fiscal year 1997. This decrease was primarily due to a (pound)4 million decrease in maintenance costs and a (pound)15 million decrease in selling, general and administrative costs, which were partially offset by a (pound)1 million increase in depreciation and amortization resulting from the application of the purchase method of accounting.
The decrease in selling, general and administrative costs included a decrease in certain classes of computer software development costs which were expensed during the first half of Pro Forma Fiscal Year 1996 but which were capitalized subsequently, having satisfied the criteria for capitalization under the Company's accounting policy (see Note 1 to the "Notes to the Financial Statements"). The decrease in selling, general and administrative costs also included a decrease in labor costs resulting from a reduction in personnel.
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Operating expenses decreased by (pound)10 million (6%) from (pound)157 million in fiscal year 1995 to (pound)147 million in Pro Forma Fiscal Year 1996. This decrease was principally due to a reduction in severance costs of (pound)6 million as a result of providing for severance costs under the purchase method of accounting at the acquisition date and a net decrease in certain classes of computer software development costs which were expensed during fiscal year 1995 but were capitalized in Pro Forma Fiscal Year 1996, partially offset by an increase in net pension costs and an increase in depreciation and amortization expense.
Interest Expense
Interest expense decreased by (pound)14 million from (pound)66 million in the Pro Forma Fiscal Year 1996 to (pound)52 million in the fiscal year 1997, principally as a result of the financing costs associated with the amount of debt issued for the acquisition. Interest expense for Pro Forma Fiscal Year 1996 reflects interest expense recorded in connection with the acquisition as if the acquisition had occurred on April 1, 1995, and had been 100% financed with short-term borrowings at an interest rate of 6% per year. However, in the fiscal year 1997, the Company benefitted from the retirement of (pound)96 million of debt and the conversion of (pound)500 million of debt to equity during the second half of fiscal year 1996. The weighted average balance of debt outstanding during the fiscal year 1997 was (pound)623 million at a weighted average interest rate of 8.3% compared to (pound)876 million at 7.5% during the Pro Forma Fiscal Year 1996.
Interest expense increased by (pound)55 million from (pound)11 million in fiscal year 1995 to (pound)66 million in Pro Forma Fiscal Year 1996 principally as a result of the financing costs associated with the increased amounts of debt issued for acquisition. Interest expense for Pro Forma Fiscal Year 1996 reflects interest expense recorded in connection with the acquisition as if the acquisition had occurred on April 1, 1995 and had initially been 100% financed with short term borrowings at an interest rate of 6% per year. In the second half of Pro Forma Fiscal Year 1996, the Company converted (pound)500 million of debt to equity. The weighted average balance of debt outstanding during the Pro Forma Fiscal Year 1996 was (pound)876 million at a weighted average interest rate of 7.5% compared to (pound)93 million at 11.9% during fiscal year 1995.
Gain on Sale of Investments
Gains on the sale of investments increased by (pound)6 million from no gain in the Pro Forma Fiscal Year 1996 to (pound)6 million in the fiscal year 1997. This increase was principally attributable to additional proceeds of (pound)4 million relating to the demerger of the PSB associated with the sale of NGG. See "Significant Events".
Income Taxes
Income taxes increased by (pound)6 million from (pound)26 million in the Pro Forma Fiscal Year 1996 to (pound)32 million in the fiscal year 1997. Income taxes decreased by (pound)24 million from (pound)50 million in fiscal year 1995 to (pound)26 million in Pro Forma Fiscal Year 1996. The increase and decrease, respectively, were primarily attributable to an increase/decrease in pre-tax income.
Future Earnings Potential
The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including the success of the implementation of reorganization plans, future regulatory price reviews and the level of energy sales growth in the electricity supply business.
The largest portion (approximately 86%) of SWEB's operating income is derived from its distribution business essentially the operation and maintenance of the electricity network in its Franchise Area in south west England. SWEB is the only distributor of electricity in this area, and management believes that economic, environmental and regulatory factors are likely to prevent competitors from entering this business in SWEB's Franchise Area.
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The supply market is subject to change as it is currently partially open to competition and competition is scheduled to be extended to the remaining customers (largely domestic and small commercial) after March 31, 1998.
Two possible major impacts on future earnings are a court ruling related to a pension matter and the windfall tax expected to be introduced by the Labour government. See Notes 2 and 4, respectively, in the "Notes to the Financial Statements" herein for discussion of these matters. Additionally, other contingencies, including the possibility of changes in the valuation of the Teesside contract, and other matters that may affect future earnings potential are discussed in Notes 3 and 4.
FINANCIAL CONDITION
Overview
Substantial changes in the Company's financial condition during the fiscal year 1997 were the addition by SWEB of approximately (pound)69 million in property, plant, and equipment, largely in respect of the distribution network; the issuance of $500 million of bonds; the issuance of $82 million of mandatorily redeemable preferred securities; and the introduction of a commercial paper program. The funds required for the plant additions were derived primarily from operations. It is expected that SWEB's capital requirements in the foreseeable future for investment in property will be generated from operating activities. The funds from the issuance of debt were used to retire short-term debt.
Demand for electricity in Great Britain, in general, and in SWEB's Franchise Area, in particular, is seasonal, with demand being higher in the winter months and lower in the summer months. SWEB balances the effect of this and other cyclical influences on its working capital needs with drawings under its available credit facilities.
The Company's sole investment and only significant asset is the entire share capital of SWEB. The Company is therefore dependent upon dividends from SWEB for its cash flow. SWEB can make distribution of dividends to the Company under English law to the extent that it has distributable reserves, subject to the retention of sufficient financial resources to conduct its supply and distribution businesses as required by its regulatory license. The Company believes that currently sufficient distributable reserves will exist at SWEB to allow for any and all cash flow generated at SWEB through operations to be distributed to the Company through dividends to the Company. In the UK, the Accounting Standards Board currently has a discussion paper reviewing the treatment of deferred income tax accounting to be required in the future; SWEB's distributable reserves could be significantly reduced by this matter.
Financing Activities
In November 1996, the Company issued $500 million Senior Notes in the US, the proceeds of which were used to reduce short-term bank loans in the UK. Some $168 million of the Senior Notes are due for redemption in 2001 and $332 million in 2006; the Senior Notes are at rates of 6.375% and 6.8%, respectively. The Company entered into currency swap transactions that effectively convert the US dollar obligations of the Senior Notes into pounds sterling obligations, with a nominal value of (pound)300 million.
SWEB has established a commercial paper program in the US, first utilized in February 1997 to reduce short-term bank loans. The maximum available under the program, which is fully supported by a swingline facility provided by a syndicate of banks, is $520 million. The amount not utilized at March 31, 1997 was $117 million. SWEB enters into foreign currency contracts to hedge the currency risk associated with the interest and principal of each issue under this program.
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The Company and SWEB have entered into agreements that effectively swap into fixed rates, (pound)150 million of SWEB's variable-rate debt, for periods of between 7 and 15 years.
In January 1997, Southern Investments UK Capital Trust I (the "Trust"), a statutory business trust formed under the laws of the State of Delaware and established for the sole purpose of issuing its own securities and investing the proceeds thereof in the 8.23% subordinated debentures issued by the Company and scheduled to mature on February 1, 2027, sold $82 million of its 8.23% preferred securities. The Company guarantees the Trust's obligations under the preferred securities. The proceeds received by the Company from the sale of the preferred securities were used in part to repay short-term bank loans. The Company has also entered into foreign currency swap contracts to hedge the currency risk associated with the interest and principal on the preferred securities, by swapping the US dollar liabilities back to pounds sterling for the period to February 2007. The nominal value of the swapped liabilities is (pound)50 million.
Sources of Capital
To meet short-term cash needs and contingencies, the Company and SWEB together had at March 31, 1997 approximately (pound)3 million of cash and cash equivalents, $520 million of unused committed lines of credit (as standby for the commercial paper program) and (pound)120 million of other unused committed lines of credit with banks. Subsequent to March 31, 1997, SWEB has increased the amount of committed lines of credit with banks. At March 31, 1997 the Company and SWEB together had short-term debt of (pound)284 million largely payable to investors in the commercial paper program in the US.
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Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
*Change of Auditors.
Following acquisition, there was a change in the auditors of SWEB. See Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
At the request of the board of directors of SWEB, Ernst & Young, Chartered Accountants, tendered their resignation, which was accepted effective September 18, 1995, as independent auditors of SWEB, the reports of which did not contain an adverse opinion or disclaimer of opinion for fiscal years 1995 or 1994. Nor were such reports modified as to uncertainty, audit scope, or accounting principles. During fiscal years 1995 and 1994, and during the interim period of fiscal year 1996 preceding September 18, 1995, there were no unresolved disagreements with Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which would have warranted reference to the subject matter of such disagreement(s) in connection with its reports.
On September 18, 1995, the board of directors of the Company approved the engagement of Arthur Andersen, Independent Public Accountants, as independent auditors of SWEB. Arthur Andersen has been the independent auditor of the Company since its inception (June 23, 1995), and is the independent auditor of Southern, the ultimate parent of SWEB.
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PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT
The following table sets forth certain information with respect to the directors and executive officers of the Company as of March 31, 1997:
Richard J. Pershing has been a Director of the Company since June 1995 and Chief Executive Officer since July 1996. From February 1994 to the present, Mr. Pershing has served as Senior Vice President and International Executive Officer of Southern Energy, an indirect wholly-owned subsidiary of Southern. From June 1992 to February 1994, he served as Vice President of International Business Development at Southern Energy. From January 1991 to June 1992, he served as Vice President of Human Resources at Georgia Power Company ("Georgia Power"), also a subsidiary of Southern.
C.B. (Mike) Harreld has been a Director of the Company since September 1995 and Chief Financial and Accounting Officer of the Company since July 1996. He has also been the Finance Director of SWEB since September 1995. From February 1986 to August 1995, he served as Vice President, Comptroller and Chief Accounting Officer of Georgia Power.
Thomas G. Boren has been a Director of the Company since July 1995 and President and Chief Executive Officer of Southern Energy since February 1992. From May 1989 to February 1992, Mr. Boren served as Senior Vice President of Administration at Georgia Power.
Alan W. Harrelson has been a Director of the Company since September 1995. From January 1994 to September 1995, Mr. Harrelson served as General Manager, Northern Region Power Delivery of Georgia Power. From June 1991 to December 1993, he served as Network Underground Manager, Power Delivery of Georgia Power.
Gale E. Klappa has been a Director of the Company since September 1995. From February 1992 to September 1995 he served as Senior Vice President of Marketing for Georgia Power.
C. Philip Saunders has been a Director of the Company since September 1995. From February 1994 to September 1995, he served as Western Region and Power Marketing Director for US business development at Southern Energy. From May 1992 to February 1994, Mr. Saunders was Assistant to the Senior Vice President of Marketing at Georgia Power.
Charles W. Whitney has been a Director of the Company since July 1995. From November 1995 to the present, Mr. Whitney has served as Vice President of SEI Holdings, Inc., also a subsidiary of Southern. From June 1994 to November
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1995, he served as Vice President of Southern Energy. From January 1991 to June 1994, he served as Vice President of Georgia Power.
Accentacross Limited ("Accentacross") has been a Director of the Company since July 1996. Robert D. Fagan represents Accentacross at meetings of the Directors of the Company. Mr. Fagan has represented Accentacross at meetings of the Directors of the Company since July 1996. From November 1994 to the present, Mr. Fagan has served as President of PMDC. From April 1989 to November 1994, he served as Vice President and General Manager of Mission Energy Company ("Mission Energy"). Mr. Fagan is also currently a Director of PMDC.
Mighteager Limited ("Mighteager") has been a Director of the Company since July 1996. Roger L. Petersen represents Mighteager at meetings of the Directors of the Company. Mr. Petersen has represented Mighteager at meetings of the Directors of the Company since July 1996. From January 1995 to the present, Mr. Petersen has served as Vice President of PMDC. From October 1986 to December 1994, Mr. Petersen served as Vice President of Mission Energy.
Accentacross and Mighteager were elected by PMDC UK as members of the board of directors of the Company pursuant to a Shareholders' Agreement dated July 1, 1996 (the "Shareholders' Agreement") among Southern Electric International-Europe Inc. ("SEI-Europe"), PMDC UK and Holdings. The Shareholders' Agreement provides that each shareholder of Holdings owning 10 percent or more of the shares of Holdings has the right to elect one director for every 10 percent held. This right applies not only to the board of directors of Holdings but also extends to the board of directors of the Company as a wholly-owned subsidiary of Holdings. Thus, PMDC UK, as holder of 25 percent of the shares of Holdings, has the right to elect two directors to the board of the Company. Accentacross and Mighteager are represented on the board of directors of the Company by Messrs. Fagan and Petersen, respectively.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Accentacross and Mighteager (the "PMDC Directors") do not receive compensation for their services as Directors of the Company. The other officers and directors listed in Item 10 above (such officers and directors, with the exception of the PMDC Directors, each a "Southern Company system Officer or Director," as applicable) have received, and will continue to receive, compensation in respect of services performed by such persons in their capacities as Southern Company system Officers or Directors of the Company from Southern Energy, their primary employer and an affiliate of the Company. The Company is charged by Southern Energy for the time spent by those Southern Company system Officers and Directors who do not devote their full time to the affairs of the Company and for a portion of the overhead costs associated with each such Southern Company system Officer and Director. The salaries of all Southern Company system Officers and Directors are paid by Southern Energy, and Southern Energy is reimbursed by the Company, in accordance with a services agreement between the Company and Southern Energy. Southern Company system Officers and Directors receive no cash or non-cash compensation as a result of these arrangements beyond that which they would otherwise receive from Southern Energy for the services performed by them for Southern Energy.
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Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners. The authorized share capital of the Company consists of 500,400,587 ordinary shares of (pound)1 each, all of which have been issued fully paid and are held by Holdings. The following table sets forth, as of March 31, 1997, certain information regarding beneficial ownership of Holdings' common stock held by each person known by the Company to own beneficially more than 10% of Holdings' outstanding common stock.
(1) Such shares are owned by SEI-Europe, an indirect wholly-owned subsidiary of Southern. (2) Such shares are owned by PMDC UK, an indirect wholly-owned subsidiary of PP&L Resources, Inc.
The A Ordinary shares and the B Ordinary shares have the same voting rights, and the only material difference between the A Ordinary shares and the B Ordinary shares is that the holders of the B Ordinary shares are entitled to a smaller proportion of dividends paid in respect of earnings during calendar year ending December 31, 1996 than the holders of the A Ordinary shares.
Security ownership of management. The following table shows the number of shares of Southern common stock owned by the directors, nominees and executive officers as of March 31, 1997. It is based on information furnished by the directors, nominees and executive officers. The shares owned by all directors, nominees and executive officers as a group constitute less than one percent of the total number of shares outstanding on March 31, 1997.
1 As used in this table, "beneficial ownership" means the sole or shared power to vote, or to direct the voting of, a security and/or investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security).
2 The shares shown include shares of Southern common stock of which certain directors and executive officers have the right to acquire beneficial ownership within 60 days pursuant to the Executive Stock Plan, as follows: Mr. Klappa, 15,012 shares; Mr. Boren, 16,987 shares; and Mr. Harreld, 1,510 shares.
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The two corporate directors, Accentacross Limited and Mighteager Limited, do not own any equity securities of the Company or any of its parents or subsidiaries.
Changes in control. The Company knows of no arrangements which may at a subsequent date result in any change in control.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with management and others. None.
Certain business relationships. See Item 11 herein.
Indebtedness of management. None.
Transactions with promoters. None.
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Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report on this Form 10-K:
(1) Financial Statements: The financial statements and the related reports of independent public accountants and auditors filed as a part of this annual report are listed under Item 8 herein.
(2) Financial Statement Schedules:
Reports of Independent Public Accountants and Independent Auditors as to Schedules for SOUTHERN INVESTMENTS UK plc and Subsidiaries (Successor Company) and SOUTH WESTERN ELECTRICITY plc and Subsidiaries (Predecessor Company) are included herein on pages S-1 through S-3.
Financial Statement Schedules for the Company are included herein on page S-4.
(3) Exhibits: Exhibits are listed in the Exhibit Index on page E-1 and E-2.
(b) Reports on Form 8-K: The registrant has not filed any reports on Form 8-K during the last quarter of the fiscal year ended March 31, 1997.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, Southern Investments UK plc, a public limited company incorporated and existing under the laws of England and Wales, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia, on the 27th day of June, 1997.
SOUTHERN INVESTMENTS UK plc
By: Richard J.Pershing Director and Chief Executive Officer
By:/s/ WAYNE BOSTON Wayne Boston Attorney-in-Fact
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following directors and officers of Southern Investments UK plc in the capacities and on the date indicated:
Signature Title Date
RICHARD J. PERSHING Chairman and Chief Executive Officer
CARSON B. HARRELD Chief Financial and Accounting Officer
THOMAS G. BOREN | | ALAN W. HARRELSON | | GALE E. KLAPPA | | C. PHILIP SAUNDERS | | CHARLES W. WHITNEY | Directors | ACCENTACROSS LIMITED | | By: Robert D. Fagan | Director | | MIGHTEAGER LIMITED | | By: Roger L. Petersen | Director |
/s/ WAYNE BOSTON June 27, 1997 Wayne Boston Attorney-in-Fact
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To the Board of Directors of Southern Investments UK plc:
We have audited in accordance with generally accepted auditing standards, the financial statements of SOUTHERN INVESTMENTS UK plc AND SUBSIDIARIES (Successor Company) included in this report and have issued our report thereon dated June 24, 1997. Our audit was made for the purposes of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 (a) (2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen ARTHUR ANDERSEN
Bristol, England June 24, 1997
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REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
To the Board of Directors of South Western Electricity plc:
We have audited the consolidated financial statements of SOUTH WESTERN ELECTRICITY plc AND SUBSIDIARIES (Predecessor Company) for the year ended March 31, 1995, and have issued our report thereon dated August 27, 1996. Our audit also included the financial statement schedule listed in Item 14 (a) (2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young ERNST & YOUNG Chartered Accountants
Bristol, England August 27, 1996
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
To the Board of Directors of South Western Electricity plc:
We have audited in accordance with generally accepted auditing standards, the financial statements of SOUTH WESTERN ELECTRICITY plc AND SUBSIDIARIES (Predecessor Company) included in this report and have issued our report thereon dated August 27, 1996. Our audit was made for the purposes of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 (a) (2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen ARTHUR ANDERSEN
Bristol, England June 24, 1997
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED MARCH 31, 1997, AND 1995 AND FOR THE PERIODS FROM INCEPTION (JUNE 23, 1995) TO MARCH 31, 1996 AND FROM APRIL 1, 1995 TO SEPTEMBER 17, 1995
(In Millions)
- - ------------- (1) In the period from inception (June 23, 1995) to March 31, 1996, the value shown includes an additional (pound)4 million of provision created resulting from application of purchase accounting at the acquisition. In the year ended March 31, 1997, (pound)2 million of this provision was reversed as part of the review of the purchasing accounting adjustments.
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The following exhibits indicated by an asterisk preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filed with the SEC, respectively, as the exhibits and in the file numbers indicated and are incorporated herein by reference.
3.1 -- Memorandum of Association of the Company. (Designated in Registration No. 333-09033 as Exhibit 3.1.)
3.2 -- Articles of Association of the Company. (Designated in Registration No. 333-09033 as Exhibit 3.2.)
4.1 -- Trust Indenture dated as of November 21, 1996, between the Company and Bankers Trust Company, as trustee.
4.2 -- First Supplemental Indenture dated as of November 21, 1996 between the Company and Bankers Trust Company, as trustee.
4.3 -- Deposit Agreement dated as of November 21, 1996 between the Company and Bankers Trust Company, as book-entry depositary.
4.4 -- Subordinated Debenture Indenture dated as of January 29, 1997, among the Company, Bankers Trust Company, as trustee, and Bankers Trust Luxembourg S.A., as paying agent and transfer agent. (Designated in Registration No. 333-26939 as Exhibit 4.1.)
4.5 -- Certificate of Trust of Southern Investments UK Capital Trust I (Designated in Registration No. 333-26939 as Exhibit 4.3.)
4.6 -- Amended and Restated Declaration of Trust dated as of January 29, 1997 of Southern Investments UK Capital Trust I. (Designated in Registration No. 333-26939 as Exhibit 4.4.)
4.7 -- Form of Exchange Guarantee of the Company relating to the Exchange Capital Securities. (Designated in Registration No. 333-28939 as Exhibit 4.6.)
4.8 -- Capital Securities Guarantee dated as of January 29, 1997 of the Company relating to the Original Capital Securities. (Designated in Registration No. 333-26939 as Exhibit 4.8.)
4.9 -- Common Securities Guarantee dated as of January 29, 1997 of the Company relating to the Common Securities. (Designated in Registration No. 333-26939 as Exhibit 4.9.)
4.10 -- Deposit Agreement dated as of January 29, 1997 between the Company and Bankers Trust Company, as book-entry depositary. (Designated in Registration No. 333-26939 as Exhibit 4.10.)
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10.1 -- SWEB Public Electricity Supply License dated January 31, 1996. (Designated in Registration No. 333-09033 as Exhibit 10.1.)
10.2 -- Modifications of License Conditions dated March 31, 1994, March 30, 1994, June 30, 1993, June 15, 1992, and April 22, 1992. (Designated in Registration No. 333-09033 as Exhibit 10.2.)
10.3 -- Pooling and Settlement Agreement as amended and restated at December 2, 1994 between SWEB, Energy Settlements and Information Services (as Settlement System Administrator), Energy Pool Funds Administration Limited (as Pool Funds Administrator), NGC (as Grid Operator and Ancillary Services Provider) and Other Parties. (Designated in Registration No. 333-09033 as Exhibit 10.3.)
10.4 -- Master Connection and Use of System Agreement dated as of March 30, 1990 among NGC and its users (including SWEB). (Designated in Registration No. 333-09033 as Exhibit 10.4.)
10.5 -- Form of Supplemental Agreement between NGC and SWEB. (Designated in Registration No. 333-09033 as Exhibit 10.5.)
10.6 -- Master Agreement dated as of October 25, 1995 among The National Grid Holding plc, NGC, SWEB and the other RECs. (Designated in Registration No. 333-09033 as Exhibit 10.6.)
10.7 -- Memorandum of Understanding between The National Grid Group plc, SWEB and each of the RECs, dated November 17, 1995. (Designated in Registration No. 333-09033 as Exhibit 10.7.)
10.8 -- Form of SWEB Use of Distribution System Agreement. (Designated in Registration No. 333-09033 as Exhibit 10.8.)
10.9 -- Form of Agreement for the Connection of an Exit Point. (Designated in Registration No. 333-09033 as Exhibit 10.9.)
10.10-- Services Agreement dated as of January 1, 1996 between Southern Electric International, Inc. (now Southern Energy, Inc.) and the Company. (Designated in Registration No. 333-09033 as Exhibit 10.10.)
10.11-- Services Agreement dated as of January 1, 1996 between Southern Electric International, Inc. (now Southern Energy, Inc.) and SWEB. (Designated in Registration No. 333-09033 as Exhibit 10.11.)
10.12 -- Services Agreement dated as of January 1, 1996 between SWEB and Holdings. (Designated in Registration No. 333-09033 as Exhibit 10.12.)
10.13-- Services Agreement dated as of January 1, 1996 between the Company and SWEB. (Designated in Registration No. 333-09033 as Exhibit 10.13.)
21.1 -- Subsidiaries of Registrant. (Designated in Registration No. 333-26939 as Exhibit 21.1.)
24.1 -- Power of Attorney and Resolution.
27.1 -- Financial Data Schedule.
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